Use these links to rapidly review the document
CUMMINS INC. AND SUBSIDIARIES TABLE OF CONTENTS

Table of Contents

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, 2010

Commission File Number 1-4949



LOGO

CUMMINS INC.

Indiana
(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:

Title of each class   Name of each exchange on which registered
Common Stock, $2.50 par value   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 ý    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 ý

         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 ý    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 (§ 229.405 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 ý    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. See the definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o
(Do not check if a
smaller reporting company)
  Smaller reporting company o

         Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

         The aggregate market value of the voting stock held by non-affiliates was approximately $14.4 billion at June 27, 2010. This value includes all shares of the registrant's common stock, except for treasury shares.

         As of January 28, 2011, there were 197,847,368 shares outstanding of $2.50 par value common stock.

Documents Incorporated by Reference

         Portions of the registrant's definitive Proxy Statement for its 2011 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission on Schedule 14A within 120 days after the end of 2010, will be incorporated by reference in Part III of this Form 10-K to the extent indicated therein upon such filing.

Website Access to Company's Reports

         We maintain an inherent website at www.cummins.com. Investors may obtain copies of our filings from this website free of charge as soon as reasonable practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission.


Table of Contents


CUMMINS INC. AND SUBSIDIARIES
TABLE OF CONTENTS

PART
  ITEM    
   
   
  PAGE  

     

Cautionary Statements Regarding Forward-Looking Information

    3  

I

  1  

Business

    4  

         

Overview

    4  

         

Operating Segments

    4  

             

Engine Segment

    4  

             

Power Generation Segment

    5  

             

Components Segment

    6  

             

Distribution Segment

    8  

         

Joint Ventures, Alliances and Non-Wholly-Owned Subsidiaries

    9  

         

Supply

    12  

         

Patents and Trademarks

    12  

         

Seasonality

    12  

         

Largest Customers

    12  

         

Backlog

    13  

         

Research and Development Expense

    13  

         

Environmental Compliance

    13  

         

Employees

    15  

         

Available Information

    15  

         

Executive Officers of the Registrant

    16  

  1A  

Risk Factors

    17  

  1B  

Unresolved Staff Comments

    23  

  2  

Properties

    23  

  3  

Legal Proceedings

    25  

  4  

(Removed and Reserved)

    25  

II

  5  

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

    25  

  6  

Selected Financial Data

    28  

  7  

Management's Discussion and Analysis of Financial Condition and Results of Operations

    29  

  7A  

Quantitative and Qualitative Disclosures About Market Risk

    70  

  8  

Financial Statements and Supplementary Data

    72  

     

Index to Financial Statements

    72  

  9  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

    149  

  9A  

Controls and Procedures

    149  

  9B  

Other Information

    149  

III

  10  

Directors, Executive Officers and Corporate Governance

    149  

  11  

Executive Compensation

    149  

  12  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

    150  

  13  

Certain Relationships, Related Transactions and Director Independence

    150  

  14  

Principal Accountant Fees and Services

    150  

IV

  15  

Exhibits and Financial Statement Schedules

    151  

     

Signatures

    154  

     

Cummins Inc. Exhibit Index

    156  

2


Table of Contents

        Cummins Inc. and its consolidated subsidiaries are hereinafter sometimes referred to as "Cummins," "the Company," "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. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Future factors that could affect the outcome of forward-looking statements include the following:

        In addition, such statements could be affected by general industry and market conditions and growth rates, general domestic and international economic conditions, including the price of crude oil (diesel fuel), interest rate and currency exchange rate fluctuations, commodity prices and other future factors.

3


Table of Contents

PART I

ITEM 1.    Business

OVERVIEW

        Cummins Inc. was founded in 1919 as a corporation in Columbus, Indiana, as one of the first diesel engine manufacturers. We are a global power leader that designs, manufactures, distributes and services diesel and natural gas engines, electric power generation systems and engine-related component products, including filtration, exhaust aftertreatment, fuel systems, controls and air handling systems. We sell our products to original equipment manufacturers (OEMs), distributors and other customers worldwide. We serve our customers through a network of more than 600 company-owned and independent distributor locations and more than 6,000 dealer locations in more than 190 countries and territories.

OPERATING SEGMENTS

        We have four complementary operating segments: Engine, Power Generation, Components and Distribution. These segments share technology, customers, strategic partners, brand recognition and our distribution network to gain a competitive advantage 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 compete primarily on the basis of performance, fuel economy, speed of delivery, quality, customer support and price. Financial information about our operating segments, including geographic information, is incorporated by reference from Note 25, "OPERATING SEGMENTS," to our Consolidated Financial Statements.

Engine Segment

        Engine segment sales and EBIT as a percentage of consolidated results were:

 
  Years ended
December 31,
 
 
  2010   2009   2008  

Percent of consolidated net sales(1)

    49 %   49 %   50 %

Percent of consolidated EBIT(1)(2)

    48 %   34 %   41 %

(1)
Measured before intersegment eliminations

(2)
Defined as earnings before interest and taxes

        Our Engine segment manufactures and markets a broad range of diesel and natural gas powered engines under the Cummins brand name, as well as certain customer brand names, for the heavy- and medium-duty truck, bus, recreational vehicle (RV), light-duty automotive, agricultural, construction, mining, marine, oil and gas, rail and governmental equipment markets. We offer a wide variety of engine products including:

        Our Engine segment is organized by engine displacement size and serves these end-user markets:

4


Table of Contents

        The principal customers of our heavy- and medium-duty truck engines include truck manufacturers such as PACCAR, Ford, MAN Latin America and Daimler Trucks North America. We sell our industrial engines to manufacturers of construction, agricultural and marine equipment, including Komatsu, Hyundai, Case New Holland, Belaz, Liugong, Hitachi and Brunswick. The principal customers of our light-duty on-highway engines are Chrysler and manufacturers of RVs.

        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 primary competitors in North America are International Truck and Engine Corporation (Engine Division), Detroit Diesel Corporation, Caterpillar Inc. (CAT) and Volvo Powertrain. Our primary competitors in international markets vary from country to country, with local manufacturers generally predominant in each geographic market. Other engine manufacturers in international markets include Weichai Power Co. Ltd., MAN Nutzfahrzeuge AG (MAN), Fiat Power Systems, GE Jenbacher, Tognum AG, CAT, Volvo, Yanmar Co., Ltd., GuangxiYuchai Group and Deutz AG.

Power Generation Segment

        Power Generation segment sales and EBIT as a percentage of consolidated results were:

 
  Years ended
December 31,
 
 
  2010   2009   2008  

Percent of consolidated net sales(1)

    18 %   19 %   20 %

Percent of consolidated EBIT(1)(2)

    18 %   22 %   28 %

(1)
Measured before intersegment eliminations

(2)
Defined as earnings before interest and taxes

        Our Power Generation segment designs and manufactures most of the components that make up power generation systems, including engines, controls, alternators, transfer switches and switchgear. This segment is a global provider of power generation systems, components and services for a diversified customer base and includes the following:

5


Table of Contents

        Our Power Generation segment is organized around the following businesses:

        This segment continuously explores emerging technologies, such as fuel cells, wind and hybrid solutions and provides integrated power generation products utilizing technologies other than reciprocating engines. We use our own research and development capabilities as well as leverage business partnerships to develop cost-effective and environmentally sound power solutions.

        Our customer base for power generation products is highly diversified, with customer groups varying based on their power needs. Western Europe, India, the Middle East, China and Latin America are our largest geographic markets outside of North America.

        This operating segment competes with a variety of engine manufacturers and generator set assemblers across the world. CAT, Tognum (MTU) and Mitsubishi (MHI) remain our primary competitors, but we also compete with FG Wilson (Caterpillar group), Kohler, SDMO (Kohler group), Generac and numerous regional generator set assemblers. Our Generator technologies business competes globally with Emerson Electric Co., Marathon Electric and Meccalte, among others.

Components Segment

        Components segment sales and EBIT as a percentage of consolidated results were:

 
  Years ended
December 31,
 
 
  2010   2009   2008  

Percent of consolidated net sales(1)

    19 %   18 %   18 %

Percent of consolidated EBIT(1)(2)

    16 %   13 %   13 %

(1)
Measured before intersegment eliminations

(2)
Defined as earnings before interest and taxes

6


Table of Contents

        Our Components segment supplies products which complement our Engine segment, including filtration products, turbochargers, aftertreatment systems, intake and exhaust systems and fuel systems for commercial diesel applications. We manufacture filtration and exhaust systems for on- and off-highway heavy-duty and mid-range equipment, and we are a supplier of filtration products for industrial and passenger car applications. In addition, we develop aftertreatment and exhaust systems to help our customers meet increasingly stringent emission standards and fuel systems which to date have primarily supplied our Engine segment and our partner Scania.

        Our Components segment is organized around the following businesses:

        Customers of our Components segment generally include our Engine and Distribution segments, truck manufacturers and other OEMs, many of which are also customers of our Engine segment, such as PACCAR, Volvo, International Truck and Engine, CNH Global N.V., Iveco and other manufacturers that use our components in their product platforms.

        Our Components segment competes with other manufacturers of filtration, exhaust and fuel systems and turbochargers. Our primary competitors in these markets include Donaldson

7


Table of Contents


Company, Inc., Clarcor Inc., Mann+Hummel Group, Honeywell International, Borg-Warner, Robert Bosch GmbH, Tenneco Inc., Eberspacher Holding GmbH & Co. KG and Denso Corporation.

Distribution Segment

        Distribution segment sales and EBIT as a percentage of consolidated results were:

 
  Years ended
December 31,
 
 
  2010   2009   2008  

Percent of consolidated net sales(1)

    14 %   14 %   12 %

Percent of consolidated EBIT(1)(2)

    18 %   31 %   18 %

(1)
Measured before intersegment eliminations

(2)
Defined as earnings before interest and taxes

        Our Distribution segment consists of 19 company-owned and 22 joint venture distributors that service and distribute the full range of our products and services to end-users at approximately 380 locations in approximately 70 distribution territories. Our company-owned distributors are located in key markets, including North America, Australia, Europe, the Middle East, India, China, Africa, Russia, Brazil, Singapore and Japan.

        The Distribution segment is organized into four primary geographic regions:

        Asia Pacific and EMEA are composed of seven smaller regional distributor organizations (South Pacific, India, China, Northeast/Southeast Asia, Greater Europe, the Middle East and Africa) which allow us to better manage these vast geographic territories.

        North and Central America, is mostly comprised of a network of partially-owned distributors. Internationally, our network consists of independent, partially-owned and wholly-owned distributors. Through this network, we provide parts and service to 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.

        In addition to managing our investments in wholly-owned and partially-owned distributors, our Distribution segment is responsible for managing the performance and capabilities of our independent distributors. Our Distribution segment serves a highly diverse customer base with approximately 42 percent of their 2010 revenues being generated from the sale of new engines and power generation equipment, compared to 44 percent in 2009, and the remaining revenue generated by parts and service revenue.

        Financial information about our distributors accounted for under the equity method are incorporated by reference from Note 2, "INVESTMENTS IN EQUITY INVESTEES," to our Consolidated Financial Statements.

8


Table of Contents

        In November 2010, we purchased a majority interest in a previously independent North American distributorship. The acquisition was accounted for under the purchase method of accounting and resulted in an aggregate purchase price of $27 million. The assets of the acquired business were primarily accounts receivable, inventory, and fixed assets. The transaction generated $1 million of goodwill.

        On January 4, 2010, we acquired the remaining 70 percent interest in Cummins Western Canada (CWC) from our former principal for consideration of approximately $71 million in order to increase our ownership interests in key portions of the distribution channel. We formed a new partnership with a new distributor principal where we own 80 percent of CWC and the new distributor principal owns 20 percent. The acquisition was effective on January 1, 2010, and was accounted for as a business combination. The results of the acquired entity were included in the Distribution operating segment as of the acquisition date including $2 million of goodwill. The assets of the acquired business were primarily inventory, fixed assets and accounts receivable. See Note 21, "ACQUISITIONS AND DIVESTITURES," to the Consolidated Financial Statements for additional detail.

        Our distributors 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 above as competitors of our Engine, Power Generation or Components segments. These competitors vary by geographical location.

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. We have three approximately 80 percent owned entities that are consolidated in the Distribution segment as well as several manufacturing joint ventures in the other operating segments.

        In the event of a change of control of either party to 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 2, "INVESTMENTS IN EQUITY INVESTEES," and Note 24, "VARIABLE INTEREST ENTITIES," to the Consolidated Financial Statements.

9


Table of Contents

        Our equity income from these investees was as follows:

 
  Years ended December 31,  
In millions
  2010   2009   2008  

Distribution Entities

                                     

North American distributors

  $ 101     32 % $ 100     51 % $ 100     43 %

Komatsu Cummins Chile, Ltda

    16     5 %   12     6 %   7     3 %

All other distributors

    3     1 %   3     1 %   5     2 %

Manufacturing Entities

                                     

Dongfeng Cummins Engine Company, Ltd. 

    99     31 %   33     17 %   55     24 %

Chongqing Cummins Engine Company, Ltd. 

    46     14 %   36     18 %   30     13 %

Tata Cummins, Ltd. 

    14     4 %   5     3 %   7     3 %

Shanghai Fleetguard Filter Co., Ltd. 

    12     4 %   7     4 %   8     4 %

Komatsu manufacturing alliances

    11     3 %   (2 )   (1 )%   3     1 %

Cummins Westport, Inc. 

    10     3 %   3     1 %   6     3 %

Valvoline Cummins, Ltd. 

    8     3 %   7     4 %   2     1 %

Cummins MerCruiser Diesel Marine, LLC

    (3 )   (1 )%   (10 )   (5 )%   3     1 %

Beijing Foton Cummins Engine Co., Ltd. 

    (16 )   (5 )%   (5 )   (3 )%   (4 )   (2 )%

All other manufacturers

    20     6 %   7     4 %   9     4 %
                           
 

Cummins share of net income(1)

  $ 321     100 % $ 196     100 % $ 231     100 %
                           

(1)
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 the "equity, royalty and interest income from investees" in the Consolidated Statements of Income, see Note 2, "INVESTMENTS IN EQUITY INVESTEES," to our Consolidated Financial Statements.

Distribution Entities

        Our distribution agreements with independent and partially-owned distributors generally have a three-year term and are restricted to specified territories. Our distributors develop and maintain a network of dealers with which we have no direct relationship. The distributors are permitted to sell other, noncompetitive products only with our consent. We license all of our distributors to use our name and logo in connection with the sale and service of our products, with no right to assign or sublicense the trademarks, except to authorized dealers, without our consent. Products are sold to the distributors at standard domestic or international distributor net prices, as applicable. Net prices are wholesale prices we establish to permit our distributors an adequate margin on their sales. Subject to local laws, we can generally refuse to renew these agreements upon expiration or terminate them upon written notice for inadequate sales, change in principal ownership and certain other reasons. Distributors also have the right to terminate the agreements upon 60-day notice without cause, or

10


Table of Contents

30-day notice for cause. Upon termination or failure to renew, we are required to purchase the distributor's current inventory, signage and special tools, and may, at our option purchase other assets of the distributor, but are under no obligation to do so.

        See further discussion of our distribution network under the Distribution segment section above.

Manufacturing Entities

        Manufacturing joint ventures are generally formed with customers and 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 they supply our wholly-owned Engine segment and Power Generation segment manufacturing facilities. Components segment joint ventures and wholly owned entities provide fuel system, filtration and turbocharger products that are used in our engines as well as some competitors' products. These joint ventures are not included in our Consolidated Financial Statements.

11


Table of Contents

Non-Wholly-Owned Manufacturing Subsidiary

        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, heavy-duty and high-horsepower engines, as well as generators for the Indian and export markets. CIL also produces compressed natural gas spark-ignited engines licensed from another of our joint ventures. CIL's net income attributable to Cummins was $46 million, $28 million and $36 million for 2010, 2009 and 2008, respectively.

SUPPLY

        We source our materials and manufactured components from leading suppliers both domestically and internationally. We machine and assemble some of the components used in our engines and power generation units, including blocks, heads, turbochargers, connecting rods, camshafts, crankshafts, filters, exhaust systems, alternators and fuel systems. We single source approximately 60 to 70 percent of the total types of parts in our product designs. We have long-term agreements with critical suppliers to assure the right capacity, delivery and quality. Although we elect to source a relatively high proportion of our total raw materials and component requirements from sole suppliers, we have established a process to annually review our sourcing strategies with a focus on the reduction of risk, which has led us to dual source critical components, where possible. We are also developing suppliers in many global or emerging markets to serve our businesses across the globe and provide alternative sources in the event of disruption from existing suppliers.

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 considered significant to our business.

SEASONALITY

        While individual product lines may experience modest seasonal declines in production, there is no material effect on the demand for the majority of our products on a quarterly basis with the exception that our Power Generation 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 first quarter business activity due to holiday periods in Asia and Australia.

LARGEST CUSTOMERS

        We have thousands of customers around the world and have developed long-standing business relationships with many of them. We have long-term heavy-duty engine supply agreements with PACCAR and Volvo Trucks North America. We have mid-range supply agreements with PACCAR, as

12


Table of Contents


its exclusive engine supplier, as well as with Daimler Trucks North America (formerly Freightliner LLC), Ford and MAN (formerly Volkswagen). We also have an agreement with Chrysler for supplying the engine for use in Dodge Ram trucks. In our off-highway markets, Cummins has various engine and component supply agreements ranging across our midrange and high-horsepower businesses with Komatsu Ltd., as well as various joint ventures and other license agreements in our Engine, Component and Distribution segments. Collectively, our net sales to these seven customers was approximately 25 percent of consolidated net sales in 2010, compared to approximately 23 percent in 2009 and 22 percent in 2008 and individually was less than eight percent of consolidated net sales to any single customer in 2010, compared to less than nine percent and less than eight percent in 2009 and 2008, respectively. These agreements contain standard purchase and sale agreement terms covering engine 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 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

        As a result of the improving economy in 2010, our lead times increased from their lower levels during the recession. While we have supply agreements with some truck and off-highway equipment OEMs, 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.

RESEARCH AND DEVELOPMENT EXPENSE

        Our research and development program is focused on product improvements, innovations and cost reductions for our customers. We expense research and development expenditures, net of contract reimbursements, when incurred. Research and development expenses, net of contract reimbursements, were $402 million in 2010, $362 million in 2009 and $422 million in 2008. Contract reimbursements were $68 million in 2010, $92 million in 2009 and $61 million in 2008.

        For 2010, 2009 and 2008, approximately $38 million, $151 million and $116 million or 9 percent, 42 percent and 27 percent respectively, were directly related to compliance with 2010 Environmental Protection Agency (EPA) emission standards. For 2010, approximately $36 million or 9 percent was directly related to compliance with 2013 EPA emission standards. In 2010, we increased research, development and engineering expenses as we continued to invest in future critical technologies and products. We will continue to make investments to improve our current technologies, to continue to meet the future emission requirements around the world and improve fuel economy.

ENVIRONMENTAL COMPLIANCE

Sustainability

        We continue to be a leader in sustainable business development and practices. We have invested significantly in new products and technologies designed to further lower emission and increase fuel efficiency from our products. We have increased our commitment to addressing the global impact of climate change through the structured approach of our 10 climate change principles developed last year that address ways we are becoming a greater part of the solution. We have worked collaboratively with customers to improve their fuel economy and reduce their carbon footprint. We have significantly reduced greenhouse gas (GHG) emission from our facilities through a strong energy efficiency program and we met our publically stated goal of 25 percent intensity reduction after complete 2010 goal-year

13


Table of Contents


environmental data was verified. We have taken leadership positions on climate change by articulating our positions on key public policy issues surrounding climate change. For the sixth consecutive year, we were named to the Dow Jones World Sustainability Index, which recognizes the top 10 percent of the world's largest 2,500 companies in economic, environmental and social leadership. Our sustainability report for 2010 is available on our website at www.cummins.com.

Product Environmental Compliance

        Our engines are subject to extensive statutory and regulatory requirements that directly or indirectly impose standards governing emission and noise. Our products comply with all current emission standards that the EPA, the California Air Resources Board (CARB) and other state and international regulatory agencies have established for heavy-duty on-highway diesel and gas engines and off-highway engines. 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. Failure to comply with these standards could result in adverse effects on our future financial results.

EPA Engine Certifications

        The current on-highway emission standards came into effect in the U.S. on January 1, 2010. To meet the 2010 U.S. EPA heavy-duty on-highway emission standards, we used an evolution of our proven 2007 technology solution to maintain power and torque with substantial fuel economy improvement and maintenance intervals comparable with our 2007 compliant engines. We offer a complete lineup of on-highway engines to meet the near-zero emission standards. Mid-range and heavy-duty engines for EPA 2010 require nitrogen oxide (NOx) aftertreatment. NOx reduction is achieved by an integrated technology solution comprised of the XPI High Pressure Common Rail fuel system, Selective Catalytic Reduction (SCR) technology, next-generation cooled exhaust gas recirculation (EGR), advanced electronic controls, proven air handling and the Cummins Particulate Filter. The EPA and CARB have certified that our engines meet the 2010 emission requirements. Emission standards in international markets, including Europe, Japan, Mexico, Australia, Brazil, India and China are becoming more stringent. We believe that our experience in meeting U.S. emission standards leaves us well positioned to take advantage of opportunities in these markets as the need for emission control capability grows.

        Federal and California regulations require manufacturers to report failures of emission-related components to the EPA and CARB when the failure rate reaches a specified level. At higher failure rates, a product recall may be required. In 2010, we submitted eleven reports to the EPA relating to software corrections in the engine control module and to the exhaust aftertreatment system. The software corrections related to the engine control module and exhaust aftertreatment system necessitated the campaigns of approximately 11,400 and 6,310 engines, respectively.

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 capital outlays and are not expected to be material in 2011. Except as follows, 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 (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended or similar state laws, at approximately 20 waste disposal sites. Based upon our experiences at similar sites we believe that our aggregate future remediation costs will not be significant. We have

14


Table of Contents


established accruals that we believe are adequate for our expected future liability with respect to these sites.

        In addition, we have four 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

        As of December 31, 2010, we employed approximately 39,200 persons worldwide. Approximately 15,500 of our employees worldwide are represented by various unions under collective bargaining agreements that expire between 2011 and 2015. For a discussion of the effects of our 2008 and 2009 restructuring actions on employment, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 22, "RESTRUCTURING AND OTHER CHARGES," to our Consolidated Financial Statements in this Form 10-K.

AVAILABLE INFORMATION

        We file annual, quarterly and current reports, proxy statements and other information electronically with the Securities and Exchange Commission (the "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. The SEC maintains an internet site that contains annual, quarterly and current reports, proxy and information statements and other information that issuers (including Cummins) file 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 "Investors and Media" followed by the "Investor Relations" 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 "Investors and Media," followed by the "Investor Relations" link and then the topic heading of "Governance Documents" within the "Corporate Governance" heading. Code of Conduct, Committee Charters and other governance documents are included at this site. Cummins 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 Cummins internet site is not incorporated by reference into this report.

15


Table of Contents

EXECUTIVE OFFICERS OF THE REGISTRANT

        Following are the names and ages of the executive officers of Cummins Inc., their positions with us as of January 31, 2011, 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
  Theodore M. Solso (63)   Chairman of the Board of Directors and Chief Executive Officer (2000)    

 

N. Thomas Linebarger (48)

 

President and Chief Operating Officer (2008)

 

Executive Vice President and President—Power Generation (2005-2008)

 

Pamela L. Carter (61)

 

Vice President and President—Distribution Business (2008)

 

President—Cummins Filtration (2006-2008), President—Fleetguard (2005-2006)

 

Steven M. Chapman (56)

 

Group Vice President—China and Russia (2009)

 

Vice President—Emerging Markets and Businesses (2005-2009)

 

Richard J. Freeland (53)

 

Vice President and President—Engine Business (2010)

 

Vice President and President—Components Group (2008-2010), Vice President and President—Worldwide Distribution Business (2005-2008)

 

Mark R. Gerstle (55)

 

Vice President and Chief Administrative Officer (2008)

 

Vice President—Corporate Quality and Chief Risk Officer (2005-2008)

 

Richard E. Harris (58)

 

Vice President—Chief Investment Officer (2008)

 

Vice President—Treasurer (2003-2008)

 

Marsha L. Hunt (47)

 

Vice President—Corporate Controller (2003)

 

 

 

Marya M. Rose (48)

 

Vice President—General Counsel and Corporate Secretary (2001)

 

 

 

Livingston L. Satterthwaite (50)

 

Vice President and President—Power Generation (2008)

 

Vice President—Generator Set Business (2003-2008)

 

Anant Talaulicar (49)

 

Vice President and President—Components Group (2010)

 

Vice President and Managing Director—India ABO (2004-2010), Chairman and Managing Director—Cummins India Ltd. (2003-2010)

 

John C. Wall (59)

 

Vice President—Chief Technical Officer (2000)

 

 

 

Patrick J. Ward (47)

 

Vice President—Chief Financial Officer (2008)

 

Vice President—Engine Business Controller (2005-2008)

16


Table of Contents

        Our Chairman and Chief Executive Officer is elected annually by our Board of Directors and holds office until the first meeting of the Board of Directors following the annual meeting of the shareholders. Other officers are appointed by the Chairman and Chief Executive Officer, are ratified by our Board of Directors and hold office for such period as the Chairman and Chief Executive Officer 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 combined have a material adverse effect on our results of operations, financial position and 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.

The discovery of any significant problems with our new engine platforms in North America could materially adversely impact our results of operations, financial condition and cash flows.

        The Environmental Protection Agency (EPA) and California Air Resources Board (CARB) have certified all of our 2011 on-highway and off-highway engines, which utilize selective catalytic reduction (SCR) technology to meet requisite emission levels. We introduced SCR technology into our engine platforms in 2010. The effective performance of SCR technology and the overall performance of these engine platforms impact a number of our operating segments and remain crucial to our success in North America. While the model year 2010 engine platforms have performed well in the field and the 2011 model year engines have undergone extensive testing, the discovery of any significant problems in these platforms could result in recall campaigns, increased warranty costs, reputational risk and brand risk.

Another downturn in our markets could materially adversely affect our results of operations, financial condition and cash flows again.

        Although the emerging markets, including China, India and Brazil, recovered in 2010, the global economy remains fragile, with North America and other developed countries continuing to experience sluggish results and certain countries in Europe experiencing a debt crisis. If the global economy were to take another significant downturn, depending upon the length, duration and severity of such a downturn, our results of operations, financial condition and cash flow would almost certainly be materially adversely affected again. Specifically, our revenues would likely decrease, we may be forced to consider further restructuring actions, we may need to increase our allowance for doubtful accounts, our days sales outstanding may increase and we could experience impairments to assets of certain of our businesses.

Another downturn in the North American and European automotive industries could adversely impact our business.

        A number of companies in the global automotive industry have experienced significant financial difficulties in recent years. In North America, General Motors Corporation ("GM"), Ford Motor Company and Chrysler Group, LLC ("Chrysler") experienced declining markets; furthermore, GM and Chrysler previously filed for, and then exited, bankruptcy under Chapter 11 of the U.S. bankruptcy code and accepted substantial monetary infusions from the U.S. government. Automakers across Europe and Japan also experienced difficulties from a weakened economy and tightening credit

17


Table of Contents


markets. Because many of our suppliers also supply automotive industry participants, the difficult automotive industry conditions also adversely affected our supply base. During the recession, lower production levels for some of our key suppliers, increases in certain raw material, commodity and energy costs and the global credit market crisis resulted in severe financial distress among many companies within the automotive supply base. A return to financial distress within the automotive industry and our shared supply base and/or the subsequent bankruptcy of one or more additional automakers may lead to further supplier bankruptcies, commercial disputes, supply chain interruptions, supplier requests for company sponsored capital support or a collapse of the supply chain.

We rely on income from investees that we do not directly control.

        Our net income includes significant equity, royalty and interest income from investees that we do not directly control. For 2010, we recognized $351 million of equity, royalty and interest income from investees, compared to $214 million in 2009. The majority of our equity, royalty and interest income from investees comes from our 12 unconsolidated North American distributors, and from two of our joint ventures in China, Dongfeng Cummins Engine Company, Ltd. ("DCEC") and Chongqing Cummins Engine Company, Ltd. ("CCEC"). Our equity ownership interests in our unconsolidated North American distributors generally range from 30 percent to 50 percent. We have 50 percent equity ownership interests in DCEC and CCEC. 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 operations, which puts a substantial portion of our net income at risk from the actions or inactions of these other 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.

Government regulation could adversely affect our business.

        Our engines are subject to extensive statutory and regulatory requirements governing emission and noise, including standards imposed by the EPA, the European Union, state regulatory agencies, such as the CARB and other regulatory agencies around the world. We have made, and will be required to continue to make, significant capital and research expenditures to comply with these regulatory standards. Developing engines to meet 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 may be required to develop new products to comply with new regulations, particularly those relating to air emission. For example, we were required to develop new engines to comply with stringent emission standards in the U.S. by January 1, 2010, including the reduction of NOx emission to near zero levels, among other requirements. While we were able to meet this and previous deadlines, our ability to comply with other existing and future regulatory standards will be essential for us to maintain our position in the engine markets we serve. Further, 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.

Our truck manufacturers and OEM customers may not continue to outsource their engine supply needs.

        Several of our engine customers, including PACCAR Inc., Volvo AB and Chrysler, are truck manufacturers or OEMs that manufacture engines for some of their own products. Despite their 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 capability, 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

18


Table of Contents


future. 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 could have a material adverse effect on our results of operations.

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 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 to address some of these risks (i.e. copper, platinum and palladium), there can be no assurance that commodity price fluctuations will not adversely affect our results of operations, financial condition and cash flows. In addition, while the use of commodity price hedging instruments may provide us with 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.

We are subject to 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 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 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. While we customarily enter into financial transactions to address these risks, there can be no assurance that currency exchange rate fluctuations will not adversely affect our results of operations, financial condition and cash flows. In addition, while the use of currency hedging instruments may provide us with protection from adverse fluctuations in currency exchange rates, by utilizing these instruments we potentially forego the benefits that might result from favorable fluctuations in currency exchange rates.

        We also face risks arising from the imposition of exchange controls and currency devaluations. 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.

We are vulnerable to supply shortages from single-sourced suppliers.

        During 2010, we single sourced approximately 60 to 70 percent of the total types of parts in our product designs. 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 capacity constraints, labor disputes, economic downturns, availability of credit, the impaired financial condition of a particular supplier, suppliers' allocations to other purchasers, weather emergencies or acts of war or terrorism. Any extended delay in receiving critical supplies could impair our ability to deliver products to our customers.

19


Table of Contents


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 to our reputation, 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 a known or suspected performance issue.

We face significant competition in the markets 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 and other technologies and we will continue to face new competition from these expanding technologies. Our products primarily compete on the basis of price, performance, fuel economy, speed of delivery, quality and customer support. We also face competitors in some emerging markets 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. For a more complete discussion of the competitive environment in which each of our segments operates, see "Operating Segments" in "Item 1 Business."

We are exposed to political, economic and other risks that arise from operating a multinational business.

        Approximately 64 percent of our net sales for 2010 were attributable to customers outside the U.S., compared to 52 percent in 2009. Accordingly, our business is subject to the political, economic and other risks that are inherent in operating in numerous countries. These risks include:

        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.

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 flows.

        We sponsor both funded and unfunded domestic and foreign defined benefit pension and other retirement plans. Our pension expense 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

20


Table of Contents


present value. We could experience increased pension expense 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 expense in future years and adverse changes to our financial condition. 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 face reputational and legal risk from operation outside the U.S. and affiliations with joint venture partners

        Several of our foreign subsidiaries, affiliates and joint venture partners are located outside the U.S. with 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 customs or our Code of Business Conduct and actions by these entities may cause us legal or reputational risk if they violate applicable laws, rules or business practices.

We face the challenge of increasing our capacity and ramping up our production at the appropriate pace as we exit the downturn.

        Prior to the recession, we experienced capacity constraints and longer lead times for certain products. Accurately forecasting our expected volumes and appropriately adjusting our capacity as we exit the downturn have been, and will continue to be, important factors in determining our results of operations. We cannot guarantee that we will be able to increase manufacturing capacity to a level that meets demand for our products, which could prevent us from meeting increased customer demand and could harm our business. However, 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 risks of 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. We may experience material product liability losses in the future. 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. An unsuccessful defense of a significant product liability claim could have a material adverse effect upon us. In addition, 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.

We may need to write off significant investments in our new light-duty diesel engine platforms if customer commitments further deteriorate.

        We began development of a new light-duty diesel engine platform in July 2006 to be used in a variety of on- and off-highway applications. Since that time, and as of December 31, 2010, we have capitalized investments of approximately $218 million. Market uncertainty due to the global recession resulted in some customers delaying or cancelling their vehicle programs, while others remain active. If customer expectations or volume projections further deteriorate from our current levels and we do not

21


Table of Contents


identify new customers, we may need to recognize an impairment charge and write the assets down to net realizable value.

Our operations are subject to extensive 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.

Unanticipated changes in our effective tax rate, the adoption of new tax legislation or exposure to additional income tax liabilities could adversely affect our profitability.

        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 the distribution of 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.

We may be adversely impacted by work stoppages and other labor matters.

        As of December 31, 2010, we employed approximately 39,200 persons worldwide. Approximately 15,500 of our employees worldwide are represented by various unions under collective bargaining agreements that expire between 2011 and 2015. While we have no reason to believe that we will be impacted by work stoppages and 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 slow-downs experienced by our customers or suppliers could result in slow-downs or closures that would have a material adverse effect on our operations.

22


Table of Contents

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 accounting principles generally accepted in the United States of America (GAAP), 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 the 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, Seymour   Belgium: Rumst

  Tennessee: Memphis   Brazil: Sao Paulo

  New Mexico: Clovis   China: Wuhan

  New York: Lakewood   India: Pune

  North Carolina: Whitakers   Mexico: San Luis Potosi

      United Kingdom (U.K.): Darlington, Daventry, Cumbernauld

      Singapore: Singapore SG

Power Generation

 

Indiana: Elkhart

 

Brazil: Sao Paulo

  Minnesota: Fridley   China: Wuxi, Wuhan

      Germany: Ingolstadt

      India: Pirangut, Daman, Ahmendnagar, Ranjangaon

      Mexico: San Luis Potosi

      Romania: Craiova

      Singapore: Singapore SG

      U.K.: Margate, Manston, Stamford

23


Table of Contents

Segment
  U.S. Facilities   Facilities Outside the U.S.

Components

 

Indiana: Columbus

 

Australia: Scoresby, Kilsyth

  Ohio: Findlay   Brazil: Sao Paulo

  South Carolina: Ladson, Charleston   China: Beijing, Hubei Sheng, Shangai, Wuxi

  Tennessee: Cookeville   France: Quimper

  Texas: El Paso   India: Pune, Daman, Dewas, Pithampur,

  Wisconsin: Janesville, Mineral Point,   Radurapur

  Arcadia, Black River Falls, Viroqua,   Japan: Tokyo

  Neillsville, Bloomer   Mexico: Ciudad Juarez, San Luis Potosi

      Singapore: Singapore SG

      South Africa: Pretoria, Johannesburg

      U.K.: Darlington, Huddersfield

        In addition, engines and engine components are manufactured by joint ventures or independent licensees at manufacturing plants in the U.K., China, India, Japan, Pakistan, South Korea, Turkey and Indonesia.

Distribution Facilities

        The principal distribution facilities used by our Distribution segment are located in the following locations:

U.S. Facilities
  Facilities Outside the U.S.

Massachusetts: Dedham

  Australia: Scoresby

New York: Bronx

  Belgium: Mechelen

Pennsylvania: Bristol, Harrisburg

  Canada: Surrey, Edmonton

  China: Beijing, Shanghai

  Germany: Gross Gerau

  India: Pune

  Japan: Tokyo

  Russia: Moscow

  Singapore: Singapore SG

  South Africa: Johannesburg

  U.K.: Wellingborough

  United Arab Emirates: Dubai

Headquarters and Other Offices

        Our Corporate Headquarters are located in Columbus, Indiana. Additional marketing and operational headquarters are in the following locations:

U.S. Facilities
  Facilities Outside the U.S.

Indiana: Columbus, Indianapolis

  China: Beijing, Shanghai

Tennessee: Franklin, Nashville

  India: Pune

Washington DC

  U.K.: Staines, Stockton

24


Table of Contents

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; 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 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.

ITEM 4.    (Removed and Reserved)

PART II

ITEM 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

        (a)   Our common stock, par value $2.50 per share, 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 14, "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
  (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)
 

September 27, - October 31, 2010

    3,391   $ 91.18         145,336  

November 1 - November 28, 2010

    19,691     95.33         129,784  

November 29 - December 31, 2010

    14,957     106.05         117,989  
                     

Total

    38,039   $ 99.18            
                     

(1)
Shares purchased represent shares under 2007 Board authorized repurchase program (for up to $500 million of our common shares) and our Key Employee Stock Investment Plan established in 1969 (there is no maximum repurchase limitation in this plan).

25


Table of Contents

(2)
These values reflect the sum of shares held in loan status of our Key Employee Stock Investment Plan. The $500 million repurchase program authorized by the Board of Directors in 2007 does not limit the number of shares that may be purchased and was excluded from this column.

        In December 2007, the Board of Directors authorized us to acquire an additional $500 million of our common stock beginning in 2008. This authorization does not have an expiration date. We acquired $128 million in 2008, $20 million in 2009 and $241 million in 2010, leaving $111 million available for purchase under this authorization at December 31, 2010. In February 2011, the Board of Directors approved a new share repurchase program and authorized the acquisition of up to $1 billion of Cummins common stock upon the completion of the $500 million program.

        During the fourth quarter of 2010, we repurchased 38,039 shares from employees in connection with the 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 initial five-year terms at a fixed interest rate established at the date of purchase and may be refinanced after its initial five-year period for an additional five-year period. Participants must hold shares for a minimum of six months from date of purchase and after shares are sold 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 if the participant defaulted in repayment of the loan. There is no maximum amount of shares that we may purchase under this plan.

26


Table of Contents


Performance Graph (Unaudited)

        The following Performance Graph and related information shall not be deemed "soliciting material" or to be "filed" with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing 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 2010, we re-evaluated our peer group that management benchmarks against and have chosen to include companies that participate in similar end-markets and have similar businesses. Our revised peer group includes BorgWarner Inc, Caterpillar, Inc., Daimler AG, Danaher Corporation, Deere & Company, Donaldson Company Inc., Eaton Corporation, Emerson Electric Co., W.W. Grainger Inc. , Honeywell International, Illinois Tool Works Inc., Ingersoll-Rand Company Ltd., Navistar International Corporation, Paccar Inc., Parker-Hannifin Corporation, Textron Inc. and Volvo AB. 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

GRAPHIC


ASSUMES $100 INVESTED ON JAN 01, 2006
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC 31, 2010

27


Table of Contents


ITEM 6.    Selected Financial Data

        The selected financial information presented below for each of the five years ended December 31, 2010, was derived from our Consolidated Financial Statements. This information should be read in conjunction with our Consolidated Financial Statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations."

In millions, except per share amounts
  2010   2009   2008   2007   2006  

For the years ended December 31,

                               

Net sales

  $ 13,226   $ 10,800   $ 14,342   $ 13,048   $ 11,362  

U.S. percentage of sales

   
36

%
 
48

%
 
41

%
 
46

%
 
50

%

Non-U.S. percentage of sales

    64 %   52 %   59 %   54 %   50 %

Gross margin

   
3,168
   
2,169
   
2,940
   
2,556
   
2,465
 

Research, development and engineering expenses

    414     362     422     329     321  

Equity, royalty and interest income from investees

    351     214     253     205     140  

Interest expense

    40     35     42     58     96  

Consolidated net income(1)

    1,140     484     818     788     759  

Net income attributable to Cummins Inc.(1)(2)

    1,040     428     755     739     715  

Net earnings per share attributable to Cummins Inc.(3)

                               
 

Basic

  $ 5.29   $ 2.17   $ 3.87   $ 3.72   $ 3.76  
 

Diluted

    5.28     2.16     3.84     3.70     3.55  

Cash dividends declared per share

    0.875     0.70     0.60     0.43     0.33  

Cash flows from operations

  $ 1,006   $ 1,137   $ 987   $ 810   $ 840  

Capital expenditures

    364     310     543     353     249  

At December 31,

                               

Cash and cash equivalents

  $ 1,023   $ 930   $ 426   $ 577   $ 840  

Total assets

    10,402     8,816     8,519     8,195     7,465  

Long-term debt

    709     637     629     555     647  

Total equity(4)

    4,996     4,020     3,480     3,702     3,056  

(1)
For the year ended December 31, 2010, consolidated net income included $32 million in Brazil tax recoveries ($21 million after-tax) and $2 million in flood damage expenses. In the third quarter of 2010, it was determined that we overpaid a Brazilian revenue based tax during the period of 2004-2008. Consolidated net income includes a pre-tax recovery related to tax credits on imported products arising from this overpayment. For the year ended December 31, 2009, consolidated net income included $99 million in restructuring and other charges and a gain of $12 million related to flood damage recoveries. For the year ended December 31, 2008, consolidated net income included a $37 million restructuring charge, a $36 million decrease in cash surrender value in corporate owned life insurance and $5 million of losses related to flood damages.

(2)
On January 1, 2009, we adopted changes issued by the Financial Accounting Standards Board to consolidation accounting and reporting. These changes, among others, require that minority interests be renamed noncontrolling interests and a company present a consolidated net income measure that includes the amount attributable to such noncontrolling interests for all periods presented.

(3)
All per share amounts have been adjusted for the impact of a two-for-one stock split on April 9, 2007 and an additional two-for-one stock split on January 2, 2008.

(4)
During 2006, we adopted the provisions of accounting for defined benefit pension and other postretirement plans under accounting principles generally accepted in the United States of America (GAAP), which resulted in a $94 million non-cash charge to equity. In 2008, we recorded a $433 million non-cash charge to equity to reflect losses associated with the effect of market conditions on our pension plans. In 2010, we recorded a $125 million non-cash credit to equity to reflect gains associated with the effect of market conditions on our pension plans.

28


Table of Contents

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:

29


Table of Contents

EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS

        We are a global power leader that designs, manufactures, distributes and services diesel and natural gas engines, electric power generation systems and engine-related component products, including filtration, exhaust aftertreatment, fuel systems, controls and air handling systems. We sell our products to original equipment manufacturers (OEMs), distributors and other customers worldwide. We have long-standing relationships with many of the leading manufacturers in the markets we serve, including PACCAR Inc., Chrysler Group, LLC, Daimler Trucks North America, MAN Nutzfahrzeuge AG, Ford Motor Company, Komatsu, Volvo AB and Case New Holland. We serve our customers through a network of more than 600 company-owned and independent distributor locations and approximately 6,000 dealer locations in more than 190 countries and territories.

        Our reportable operating segments consist of the following: Engine, Power Generation, Components and Distribution. This reporting structure is organized according to the products and markets each segment serves and allows management to focus its efforts on providing enhanced service to a wide range of customers. The Engine segment produces engines and parts for sale to customers in on-highway and various industrial markets. The engines are used in trucks of all sizes, buses and recreational vehicles, as well as various industrial applications including construction, mining, agriculture, marine, oil and gas, rail and military. The Power Generation segment is an integrated provider of power systems which sells engines, generator sets and alternators. The Components segment sells filtration products, exhaust aftertreatment systems, turbochargers and fuel systems. 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.

        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 and is particularly sensitive to changes in interest rate levels and our customers' access to credit. Our sales may also be impacted by OEM inventory levels and production schedules and stoppages. Economic downturns in markets we serve generally result in reductions in sales and pricing of our products. As a worldwide business, our operations are also affected by political, economic and regulatory matters, including environmental and emission standards, in the countries we serve. 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.

        In 2010, emerging markets recovered with stronger demand in China, India and Brazil, while we started to see modest but uneven signs of recovery in developed markets. As we expected, after the strong demand in the second half of 2009, in advance of the 2010 United States (U.S.) emission change, demand for heavy-duty on-highway products in North America decreased approximately 61 percent in 2010 versus 2009. In addition, medium-duty truck shipments in North America decreased 34 percent in 2010 versus 2009. Excluding North American on-highway markets, overall order trends improved and were consistent with our expectations of organic revenue growth in 2010. In recognition of the global economic challenges, we launched significant restructuring initiatives in late 2008 and 2009 that were designed to reduce structural and overhead costs across all of our businesses, improve operational performance, strengthen our position in emerging markets and prepare to capitalize on the eventual recovery in North America and Europe. These initiatives helped to mitigate the adverse volume impacts that certain markets experienced and they better position us for when a more robust economic recovery extends beyond the emerging markets. Despite the slow recovery in the U.S. markets and Europe, we were able to operate much more efficiently and, as a result, recorded the most profitable results in our history in 2010.

30


Table of Contents

        The following table contains sales and earnings before interest and taxes (EBIT) results by operating segment for the years ended December 31, 2010 and 2009. Refer to the section titled "Operating Segment Results" later in MD&A for a more detailed discussion of net sales and EBIT by operating segment including the reconciliation of segment EBIT to income before taxes.

Operating Segments

 
  2010   2009   Percent
change
2010 vs. 2009
 
 
   
  Percent
of Total
   
   
  Percent
of Total
   
 
In millions
  Sales   EBIT   Sales   EBIT   Sales   EBIT  

Engine

  $ 7,888     60 % $ 809   $ 6,405     59 % $ 252     23 %   NM  

Power Generation

    2,919     22 %   299     2,417     22 %   167     21 %   79 %

Components

    3,046     23 %   278     2,355     22 %   95     29 %   NM  

Distribution

    2,324     18 %   297     1,784     17 %   235     30 %   26 %

Intersegment eliminations

    (2,951 )   (23 )%       (2,161 )   (20 )%       37 %    

Non-segment

            (26 )           (74 )       (65 )%
                                       

Total

  $ 13,226     100 % $ 1,657   $ 10,800     100 % $ 675     22 %   NM  
                                       

        Net income attributable to Cummins Inc. for 2010 was $1,040 million, or $5.28 per diluted share, on sales of $13.2 billion, compared to 2009 net income attributable to Cummins Inc. of $428 million, or $2.16 per diluted share, on sales of $10.8 billion. We recorded restructuring and other charges of $99 million ($65 million after -tax, or $0.33 per diluted share) in 2009. For a detailed discussion of restructuring see Note 22, "RESTRUCTURING AND OTHER CHARGES," to our Consolidated Financial Statements. The increase in income was driven by higher volumes in emerging markets, price improvements, increased equity income, decreased warranty expenses and restructuring charges incurred in 2009 that were not repeated in 2010. These were partially offset by higher income tax expense, selling, general and administrative expenses and research, development and engineering expenses in 2010 as compared to 2009.

        In 2010, we recorded a pre-tax recovery of $32 million ($21 million after -tax, or $0.11 per diluted share) related to the overpayment of revenue based taxes on imported products in Brazil from 2004-2008. The tax recovery was recorded in cost of sales in our non segment business results as it was not considered by management in its evaluation of operating results for the year.

        We generated $1,006 million of operating cash flows for the twelve months ended December 31, 2010, compared to $1,137 million for the twelve months ended December 31, 2009. Refer to the section titled "Operating Activities" later in the MD&A for a discussion of items impacting cash flows. In December 2007, our Board of Directors authorized the acquisition of up to $500 million of our common stock. In February 2009, we temporarily suspended our stock repurchase program to conserve cash through the U.S. recession. We resumed stock repurchases under our Board authorization in the fourth quarter of 2009 and we have repurchased $241 million of common stock during 2010. In February 2011, the Board of Directors authorized the acquisition of up to $1 billion of Cummins common stock. In July 2010, our Board authorized a dividend increase of 50 percent to $0.2625 effective in the third quarter. Our debt to capital ratio (total capital defined as debt plus equity) at December 31, 2010, was 14.4 percent, compared to 14.9 percent at December 31, 2009. We currently have a Baa2 credit rating with a stable outlook from Moody's Investors Services, a BBB+ credit rating with a stable outlook from Standard and Poor's and a BBB+ credit rating and a positive outlook from Fitch. In addition to the $1.362 billion in cash and marketable securities on hand, we have sufficient access to our revolver and accounts receivable program to meet currently anticipated growth and funding needs.

31


Table of Contents

        Our global pension plans, including our unfunded non-qualified plans, were 96 percent funded at year-end 2010. The U.S. qualified plan, which is approximately 62 percent of the worldwide pension obligation, was 99 percent funded, and the international plans were 107 percent funded. Asset returns in 2010 for the U.S. qualified plan were 15.2 percent while the year-end 2010 discount rate was 5.40%, down 0.20 percentage points from the 2009 discount rate of 5.60%. We expect to contribute $130 million of cash to our global pension plans in 2011. We do not have a required minimum pension contribution obligation for our U.S. plans in 2010. We expect pension and other postretirement benefit expense in 2011 to decrease by approximately $5 million pre-tax, or $0.02 per diluted share, when compared to 2010. Refer to application of critical accounting estimates within MD&A and Note 11, "PENSION AND OTHER POST RETIREMENT BENEFITS," to the Consolidated Financial Statements, for additional information concerning our pension and other post-retirement benefit plans.

2011 OUTLOOK

Near-Term:

        In 2010, economies in emerging markets, including China, India and Brazil, recovered and we started to see signs of economic recovery in developed markets. We expect the following positive trends in 2011:

        We expect the following challenges to our business that will put pressure on earnings in 2011:

Long-Term:

        We see improvements in most of our current markets and we are confident that opportunities for long-term profitable growth will continue in the future.

32


Table of Contents

RESULTS OF OPERATIONS

 
   
   
   
  Favorable/(Unfavorable)  
 
  Years ended December 31,   2010 vs. 2009   2009 vs. 2008  
In millions (except per share amounts)
  2010   2009   2008   Amount   Percent   Amount   Percent  

Net sales

  $ 13,226   $ 10,800   $ 14,342   $ 2,426     22 % $ (3,542 )   (25 )%

Cost of sales

    10,058     8,631     11,402     (1,427 )   (17 )%   2,771     24 %
                                   

Gross margin

    3,168     2,169     2,940     999     46 %   (771 )   (26 )%

Operating expenses and income

                                           
 

Selling, general and administrative expenses

    1,487     1,239     1,450     (248 )   (20 )%   211     15 %
 

Research, development and engineering expenses

    414     362     422     (52 )   (14 )%   60     14 %
 

Equity, royalty and interest income from investees

    351     214     253     137     64 %   (39 )   (15 )%
 

Restructuring and other charges

        99     37     99     100 %   (62 )   NM  
 

Other operating (expense) income, net

    (16 )   (1 )   (12 )   (15 )   NM     11     92 %
                                   

Operating income

    1,602     682     1,272     920     NM     (590 )   (46 )%
 

Interest income

    21     8     18     13     NM     (10 )   (56 )%
 

Interest expense

    40     35     42     (5 )   (14 )%   7     17 %
 

Other income (expense), net

    34     (15 )   (70 )   49     NM     55     79 %
                                   

Income before income taxes

    1,617     640     1,178     977     NM     (538 )   (46 )%

Income tax expense

    477     156     360     (321 )   NM     204     57 %
                                   

Consolidated net income

    1,140     484     818     656     NM     (334 )   (41 )%

Less: Net income attributable to noncontrolling interests

    100     56     63     (44 )   (79 )%   7     11 %
                                   

Net income attributable to Cummins Inc.

  $ 1,040   $ 428   $ 755   $ 612     NM   $ (327 )   (43 )%
                                   

Diluted earnings per common share attributable to Cummins Inc

  $ 5.28   $ 2.16   $ 3.84   $ 3.12     NM   $ (1.68 )   (44 )%
                                   

"NM"—not meaningful information.


 
   
   
   
  Favorable/(Unfavorable)
Percentage Points
 
Percent of sales
  2010   2009   2008   2010 vs. 2009   2009 vs. 2008  

Gross margin

    24.0 %   20.1 %   20.5 %   3.9     (0.4 )

Selling, general and administrative expenses

    11.2 %   11.5 %   10.1 %   0.3     (1.4 )

Research, development and engineering expenses

    3.1 %   3.4 %   2.9 %   0.3     (0.5 )

2010 vs. 2009

Net Sales

        Sales increased in all segments primarily due to increased demand from the recovery of emerging markets and improvement in developed markets. The primary drivers for the increase in sales were:

33


Table of Contents

        A more detailed discussion of sales by segment is presented in the "OPERATING SEGMENT RESULTS" section.

        Sales to international markets were 64 percent of total net sales in 2010, compared with 52 percent of total net sales in 2009 and 59 percent of total net sales in 2008.

Gross Margin

        Significant drivers of the change in gross margin were as follows:

In millions
  2010 vs. 2009
Increase/(Decrease)
 

Volume/mix

  $ 469  

Warranty expense

    145  

Price

    136  

Material costs

    109  

Acquisitions

    63  

Currency

    62  

Brazil tax recovery

    32  

Other

    (17 )
       

Total

  $ 999  
       

        Gross margin increased by $999 million and as a percentage of sales increased by 3.9 percentage points. The significant improvement was led by higher volumes, decreases in warranty expense, increased pricing and favorable material costs.

        The warranty provision on sales issued in 2010 as a percentage of sales was 3.0 percent compared to 3.3 percent in 2009. The decrease as a percentage of sales was primarily due to engine mix. A more detailed discussion of margin by segment is presented in the "OPERATING SEGMENT RESULTS" section.

        In the third quarter of 2010, it was determined that we overpaid a Brazilian revenue based tax on imported products during the period 2004-2008. Our results include a pre-tax recovery of $32 million in cost of sales ($21 million after-tax) related to tax credits arising from an overpayment. This recovery has been excluded from segment results as it was not considered by management in its evaluation of operating results for the year.

Selling, General and Administrative Expenses

        Selling, general and administrative expenses increased primarily due to higher volumes in support of the business and an increase of $151 million in compensation and related expenses. Compensation and related expenses include salaries, fringe benefits and variable compensation. Variable compensation related to 2010 performance increased $93 million over variable compensation related to 2009 performance. Salaries and fringe benefits increased due to severance actions taken throughout 2009 that were partially offset by increased employment in 2010. Overall, selling, general and administrative expenses as a percentage of sales decreased slightly to 11.2 percent in 2010 from 11.5 percent in 2009.

34


Table of Contents

Research, Development and Engineering Expenses

        Research, development and engineering expenses increased primarily due to an increase of $35 million in compensation and related expenses and a decrease of $24 million in reimbursements. Compensation and related expenses include salaries, fringe benefits and variable compensation. Variable compensation related to 2010 performance increased $20 million over variable compensation related to 2009 performance. Overall, research, development and engineering expenses, as a percentage of sales, decreased slightly to 3.1 percent in 2010 from 3.4 percent in 2009. Research activities continue to focus on development of new products to meet future emission standards around the world and improvements in fuel economy performance.

Equity, Royalty and Interest Income From Investees

        Equity, royalty and interest income from investees increased primarily due to the following:

In millions
  2010 vs. 2009
Increase/(Decrease)
 

Dongfeng Cummins Engine Company, Ltd. (DCEC)

  $ 66  

Komatsu manufacturing alliances

    13  

Royalty and interest income

    12  

        These overall increases were primarily due to higher demand as a result of economic recovery in emerging markets.

Other Operating (Expense) Income, Net

        Other operating (expense) income was as follows:

 
  Years ended
December 31,
 
In millions
  2010   2009  

Amortization of intangible assets

  $ (15 ) $ (7 )

Loss on sale of fixed assets

    (4 )   (8 )

Royalty expense

    (3 )   (7 )

Flood damage (loss) gain(1)

    (2 )   12  

Royalty income

    10     8  

Other, net

    (2 )   1  
           

Total other operating (expense) income, net

  $ (16 ) $ (1 )
           

(1)
In 2009, the flood gain represents flood insurance proceeds received which more than offset flood related expenses recognized in 2009 and 2008.

Interest Income

        Interest income increased primarily due to higher investment balances in 2010 compared to 2009.

Interest Expense

        Interest expense increased primarily due to higher borrowings in 2010 compared to 2009.

35


Table of Contents

Other Income (Expense), Net

        Other income (expense) was as follows:

 
  Years ended
December 31,
 
In millions
  2010   2009  

Change in cash surrender value of corporate owned life insurance(1)

  $ 12   $ (4 )

Gain on acquisition of Cummins Western Canada (CWC)

    12      

Dividend income

    7     5  

Life insurance proceeds

    7      

Foreign currency losses, net(2)

    (1 )   (20 )

Bank charges

    (15 )   (14 )

Other, net

    12     18  
           

Total other income (expense), net

  $ 34   $ (15 )
           

(1)
The change in cash surrender value of corporate owned life insurance for the years ended December 31, 2010, was due to improved market performance. The change in the cash surrender value of corporate owned life insurance for the year ended December 31, 2009, was due to market deterioration.

(2)
The foreign currency exchange losses in 2009 were due to unfavorable currency fluctuations; primarily in the British Pound and Brazilian Real.

Income Tax Expense

        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. Our effective tax rate for 2010 was 29.5 percent compared to 24.4 percent for 2009. Our 2010 income tax provision also includes a $17 million (1.1 percent) reduction in the fourth quarter related to the legislative reinstatement of the U.S. research tax credit. During 2010, we also released $3 million (0.2 percent) of deferred U.S. tax liabilities on foreign earnings now considered to be permanently reinvested outside of the U.S. Our 2009 income tax provision also includes a $29 million (4.5 percent) reduction in the fourth quarter related to adjustments to deferred tax accounts. In 2009, we released $19 million of deferred tax liabilities on foreign earnings now considered to be permanently reinvested outside of the U.S. and recorded a deferred tax asset of $10 million related to prior period matters.

        We expect our 2011 effective tax rate to be 30 percent excluding any discrete items that may arise.

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 increased primarily due to higher income of $18 million at Cummins India Ltd., a publicly traded company on various exchanges in India and a $15 million increase in income from Wuxi Cummins Turbo Technologies Co. Ltd., reflecting the economic recovery in emerging markets.

36


Table of Contents

Net Income Attributable to Cummins Inc. and Diluted Earnings Per Share Attributable to Cummins Inc.

        Net income and diluted earnings per share attributable to Cummins Inc. increased primarily due to higher volumes in emerging markets and certain developed countries, significantly improved gross margins, increased equity income and restructuring charges incurred in 2009 that were not repeated in 2010. These were partially offset by higher income tax expense, selling, general and administrative expenses and research, development and engineering expenses. Diluted earnings per share also benefited $0.06 from lower shares primarily due to the stock repurchase program.

2009 vs. 2008

Net Sales

        Sales decreased in all segments primarily due to lower demand as a result of the global economic downturn. The primary drivers were:

        A more detailed discussion of sales by segment is presented in the "OPERATING SEGMENT RESULTS" section.

Gross Margin

        Significant drivers of the change in gross margin were as follows:

In millions
  2009 vs. 2008
Increase (Decrease)
 

Volume/mix

  $ (1,228 )

Price

    252  

Production costs

    132  

Warranty expense

    46  

Material costs

    13  

Currency

    8  

Other

    6  
       

Total

  $ (771 )
       

        Gross margin decreased by $771 million, and as a percentage of sales decreased by 0.4 percentage points. The decrease was led by lower volumes which were partially offset by increased engine purchases ahead of the January 1, 2010, emission standards change, improved pricing and decreased production costs. The overall decrease in volumes was due to lower sales resulting from the global economic downturn. Our warranty provision on sales in 2009 was 3.3 percent compared to 2.9 percent in 2008. Our 2008 warranty expense included $117 million recorded in the fourth quarter associated with increases in the estimated warranty liability primarily for certain mid-range engine products launched in 2007. The accrual rates in 2009 for these related engine products were higher than those recorded in 2008 before this change in estimate. As such, our warranty as a percentage of sales for

37


Table of Contents


these engine families is higher on products sold in 2009 than it was in 2008. Overall, our relative product mix also impacted the rate as a percentage of sales when comparing these two periods.

        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 primarily due to a decrease of $74 million in discretionary spending, in order to conserve cash, and a decrease of $71 million in compensation and related expenses. Compensation and related expenses include salaries, fringe benefits and variable compensation. Salaries and fringe benefits decreased due to severance actions taken throughout 2009. Overall, selling, general and administrative expenses as a percentage of sales increased to 11.5 percent in 2009 from 10.1 percent in 2008, primarily due to the 25 percent decrease in net sales.

Research, Development and Engineering Expenses

        Research, development and engineering expenses decreased primarily due to a lower number of engineering projects to conserve cash while focusing on the development of critical technologies, new products and increased reimbursements from third parties for engineering projects. Overall, research, development and engineering expenses as a percentage of sales increased to 3.4 percent in 2009 from 2.9 percent in 2008, primarily due to the 25 percent decrease in net sales.

Equity, Royalty and Interest Income from Investees

        Equity, royalty and interest income from investees decreased primarily due to the following changes in equity income:

In millions
  2009 vs. 2008
Increase/(Decrease)
 

Dongfeng Cummins Engine Company, Ltd. (DCEC)

  $ (22 )

Cummins MerCruiser Diesel, LLC (MerCruiser)

    (13 )

        These decreases were primarily due to lower demand as a result of the global economic conditions. The effects of the global economic downturn were partially offset by modest increases in some markets.

38


Table of Contents

Other Operating (Expense) Income, Net

        Other operating (expense) income was as follows:

 
  Years ended
December 31,
 
In millions
  2009   2008  

Flood damage gain (loss)(1)

  $ 12   $ (5 )

Royalty income

    8     12  

Royalty expense

    (7 )   (10 )

Amortization of other intangibles

    (7 )   (13 )

(Loss) gain on sale of fixed assets

    (8 )   5  

Other, net

    1     (1 )
           

Total other operating (expense) income, net

  $ (1 ) $ (12 )
           

(1)
The flood gain represents flood insurance proceeds received during the third and fourth quarters of 2009 which more than offset flood related expenses recognized in 2009 and 2008.

Interest Income

        Interest income decreased primarily due to lower interest rates in 2009 compared to 2008.

Interest Expense

        Interest expense decreased primarily due to declining short-term interest rates.

Other (Expense) Income, Net

        Other (expense) income was as follows:

 
  Years ended
December 31,
 
In millions
  2009   2008  

Foreign currency loss(1)

  $ (20 ) $ (46 )

Bank charges

    (14 )   (12 )

Change in cash surrender value of corporate owned life insurance(2)

    (4 )   (36 )

Dividend income

    5     6  

Other, net

    18     18  
           

Total other (expense) income, net

  $ (15 ) $ (70 )
           

(1)
The foreign currency exchange losses in 2009 and 2008 were due to unfavorable currency fluctuations, especially with the British Pound and Brazilian Real in 2009 and the British Pound, Euro, Australian Dollar and Indian Rupee in 2008.

(2)
The change in the cash surrender value of corporate owned life insurance in 2008 was due to market deterioration, which included the write down of certain investments to zero.

Income Tax Expense

        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. Our effective tax rate for

39


Table of Contents


2009 was 24.4 percent compared to 30.6 percent for 2008. The decrease is due to tax on foreign earnings, which are subject to lower tax rates, and an increase in research tax credits. Our 2009 income tax provision also includes a $29 million (4.5 percent) reduction in the fourth quarter related to adjustments to deferred tax accounts. In 2009, we released $19 million (3.0 percent) of deferred tax liabilities on foreign earnings, now considered to be permanently reinvested outside the U.S. and recorded a deferred tax asset of $10 million (1.5 percent) related to prior period matters.

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 primarily due to lower income of $8 million at Cummins India Limited, a publicly traded company at various exchanges in India, as a result of the decline in demand due to the global economic downturn. There were no other individual fluctuations in the subsidiaries that were significant.

Net Income Attributable to Cummins Inc. and Diluted Earnings Per Share Attributable to Cummins Inc.

        Net income attributable to Cummins Inc. and diluted earnings per share attributable to Cummins Inc. decreased primarily due to significantly lower volumes, restructuring and other charges and decreased equity income partially offset by a lower effective tax rate.

RESTRUCTURING AND OTHER CHARGES

2009 Restructuring Actions

        In 2009, we executed restructuring actions in response to a reduction in orders in most of our U.S. and foreign markets due to the deterioration in the global economy. We reduced our global workforce by approximately 1,000 professional employees. In addition, we took numerous employee actions at many of our manufacturing locations, including approximately 3,200 hourly employees, significant downsizing at numerous facilities and complete closure of several facilities and branch distributor locations. Employee termination and severance costs were recorded based on approved plans developed by the businesses and corporate management which specified positions to be eliminated, benefits to be paid under existing severance plans, union contracts or statutory requirements and the expected timetable for completion of the plan. Estimates of restructuring costs were made based on information available at the time charges were recorded. Due to the inherent uncertainty involved, actual amounts paid for such activities may differ from amounts initially recorded.

        In response to closures and downsizing noted above, we incurred $2 million of restructuring expenses for lease terminations and $5 million of restructuring expenses for asset impairments. During 2009, we recorded a total pre-tax restructuring charge of $85 million, comprising $90 million of charges related to 2009 actions net of the $3 million favorable change in estimate related to 2008 actions and the $2 million favorable change in estimate related to earlier 2009 actions, in "Restructuring and other charges" in the Consolidated Statements of Income.

40


Table of Contents

        These restructuring actions included:

In millions
  Year ended
December 31, 2009
 

Workforce reductions

  $ 81  

Exit activities

    7  

Other

    2  

Changes in estimate

    (5 )
       

Total restructuring charges

    85  

Curtailment loss

    14  
       

Total restructuring and other charges

  $ 99  
       

        In addition, as a result of the restructuring actions described above, we also recorded a $14 million curtailment loss in our pension and other postretirement plans. See Note 11, "PENSION AND OTHER POSTRETIREMENT BENEFITS," to the Consolidated Financial Statements for additional detail.

        At December 31, 2010, of the approximately 4,200 employees affected by this plan, substantially all terminations were complete.

        We do not include restructuring charges in our operating segment results. The pre-tax impact of allocating restructuring charges to the segment results would have been as follows:

In millions
  Year ended
December 31, 2009
 

Engine

  $ 47  

Power Generation

    12  

Components

    35  

Distribution

    5  
       

Total restructuring and other charges

  $ 99  
       

        The following table summarizes the balance of accrued restructuring charges by expense type and the changes in the accrued amounts for the applicable periods. The restructuring related accruals were recorded in "Other accrued expenses" in our Consolidated Balance Sheets.

In millions
  Severance Costs   Exit Activities   Other   Total  

2009 Restructuring charges

  $ 81   $ 7   $ 2   $ 90  

Cash payments for 2009 actions

    (70 )   (1 )       (71 )

Non cash items

        (5 )   (2 )   (7 )

Changes in estimates

    (2 )           (2 )

Translation

    1             1  
                   

Balance at December 31, 2009

  $ 10   $ 1   $   $ 11  

Cash payments for 2009 actions

    (7 )           (7 )

Changes in estimates

    (3 )   (1 )       (4 )
                   

Balance at December 31, 2010

  $   $   $   $  
                   

2008 Restructuring Actions

        We executed restructuring actions primarily in the form of voluntary and involuntary separation programs in the fourth quarter of 2008. These actions were in response to the continued deterioration in our U.S. businesses and most key markets around the world in the second half of 2008, as well as a

41


Table of Contents


reduction in orders in most U.S. and global markets for 2009. We reduced our worldwide professional workforce by approximately 650 employees, or 4.5 percent. We offered a voluntary retirement package to certain active professional employees in the U.S. based on a clearly defined set of criteria. We also took voluntary and involuntary actions which included approximately 800 hourly employees, the majority of which received severance benefits. The compensation packages contained salary and continuation of benefits, including health care, life insurance and outplacement services. The voluntary retirement package was accepted by approximately 150 employees. The remaining professional reductions of 500 employees were involuntary. The expenses recorded during the year ended December 31, 2008, included severance costs related to both voluntary and involuntary terminations. During 2008, we incurred a pre-tax charge related to the professional and hourly restructuring initiatives of approximately $37 million.

        Employee termination and severance costs were recorded based on approved plans developed by the businesses and corporate management which specified positions to be eliminated, benefits to be paid under existing severance plans or statutory requirements and the expected timetable for completion of the plan. At December 31, 2008, of the approximately 1,450 employees affected by this plan, 1,250 had been terminated. All terminations were substantially complete as of December 31, 2009.

        We do not include restructuring charges in the segment results. The pre-tax impact of allocating restructuring charges for the year ended December 31, 2008, would have been as follows:

In millions
  Year ended
December 31, 2008
 

Engine

  $ 17  

Power Generation

    3  

Components

    15  

Distribution

    2  
       

Total restructuring charges

  $ 37  
       

        The following table summarizes the balance of accrued restructuring expenses for 2008 actions, which were included in the balance of "Other accrued expenses" in our Consolidated Balance Sheets as of December 31, 2009 and 2008:

In millions
  Severance Costs  

2008

       

Restructuring charges

  $ 37  

Cash payments for 2008 actions

    (3 )
       

Balance at December 31, 2008

    34  

2009

       

Cash payments for 2008 actions

    (31 )

Change in estimate

    (3 )
       

Balance at December 31, 2009

  $  
       

42


Table of Contents

OPERATING SEGMENT RESULTS

        Our reportable operating segments consist of the following: Engine, Power Generation, Components, and Distribution. This reporting structure is organized according to the products and markets each segment serves and allows management to focus its efforts on providing enhanced service to a wide range of customers. The Engine segment produces engines and parts for sale to customers in on-highway and various industrial markets. The engines are used in trucks of all sizes, buses and RVs, as well as various industrial applications including construction, mining, agriculture, marine, oil and gas, rail and military. The Power Generation segment is an integrated provider of power systems which sells engines, generator sets and alternators. The Components segment includes sales of filtration products, exhaust and aftertreatment systems, turbochargers and fuel systems. 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.

        We use segment EBIT (defined as earnings before interest expense, taxes and noncontrolling interests) as a primary basis for the chief operating decision-maker to evaluate the performance of each of our operating segments. Segment amounts exclude certain expenses not specifically identifiable to segments.

        The accounting policies of our operating segments are the same as those applied in our Consolidated 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 have allocated certain common costs and expenses, primarily corporate functions, among segments differently than we would for stand-alone financial information prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). These include certain costs and expenses of shared services, such as information technology, human resources, legal and finance. We also 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, restructuring and other charges, flood damage gains or losses, or income taxes to individual segments. In 2010, non-segment items also included a Brazil revenue tax recovery that was not allocated to the businesses as it was not considered by management in its evaluation of operating results for the year. Segment EBIT may not be consistent with measures used by other companies.

43


Table of Contents

        Following is a discussion of operating results for each of our business segments.

Engine Segment Results

        Financial data for the Engine segment was as follows:

 
   
   
   
  Favorable/ (Unfavorable)  
 
  Years ended December 31,   2010 vs. 2009   2009 vs. 2008  
In millions
  2010   2009   2008   Amount   Percent   Amount   Percent  

External sales

  $ 6,594   $ 5,582   $ 7,432   $ 1,012     18 % $ (1,850 )   (25 )%

Intersegment sales

    1,294     823     1,378     471     57 %   (555 )   (40 )%
                                   
 

Total sales

    7,888     6,405     8,810     1,483     23 %   (2,405 )   (27 )%

Depreciation and amortization

    171     185     180     14     8 %   (5 )   (3 )%

Research, development and engineering expenses

    263     241     286     (22 )   (9 )%   45     16 %

Equity, royalty and interest income from investees

    161     54     99     107     NM     (45 )   (45 )%

Interest income

    12     3     10     9     NM     (7 )   (70 )%

Segment EBIT

    809     252     535     557     NM     (283 )   (53 )%

 

 
   
   
   
 
Percentage
    Points    
 
Percentage
    Points    
 

Segment EBIT as a percentage of total sales

    10.3 %   3.9 %   6.1 %   6.4     (2.2)
 

        Engine segment sales by market were as follows:

 
   
   
   
  Favorable/ (Unfavorable)  
 
  Years ended December 31,   2010 vs. 2009   2009 vs. 2008  
In millions
  2010   2009   2008   Amount   Percent   Amount   Percent  

Heavy-duty truck

  $ 1,503   $ 1,996   $ 2,308   $ (493 )   (25 )% $ (312 )   (14 )%

Medium-duty truck and bus

    1,435     1,232     1,550     203     16 %   (318 )   (21 )%

Light-duty automotive and RV

    1,022     688     804     334     49 %   (116 )   (14 )%
                                   

Total on-highway

    3,960     3,916     4,662     44     1 %   (746 )   (16 )%

Industrial

    2,889     1,821     3,029     1,068     59 %   (1,208 )   (40 )%

Stationary power

    1,039     668     1,119     371     56 %   (451 )   (40 )%
                                   

Total sales

  $ 7,888   $ 6,405   $ 8,810   $ 1,483     23 % $ (2,405 )   (27 )%
                                   

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

 
   
   
   
  Favorable/ (Unfavorable)  
 
  Years ended December 31,   2010 vs. 2009   2009 vs. 2008  
 
  2010   2009   2008   Amount   Percent   Amount   Percent  

Midrange

    368,900     269,200     418,300     99,700     37 %   (149,100 )   (36 )%

Heavy-duty

    61,200     85,900     108,300     (24,700 )   (29 )%   (22,400 )   (21 )%

High-horsepower

    18,500     13,400     20,600     5,100     38 %   (7,200 )   (35 )%
                                   

Total unit shipments

    448,600     368,500     547,200     80,100     22 %   (178,700 )   (33 )%
                                   

44


Table of Contents

2010 vs. 2009

Sales

        Engine segment sales increased versus 2009, due to improved sales in most markets, especially the industrial, stationary power, light-duty automotive and medium-duty truck markets, which were partially offset by decreases in the North American heavy-duty truck market. The following are the primary drivers by market.

        These increases were partially offset by a decline in heavy-duty truck engine sales. Consistent with prior emission standards changes, North American (includes the U.S and Canada and excludes Mexico) unit sales declined 61 percent due to higher engine purchases by OEMs in late 2009, ahead of the Environmental Protection Agency's (EPA)'s 2010 emission standards change, as part of the OEM's transition plan.

        Total on-highway-related sales for 2010 were 50 percent of total engine segment sales, compared to 61 percent in 2009.

Segment EBIT

        Engine segment EBIT increased significantly versus 2009, primarily due to higher gross margin and equity, royalty and interest income from investees which were partially offset by increased selling, general and administrative expenses and research, development and engineering expenses. Changes in Engine segment EBIT and EBIT as a percentage of sales were as follows:

 
  Year ended December 31, 2010 vs. 2009
Favorable/(Unfavorable) Change
 
In millions
  Amount   Percent   Percentage point
change as a percent
of sales
 

Gross margin

  $ 539     53 %   3.8  

Equity, royalty and interest income from investees

    107     NM     1.2  

Selling, general and administrative expenses

    (88 )   (16 )%   0.5  

Research, development and engineering expenses

    (22 )   (9 )%   0.5  

        The increase in gross margin versus 2009, was primarily due to higher volumes, improved price realization, decreased warranty expense and cost structure improvements from actions taken in late 2008 and early 2009, partially offset by an unfavorable mix. Equity, royalty and interest income from investees increased in most unconsolidated joint ventures. The increase was led by higher demand in emerging markets, especially at DCEC and Komatsu-Cummins Engine Company (KCEC). The increase

45


Table of Contents


in selling, general and administrative expenses was primarily due to higher variable compensation which resulted from the segment's strong performance.

2009 vs. 2008

Sales

        Engine segment sales experienced deterioration across all major markets, versus 2008, as a result of the global economic downturn. The following are the primary drivers by market.

        Total on-highway-related sales were 61 percent of total Engine segment sales, compared to 53 percent in 2008.

Segment EBIT

        Engine segment EBIT decreased versus 2008, primarily due to lower gross margin and equity, royalty and interest income from investees which were partially offset by decreased selling, general and administrative expenses and decreased research, development and engineering expenses. Changes in Engine segment EBIT and EBIT as a percentage of sales were as follows:

 
  Year ended December 31, 2009 vs. 2008
Favorable/(Unfavorable) Change
 
In millions
  Amount   Percent   Percentage point
change as a
percent of sales
 

Gross margin

  $ (330 )   (24 )%   0.6 %

Selling, general and administrative expenses

    57     9 %   (1.7 )%

Research, development and engineering expenses

    45     16 %   (0.6 )%

Equity, royalty and interest income from investees

    (45 )   (45 )%   NM  

        The decrease in gross margin was primarily due to lower engine volumes in most markets as a result of the global economic downturn, which was partially offset by increased sales in the U.S. in the fourth quarter of 2009 ahead of the January 1, 2010, emission standards change, price improvements and by cost reduction activities at our manufacturing plants. Equity, royalty and interest income from investees decreased due to significantly lower demand at DCEC, KCEC and Cummins MerCruiser

46


Table of Contents


Diesel Marine LLC. The decrease in selling, general and administrative expenses and research, development and engineering expenses was primarily due to lower discretionary spending, higher recovery of engineering expenses from third parties and decreased payroll costs as the result of restructuring actions.

Power Generation Segment Results

        Financial data for the Power Generation segment was as follows:

 
   
   
   
  Favorable/ (Unfavorable)  
 
  Years ended December 31,   2010 vs. 2009   2009 vs. 2008  
In millions
  2010   2009   2008   Amount   Percent   Amount   Percent  

External sales

  $ 2,150   $ 1,879   $ 2,601   $ 271     14 % $ (722 )   (28 )%

Intersegment sales

    769     538     899     231     43 %   (361 )   (40 )%
                                   
 

Total sales

    2,919     2,417     3,500     502     21 %   (1,083 )   (31 )%

Depreciation and amortization

    41     49     41     8     16 %   (8 )   (20 )%

Research, development and engineering expenses

    36     33     41     (3 )   (9 )%   8     20 %

Equity, royalty and interest income from investees

    35     22     23     13     59 %   (1 )   (4 )%

Interest income

    5     3     3     2     67 %        

Segment EBIT

    299     167     376     132     79 %   (209 )   (56 )%

 

 
   
   
   
 
Percentage
    Points    
 
Percentage
    Points    
 

Segment EBIT as a percentage of total sales

    10.2 %   6.9 %   10.7 %   3.3     (3.8)
 

        Sales for our Power Generation segment by business were as follows:

 
   
   
   
  Favorable/ (Unfavorable)  
 
  Years ended December 31,   2010 vs. 2009   2009 vs. 2008  
In millions
  2010   2009   2008   Amount   Percent   Amount   Percent  

Commercial products

  $ 1,831   $ 1,456   $ 2,116   $ 375     26 % $ (660 )   (31 )%

Generator technologies

    549     512     686     37     7 %   (174 )   (25 )%

Commercial projects

    222     177     328     45     25 %   (151 )   (46 )%

Consumer

    186     140     238     46     33 %   (98 )   (41 )%

Power electronics

    131     132     132     (1 )   (1 )%        
                                   

Total sales

  $ 2,919   $ 2,417   $ 3,500   $ 502     21 % $ (1,083 )   (31 )%
                                   

2010 vs. 2009

Sales

        Power Generation segment sales improved in most businesses, versus 2009, primarily due to increased demand. The following are the primary drivers by business.

47


Table of Contents

Segment EBIT

        Power Generation segment EBIT increased versus 2009, primarily due to higher gross margins and equity, royalty and interest income from investees which were partially offset by increased selling general and administrative expenses. Changes in Power Generation segment EBIT and EBIT as a percentage of sales were as follows:

 
  Year ended December 31, 2010 vs. 2009
Favorable/(Unfavorable) Change
 
In millions
  Amount   Percent   Percentage point
change as a
percent of sales
 

Gross margin

  $ 151     38 %   2.4  

Selling, general and administrative expenses

    (31 )   (14 )%   0.5  

Equity, royalty and interest income from investees

    13     59 %   0.3  

Research, development and engineering expenses

    (3 )   (9 )%   0.2  

        The increase in gross margin was due to higher volumes, partially offset by increased warranty expenses and increased variable compensation. The increase in selling general and administrative expenses was primarily due to higher variable compensation expense which resulted from the strong improvement over 2009. Equity, royalty and interest income from investees increased due to higher demand, especially at Cummins Olayan Energy and CCEC.

2009 vs. 2008

Sales

        Power Generation segment sales decreased in most businesses, versus 2008, as the result of the global economic downturn. The following are the primary drivers by business.

Segment EBIT

        Power Generation segment EBIT decreased primarily due to a lower gross margin, which was partially offset by decreases in selling, general and administrative expenses and research, development

48


Table of Contents


and engineering expenses. Changes in Power Generation segment EBIT and EBIT as a percentage of sales were as follows:

 
  Year ended December 31, 2009 vs. 2008
Favorable/(Unfavorable) Change
 
In millions
  Amount   Percent   Percentage point
change as a
percent of sales
 

Gross margin

  $ (258 )   (39 )%   (2.3 )%

Selling, general and administrative expenses

    57     21 %   (1.2 )%

Research, development and engineering expenses

    8     20 %   (0.2 )%

Equity, royalty and interest income from investees

    (1 )   (4 )%   NM  

        The decrease in gross margin was primarily due to lower volumes, unfavorable sales mix and increased material and commodity costs which were partially offset by improved pricing and favorable foreign currency translation. The decrease in selling, general and administrative expenses and research, development and engineering expenses was primarily due to favorable foreign currency translation, lower variable compensation costs, implementation of severance programs and decreased discretionary spending.

Components Segment Results

        Financial data for the Components segment was as follows:

 
   
   
   
  Favorable/ (Unfavorable)  
 
  Years ended December 31,   2010 vs. 2009   2009 vs. 2008  
In millions
  2010   2009   2008   Amount   Percent   Amount   Percent  

External sales

  $ 2,171   $ 1,562   $ 2,154   $ 609     39 % $ (592 )   (27 )%

Intersegment sales

    875     793     998     82     10 %   (205 )   (21 )%
                                   
 

Total sales

    3,046     2,355     3,152     691     29 %   (797 )   (25 )%

Depreciation and amortization

    79     73     65     (6 )   (8 )%   (8 )   (12 )%

Research, development and engineering expenses

    114     88     95     (26 )   (30 )%   7     7 %

Equity, royalty and interest income from investees

    23     13     14     10     77 %   (1 )   (7 )%

Interest income

    2     1     3     1     100 %   (2 )   (67 )%

Segment EBIT

    278     95     169     183     NM     (74 )   (44 )%

 

 
   
   
   
 
Percentage
    Points    
 
Percentage
    Points    
 

Segment EBIT as a percentage of total sales

    9.1 %   4.0 %   5.4 %   5.1     (1.4)
 

49


Table of Contents

        Sales for our Components segment by business were as follows:

 
   
   
   
  Favorable/ (Unfavorable)  
 
  Years ended December 31,   2010 vs. 2009   2009 vs. 2008  
In millions
  2010   2009(1)   2008   Amount   Percent   Amount   Percent  

Filtration

  $ 1,011   $ 851   $ 1,194   $ 160     19 % $ (343 )   (29 )%

Turbo technologies

    948     704     979     244     35 %   (275 )   (28 )%

Emission solutions

    750     495     553     255     52 %   (58 )   (10 )%

Fuel systems

    337     305     426     32     10 %   (121 )   (28 )%
                                   

Total sales

  $ 3,046   $ 2,355   $ 3,152   $ 691     29 % $ (797 )   (25 )%
                                   

(1)
Beginning January 1, 2009, we reorganized the reporting structure of two businesses and moved a portion of our filtration business into the emission solutions business. For the year ended 2009, the sales for the portion of the business included in emission solutions were $86 million. Sales for the portion of the business included in filtration for the year ended 2008 was $136 million. The 2008 balances were not reclassified.

2010 vs. 2009

Sales

        Components segment sales increased in all businesses versus 2009. The following are the primary regional drivers by business.

Segment EBIT

        Components segment EBIT almost tripled versus 2009, primarily due to the improved gross margin which was partially offset by increased selling, general and administrative expenses and research,

50


Table of Contents


development and engineering expenses. Changes in Components segment EBIT and EBIT as a percentage of sales were as follows:

 
  Year ended December 31, 2010 vs. 2009
Favorable/(Unfavorable) Change
 
In millions
  Amount   Percent   Percentage point
change as a
percent of sales
 

Gross margin

  $ 233     67 %   4.3  

Selling, general and administrative expenses

    (44 )   (24 )%   0.3  

Research, development and engineering expenses

    (26 )   (30 )%    

Equity, royalty and interest income from investees

    10     77 %   0.2  

        The increase in gross margin was due to higher volumes for all businesses, increased aftertreatment content on 2010 North American truck engines and efficiencies gained from restructuring actions partially offset by higher commodity costs and warranty expenses. The increase in selling, general and administrative expenses and research, development and engineering expenses were primarily due to increased variable compensation which resulted from the segment's strong performance; other people costs and new product development program spending.

2009 vs. 2008

Sales

        Components segment sales decreased in all businesses versus 2008, as the result of the global economic downturn. The following are the primary drivers by business.

51


Table of Contents

Segment EBIT

        Components segment EBIT decreased versus 2008, primarily due to a lower gross margin which was partially offset by decreased selling, general and administrative expenses and research, development and engineering expenses. Changes in Components segment EBIT and EBIT as a percentage of sales were as follows:

 
  Year ended December 31, 2009 vs. 2008
Favorable/(Unfavorable) Change
 
In millions
  Amount   Percent   Percentage point
change as a
percent of sales
 

Gross margin

  $ (138 )   (28 )%   (0.6 )%

Selling, general and administrative expenses

    43     19 %   (0.6 )%

Research, development and engineering expenses

    7     7 %   (0.7 )%

        The decrease in gross margin was due to lower volumes for most markets, partially offset by implementation of severance programs. The decrease in selling, general and administrative expenses and research, development and engineering expenses was primarily due to implementation of severance programs, closing certain facilities, decreased discretionary spending and decreased research and development spending.

Distribution Segment Results

        Financial data for the Distribution segment was as follows:

 
   
   
   
  Favorable/ (Unfavorable)  
 
  Years ended December 31,   2010 vs. 2009   2009 vs. 2008  
In millions
  2010   2009   2008   Amount   Percent   Amount   Percent  

External sales

  $ 2,311   $ 1,777   $ 2,155   $ 534     30 % $ (378 )   (18 )%

Intersegment sales

    13     7     9     6     86 %   (2 )   (22 )%
                                   
 

Total sales

    2,324     1,784     2,164     540     30 %   (380 )   (18 )%

Depreciation and amortization

    25     17     25     (8 )   (47 )%   8     32 %

Equity, royalty and interest income from investees

    132     125     117     7     6 %   8     7 %

Interest income

    2     1     2     1     100 %   (1 )   (50 )%

Segment EBIT

    297     235     242     62     26 %   (7 )   (3 )%

 

 
   
   
   
  Percentage Points   Percentage Points  

Segment EBIT as a percentage of total sales

    12.8 %   13.2 %   11.2 %   (0.4)     2.0
 

        Sales for our Distribution segment by region were as follows:

 
   
   
   
  Favorable/ (Unfavorable)  
 
  Years ended December 31,   2010 vs. 2009   2009 vs. 2008  
In millions
  2010   2009   2008   Amount   Percent   Amount   Percent  

Asia Pacific

  $ 904   $ 755   $ 812   $ 149     20 % $ (57 )   (7 )%

Europe, Middle East and Africa

    794     692     1,022     102     15 %   (330 )   (32 )%

North & Central America

    539     278     260     261     94 %   18     7 %

South America

    87     59     70     28     47 %   (11 )   (16 )%
                                   

Total sales

  $ 2,324   $ 1,784   $ 2,164   $ 540     30 % $ (380 )   (18 )%
                                   

52


Table of Contents

2010 vs. 2009

Excluding Acquisitions

        Selected financial information for our Distribution segment excluding the impact of acquisitions was as follows:

 
  Years ended
December 31,
  Favorable/
(Unfavorable)
 
In millions
  2010   2009   Amount   Percent  

Excluding acquisitions(1)

                         
 

Sales

  $ 2,038   $ 1,784   $ 254     14 %
 

EBIT

    267 (2)   235     32     14 %

(1)
The acquisitions represent the purchase of the majority interest in Cummins Western Canada (CWC), an equity investee, in the first quarter of 2010 and the purchase of a majority interest in a previously independent North American distributorship, as explained in Note 21, "ACQUISITIONS AND DIVESTITURES," to the Consolidated Financial Statements. The acquisition of CWC and the majority interest in the distributorship increased sales by $286 million and EBIT by $30 million in 2010. The 2009 data does not exclude the acquisition which occurred in 2009.

(2)
This amount includes $13 million of equity earnings which would have been our share of CWC's income for 2010 if we had not consolidated them.

Sales

        Distribution segment sales, excluding the acquisitions, increased versus 2009, due to increased parts and service revenues, increased engine sales driven by sales in Europe and the South Pacific and favorable foreign currency impacts in most regions.

Segment EBIT

        Distribution segment EBIT increased versus 2009, primarily due to increased gross margin and a one-time gain from an acquisition that occurred in the first quarter, partially offset by increased selling, general and administrative expenses. Changes in Distribution segment EBIT and EBIT as a percentage of sales were as follows:

 
  Year ended December 31, 2010 vs. 2009
Favorable/(Unfavorable) Change
 
In millions
  Amount   Percent   Percentage point
change as a
percent of sales
 

Including acquisitions

                   
 

Gross margin

  $ 129     34 %   0.5  
 

Selling, general and administrative expenses

    (85 )   (31 )%    
 

Other (expense) income

    12 (1)   NM     0.4  

Excluding acquisitions

                   
 

Gross margin

    66     17 %   0.5  
 

Selling, general and administrative expenses

    (59 )   (21 )%   (0.9 )

(1)
The primary increase in other income represents the purchase of the majority interest in an equity investee in the first quarter of 2010, which resulted in a gain of $12 million as

53


Table of Contents

explained in Note 21, "ACQUISITIONS AND DIVESTITURES," to the Consolidated Financial Statements.

        Excluding acquisitions, the increase in gross margin versus 2009, was primarily due to higher volumes and favorable foreign currency impacts. Excluding effects from acquisitions, the increase in selling, general and administrative expenses was mainly due to higher salaries and unfavorable foreign currency impacts.

2009 vs. 2008

Excluding Acquisition

        Selected financial information for our Distribution segment excluding the impact of the acquisition was as follows:

 
  Years ended
December 31,
  Favorable/
(Unfavorable)
 
In millions
  2009   2008   Amount   Percent  

Excluding acquisition(1)

                         
 

Sales

  $ 1,746   $ 2,164   $ (418 )   (19 )%
 

EBIT

    224     242     (18 )   (7 )%

(1)
The acquisition primarily represents the purchase of one distributor in 2009. This acquisition of the distributor increased sales by $38 million and EBIT by $11 million in 2009. The 2008 data does not exclude acquisitions which occurred in 2008.

Sales

        Distribution sales, excluding the acquisition, decreased versus 2008, primarily due to the decline in power generation equipment and engine sales as a result of the global economic downturn and unfavorable foreign currency translation. Decreased sales were led by lower sales volumes primarily in Power Generation and Engines and unfavorable foreign currency impacts.

Segment EBIT

        Distribution EBIT decreased primarily due to lower gross margin, partially offset by decreased selling, general and administrative expenses and higher equity, royalty and interest income from investees. Changes in Distribution segment EBIT and EBIT as a percentage of sales were as follows:

 
  Year ended December 31, 2009 vs. 2008
Favorable/(Unfavorable) Change
 
In millions
  Amount   Percent   Percentage point
change as a
percent of sales
 

Including acquisition

                   
 

Gross margin

  $ (86 )   (18 )%   (0.2 )
 

Selling, general and administrative expenses

    54     16 %   (0.3 )

Excluding acquisition(1)

                   
 

Gross margin

    (94 )   (20 )%   (0.2 )
 

Selling, general and administrative expenses

    56     17 %   (0.5 )

(1)
Primarily represents the acquisition of one distributor in 2009. The 2008 data does not exclude acquisitions which occurred in 2008.

54


Table of Contents

        The decrease in gross margin was primarily due to lower sales volumes as a result of the global economic downturn and unfavorable foreign currency translation. Selling, general and administrative expenses decreased primarily due to favorable foreign currency translation, lower sales volumes and decreased discretionary spending.

Reconciliation of Segment EBIT to Income Before Income Taxes

        The table below reconciles the segment information to the corresponding amounts in the Consolidated Statements of Income.

 
  Years ended December 31,  
In millions
  2010   2009   2008  

Total segment EBIT

  $ 1,683   $ 749   $ 1,322  

Non-segment EBIT(1)

    (26 )   (74 )   (102 )
               

Total EBIT

  $ 1,657   $ 675   $ 1,220  

Less:

                   
 

Interest expense

    40     35     42  
               

Income before income taxes

  $ 1,617   $ 640   $ 1,178  
               

(1)
Includes intersegment sales and profit in inventory eliminations and unallocated corporate expenses. For the year ended December 31, 2010, unallocated corporate expenses include $32 million in Brazil tax recoveries ($21 million after-tax) and $2 million in flood damage expenses. The Brazil tax recovery has been excluded from segment results as it was not considered by management in its evaluation of operating results for the year ended December 31, 2010. For the year ended December 31, 2009, unallocated corporate expenses included $99 million in restructuring and other charges and a gain of $12 million related to flood damage recoveries. For the year ended December 31, 2008, unallocated corporate expenses included $37 million of restructuring charges, a $36 million decrease in cash surrender value in corporate owned life insurance and $5 million of losses related to flood damage recoveries.

LIQUIDITY AND CAPITAL RESOURCES

Management's Assessment of Liquidity

        Our financial condition and liquidity remain strong. Our solid balance sheet and credit ratings enable us to have ready access to credit as we terminated our three year credit facility a year early and entered into a new four year credit facility during 2010.

        We assess our liquidity in terms of our ability to generate adequate cash to fund our operating, investing and financing activities. Cash provided by operations is our principal source of liquidity. As of December 31, 2010, other sources of liquidity include:

55


Table of Contents

        We believe our liquidity provides us with the financial flexibility needed to fund working capital, capital expenditures, projected pension obligations, dividend payments, common stock repurchases and debt service obligations.

        On July 16, 2010, we entered into a new four year revolving credit agreement with a syndicate of lenders which provides us with a $1.24 billion unsecured revolving credit facility, the proceeds of which are to be used for the general corporate purposes of Cummins. See Note 9, "DEBT" to the Consolidated Financial Statements for further information. The credit agreement includes two financial covenants: a leverage ratio and an interest coverage ratio. At December 31, 2010, we were in compliance with both financial covenants.

        The required leverage ratio, which measures the sum of total debt plus securitization financing to consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) for the four fiscal quarters should not exceed 3.0 to 1. At December 31, 2010, our leverage using this measure was 0.46 to 1. The required interest coverage ratio, which is consolidated EBITDA minus capital expenditures to consolidated interest expense, in each case for the four consecutive fiscal quarters, should not be less than 1.50 to 1. At December 31, 2010, our interest coverage ratio using this measure was 36.68 to 1.

        We continuously monitor our pension assets and believe that we have limited exposure to the European debt crisis. No sovereign debt instruments of crisis countries are held in the trusts, while any equities held are with large, well-diversified multinational firms or are de minimus amounts in large index funds. In addition, we have rebalanced our asset portfolio's in the U.S. and U.K. with equities representing a smaller segment of the total portfolios. Our pension plans have not experienced any significant impact on liquidity or counterparty exposure due to the volatility in the credit markets.

        A significant portion of our cash flows is generated outside the U.S. More than half of our cash and cash equivalents and most of our marketable securities at December 31, 2010, are denominated in foreign currencies. 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. The repatriation of cash balances from certain subsidiaries could have adverse tax consequences; however, those balances are generally available, without legal restrictions, to fund ordinary business operations at the local level. We have and will continue to transfer cash from these subsidiaries to us and to other international subsidiaries when it is cost effective to do so.

        The maturity schedule of our existing long-term debt does not require significant cash outflows in the intermediate term. Required annual principal payments range from $8 million to $116 million over each of the next five years.

Working Capital Summary

        We fund our working capital with cash from operations and short-term borrowings when necessary. Various assets and liabilities, including short-term debt, can fluctuate significantly from month to month

56


Table of Contents


depending on short-term liquidity needs. As a result, working capital is a prime focus of management attention.

 
   
   
  Favorable/
(Unfavorable)
2010 vs. 2009
 
In millions
  2010   2009   Amount   Percent  

Cash and cash equivalents

  $ 1,023   $ 930   $ 93     10 %

Marketable securities

    339     190     149     78 %

Accounts and notes receivable

    2,243     2,004     239     12 %

Inventories

    1,977     1,341     636     47 %

Other current assets

    707     538     169     31 %
                     
 

Current assets

    6,289     5,003     1,286     26 %

Accounts and loans payable

   
1,444
   
994
   
450
   
45

%

Current portion of accrued warranty

    421     426     (5 )   (1 )%

Other accrued expenses

    1,395     1,012     383     38 %
                     
 

Current liabilities

    3,260     2,432     828     34 %

Working capital

 
$

3,029
 
$

2,571
 
$

458
   
18

%
                     

Current ratio

    1.93     2.06     (0.13 )   (6 )%
                       

Days' sales in receivables

    59     64     (5 )   (8 )%

Inventory turnover

    5.8     5.2     0.6     12 %

        Current assets increased 26 percent primarily due to an increase of 47 percent in inventory levels to meet anticipated demand, increased accounts and notes receivables due to higher sales volumes, and increased investment in marketable securities.

        Current liabilities increased 34 percent primarily due to an increase of 45 percent in accounts and loans payable which was the result of increased purchasing to support higher sales volume in the businesses and the acquisition of the majority interest in CWC.

Cash Flows

        Cash and cash equivalents increased $93 million during the year ended December 31, 2010, compared to a $504 million increase in cash and cash equivalents during the comparable period in 2009. The change in cash and cash equivalents was as follows:

57


Table of Contents

Operating Activities

 
   
   
   
  Change  
 
  Years ended December 31,  
 
  2010 vs. 2009   2009 vs. 2008  
In millions
  2010   2009   2008  

Consolidated net income

  $ 1,140   $ 484   $ 818   $ 656   $ (334 )

Restructuring and other charges, net of cash payments

        16     34     (16 )   (18 )

Depreciation and amortization

    320     326     314     (6 )   12  

(Gain) loss on investments

    (18 )       45     (18 )   (45 )

Gain on fair value adjustment for consolidated investee

    (12 )           (12 )    

Deferred income taxes

    56     5     (1 )   51     6  

Equity in income of investees, net of dividends

    (147 )   23     (45 )   (170 )   68  

Pension contributions in excess of expense

    (151 )   (36 )   (31 )   (115 )   (5 )

Other post-retirement benefits payments in excess of expense

    (35 )   (24 )   (35 )   (11 )   11  

Stock-based compensation expense

    22     20     28     2     (8 )

Excess tax (benefits) deficiencies on stock based awards

    (10 )   1     (13 )   (11 )   14  

Translation and hedging activities

    13     41     (10 )   (28 )   51  

Changes in:

                               
 

Accounts and notes receivable

    (195 )   (181 )   88     (14 )   (269 )
 

Inventories

    (574 )   482     (251 )   (1,056 )   733  
 

Other current assets

    (54 )   33     (54 )   (87 )   87  
 

Accounts payable

    345     (75 )   (174 )   420     99  
 

Accrued expenses

    233     (132 )   124     365     (256 )

Changes in other liabilities and deferred revenue

    133     155     109     (22 )   46  

Other, net

    (60 )   (1 )   41     (59 )   (42 )
                       
 

Net cash provided by operating activities

  $ 1,006   $ 1,137   $ 987   $ (131 ) $ 150  
                       

2010 vs. 2009

        Net cash provided by operating activities decreased versus 2009, primarily due to significantly higher inventory levels to meet anticipated demand, increased equity in income of investees net of dividends and higher pension contributions made in the year. This was partially offset by significantly higher consolidated net income and increases in accounts payable and accrued expenses as the result of increased purchasing to support higher sales volumes.

Pensions

        The funded status of our pension plans is dependent upon a variety of variables and assumptions including return on invested assets and market interest rate levels. We made $221 million of pension contributions in 2010 (including voluntary contributions of $108 million). These contributions include payments from our funds either to increase pension plan assets or to make direct payments to plan participants. We expect to contribute $130 million of cash to our global pension plans in 2011.

2009 vs. 2008

        Net cash provided by operating activities increased versus 2008, primarily due to favorable working capital fluctuations, principally inventories, as a result of management's response to the challenging global economy and increased dividends from our equity investees which were partially offset by

58


Table of Contents


decreased income as the result of declining sales. Management's priorities included reducing inventory, aligning our cost and capacity with the real demand for our products and managing the business to generate positive cash flows by improving our working capital.

Investing Activities

 
   
   
   
  Change  
 
  Years ended December 31,  
 
  2010 vs. 2009   2009 vs. 2008  
In millions
  2010   2009   2008  

Capital expenditures

  $ (364 ) $ (310 ) $ (543 ) $ (54 ) $ 233  

Investments in internal use software

    (43 )   (35 )   (82 )   (8 )   47  

Proceeds from disposals of property, plant and equipment

    55     10     29     45     (19 )

Investments in and advances to equity investees

    (2 )   (3 )   (89 )   1     86  

Acquisition of businesses, net of cash acquired

    (104 )   (2 )   (142 )   (102 )   140  

Proceeds from the sale of businesses

            64         (64 )

Investments in marketable securities-acquisitions

    (823 )   (431 )   (390 )   (392 )   (41 )

Investments in marketable securities-liquidations

    690     335     409     355     (74 )

Purchases of other investments

    (62 )   (62 )   (62 )        

Cash flows from derivatives not designated as hedges

    2     (18 )   (53 )   20     35  

Other, net

        7     11     (7 )   (4 )
                       
 

Net cash used in investing activities

  $ (651 ) $ (509 ) $ (848 ) $ (142 ) $ 339  
                       

2010 vs. 2009

        Net cash used in investing activities increased versus 2009, primarily due to acquisitions (See Note 21, "ACQUISITIONS" to our Consolidated Financial Statements), higher capital expenditures and increased investments in marketable securities, which were partially offset by higher proceeds from the disposal of property, plant and equipment.

        Capital expenditures were $364 million compared to $310 million in the comparable period in 2009. We continue to invest in the development of new products and we plan to spend approximately $600 million to $650 million in 2011 as we continue with product launches, facility improvements and prepare for future on-highway emission standards and product launches.

2009 vs. 2008

        Net cash used in investing activities decreased versus 2008, primarily due to decreased capital expenditures and lower investments in the acquisition of businesses which were partially offset by increased net cash paid for investments in marketable securities and lower cash proceeds from the sale of a business. These decreases primarily occurred as a result of management's decision to conserve cash and maintain liquidity during the recession.

        Capital expenditures decreased as management tightened capital spending substantially across all business by limiting expenditures to critical projects and investments in development of new products.

59


Table of Contents

Financing Activities

 
   
   
   
  Change  
 
  Years ended December 31,  
 
  2010 vs. 2009   2009 vs. 2008  
In millions
  2010   2009   2008  

Proceeds from borrowings

  $ 214   $ 76   $ 76   $ 138   $  

Payments on borrowings and capital lease obligations

    (143 )   (97 )   (152 )   (46 )   55  

Net borrowings (payments) under short-term credit agreements

    9     (2 )   33     11     (35 )

Distributions to noncontrolling interests

    (28 )   (34 )   (24 )   6     (10 )

Dividend payments on common stock

    (172 )   (141 )   (122 )   (31 )   (19 )

Proceeds from sale of common stock held by employee benefit trust

    58     72     63     (14 )   9  

Repurchases of common stock

    (241 )   (20 )   (128 )   (221 )   108  

Excess tax benefits (deficiencies) on stock-based awards

    10     (1 )   13     11     (14 )

Other, net

    26     6     4     20     2  
                       
 

Net cash used in financing activities

  $ (267 ) $ (141 ) $ (237 ) $ (126 ) $ 96  
                       

2010 vs. 2009

        Net cash used in financing activities increased versus 2009, primarily due to increased repurchases of common stock, which was partially offset by higher proceeds from borrowings primarily related to the acquisition of CWC and borrowings in Brazil.

        Our total debt was $843 million as of December 31, 2010, compared with $703 million as of December 31, 2009. Total debt as a percent of our total capital, including total long-term debt, was 14.4 percent at December 31, 2010, compared with 14.9 percent at December 31, 2009. The increase in total debt was principally due to acquisitions and borrowings in Brazil which were subsequently invested in marketable securities.

2009 vs. 2008

        Net cash used in financing activities declined versus 2008, primarily due to the decrease in repurchases of common stock and lower payments on borrowings, which was partially offset by a decrease in proceeds from borrowings and higher dividend payments.

        Our total debt was $703 million as of December 31, 2009, compared with $698 million at December 31, 2008. Total debt as a percent of our total capital, including total long-term debt, was 14.9 percent at December 31, 2009, compared to 16.7 percent at December 31, 2008.

Repurchase of Common Stock

        In December 2007, the Board of Directors authorized the acquisition of up to $500 million of Cummins common stock. We began making purchases under the plan in March 2008 and purchased $128 million of stock during 2008 at an average cost of $55.49 per share.

        In February 2009, we temporarily suspended our stock repurchase program to conserve cash. In the fourth quarter of 2009, we lifted the suspension and purchased $20 million of common stock at an average cost of $46.52 per common share.

60


Table of Contents

        In 2010, we purchased $241 million of common stock through the following quarterly purchases:

In millions (except per share amounts)
For each quarter ended
  Shares
Purchased
  Average Cost
Per Share
 

March 28

    0.7   $ 60.36  

June 27

    1.8     67.39  

September 26

    1.0     75.77  

December 31

         
           

Total

    3.5   $ 68.57  
           

        In February 2011, the Board of Directors approved a new share repurchase program and authorized the acquisition of up to $1 billion of Cummins common stock upon the completion of the $500 million program. We purchased $111 million of our common stock in February 2011 and completed the $500 million program as of this filing date.

Quarterly Dividends

        In July 2010, our Board of Directors approved a 50 percent increase in the quarterly dividends on our common stock from $0.175 per common share to $0.2625 per common share. In July 2008, our Board of Directors approved a 40 percent increase in the quarterly dividends on our common stock from $0.125 per common share to $0.175 per common share. Cash dividends per share paid to common shareholders for the last three years were as follows:

 
  Quarterly Dividends  
 
  2010   2009   2008  

First quarter

  $ 0.175   $ 0.175   $ 0.125  

Second quarter

    0.175     0.175     0.125  

Third quarter

    0.2625     0.175     0.175  

Fourth quarter

    0.2625     0.175     0.175  

        Total dividends paid to common shareholders in 2010, 2009 and 2008 were $172 million, $141 million and $122 million, respectively. Declaration and payment of dividends in the future depends upon income and liquidity position, among other factors, and is subject to declaration by our Board of Directors, who meet quarterly to consider the dividend payment. We expect to fund dividend payments with cash from operations.

Credit Ratings

        A number of our contractual obligations and financing agreements, such as our revolving credit facility, have restrictive covenants and/or pricing modifications that may be triggered in the event of downward revisions to our corporate credit rating. There were no downgrades of our credit ratings in 2010 that have impacted these covenants or pricing modifications.

        In January 2011, Fitch affirmed our ratings and upgraded our outlook to positive. In September 2010, Standard and Poor's raised our senior unsecured debt ratings to BBB+ and changed our outlook to stable. In July 2010, Moody's Investors Service, Inc. raised our senior unsecured debt ratings to Baa2.

61


Table of Contents

        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. Our ratings and outlook from each of the credit rating agencies as of the date of filing are shown in the table below.

Credit Rating Agency
  Senior L-T
Debt Rating
  S-T Debt
Rating
  Outlook

Moody's Investors Service, Inc. 

  Baa2   Non-Prime   Stable

Standard & Poor's

  BBB+   NR   Stable

Fitch

  BBB+   BBB+   Positive

CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS

        A summary of payments due for our contractual obligations and commercial commitments, as of December 31, 2010, is shown in the tables below:

Contractual Cash Obligations
  2011   2012 - 2013   2014 - 2015   After 2015   Total  
In millions
   
   
   
   
   
 

Loans payable

  $ 82   $   $   $   $ 82  

Long-term debt and capital lease obligations(1)

    121     323     119     1,436     1,999  

Operating leases

    90     128     74     121     413  

Capital expenditures

    146     16     4         166  

Purchase commitments for inventory

    718                 718  

Other purchase commitments

    123     36     2         161  

Pension funding(2)

    16     124     124         264  

Other postretirement benefits

    51     99     94     246     490  
                       

Total

  $ 1,347   $ 726   $ 417   $ 1,803   $ 4,293  
                       

(1)
Includes principal payments and expected interest payments based on the terms of the obligations. In February of 2009, we renegotiated our sale and leaseback transaction to extend the term for an additional two years and removed the requirement to provide residual insurance. The lease obligations are included in this line item. See Note 13, "COMMITMENTS AND CONTINGENCIES," to our Consolidated Financial Statements for additional information on our sale and leaseback transaction.

(2)
We are contractually obligated in the U.K. to fund $16 million in 2011; however, our expected total pension contributions for 2011 is approximately $130 million. After 2011, our contractual agreement in the U.K. is $62 million per year through 2015.

        The contractual obligations reported above exclude our unrecognized tax benefits of $85 million as of December 31, 2010. We are not able to reasonably estimate the period in which cash outflows relating to uncertain tax contingencies could occur. See Note 6, "INCOME TAXES," to the Consolidated Financial Statements for further details.

62


Table of Contents

        Our other commercial commitments as of December 31, 2010, are as follows:

Other Commercial Commitments
  2011   2012 - 2013   2014 - 2015   After 2015   Total  
In millions
   
   
   
   
   
 

Standby letters of credit under revolving credit agreement

  $ 31   $ 1   $   $   $ 32  

International and other domestic letters of credit

    25     3         2     30  

Performance and excise bonds

    18     7     52     1     78  

Guarantees, indemnifications and other commitments

    2         28     47     77  
                       

Total

  $ 76   $ 11   $ 80   $ 50   $ 217  
                       

OFF BALANCE SHEET ARRANGEMENTS

Financing Arrangements for Affiliated Parties

        In accordance with the provisions of various joint venture agreements, we may purchase and/or sell products and components from/to the joint ventures and the joint ventures may sell products and components to unrelated parties. The transfer price of products purchased from the joint ventures may differ from normal selling prices. Certain joint venture agreements transfer product to us at cost, some transfer product to us on a cost-plus basis and other agreements provide for the transfer of products at market value.

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 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 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. We believe our critical accounting estimates include those addressing the estimation of liabilities for warranty programs, recoverability of investment related to new products, accounting for income taxes, pension benefits and annual assessment of recoverability of goodwill.

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

63


Table of Contents


programs, the liability for such programs is recorded when we commit to a recall action, which generally occurs when it is announced. 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 10, "PRODUCT WARRANTY LIABILITY," to our Consolidated Financial Statements contains a summary of the activity in our warranty liability account for 2010 and 2009 including adjustments to pre-existing warranties.

Recoverability of Investment Related to New Products

        At December 31, 2010, we have capitalized $218 million associated with the future launch of our light-duty diesel engine product. Development of this product began in 2006. Market uncertainty related to the global recession that began in 2008 resulted in some customers delaying or cancelling their vehicle programs. At December 31, 2009, we reviewed our investment of $216 million for possible impairment. We used projections to assess whether future cash flows on an undiscounted basis related to the assets are likely to exceed the related carrying amount to determine if a write-down is appropriate. These projections required estimates about product volume and the size of the market for vehicles that are not yet developed. We used input from our customers in developing alternative cash flow scenarios. Our analysis indicated that the assets were recoverable. Customers that are expected to purchase sufficient quantities to recover our investment in the light-duty diesel engine products remained active with the development of this product through 2010 and there were no significant changes to the assumptions used in 2009. If customer expectations or projected volumes deteriorate and we do not identify alternative customers and/or product applications, we could be required to write-down these assets to net realizable value.

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. Future tax benefits of tax 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, 2010, we recorded net deferred tax assets of $511 million. These assets included $139 million for the value of tax loss and credit carryforwards. A valuation allowance of $50 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. 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 reduce our net tax assets 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 provision 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 tax loss and

64


Table of Contents


credit carryforwards is disclosed in Note 6, "INCOME TAXES," to our Consolidated Financial Statements.

Pension Benefits

        We sponsor a number of pension plans primarily 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. GAAP 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 expense 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 expense. 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 and is generally applied to a 5-year average market value of return. Projected returns are based primarily on broad, publicly traded equity and fixed income indices and forward-looking estimates of active portfolio and investment management. As of December 31, 2010, based upon our target asset allocations it is anticipated that our U.S. investment policy will generate an average annual return over the 20-year projection period equal to or in excess of 7.5 percent approximately 40 percent of the time while returns of 8.4 percent or greater are anticipated 25 percent of the time. We expect additional positive returns from active investment management. The 2010 one year return exceeded 15 percent, combined with the very favorable returns in 2009 has eliminated the significant deterioration in pension assets experienced in 2008 as a result of the credit crisis and related market recession. Based on the historical returns and forward-looking return expectations, we believe an investment return assumption of 8.0 percent per year in 2011 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. As of December 31, 2010, 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 6.5 percent approximately 50 percent of the time while returns of 9.3 percent or greater are anticipated 25 percent of the time. We expect additional positive returns from active investment management. The one year return for our UK plan was 13 percent for 2010 and similar to our US plan, the 2008 market related deterioration in our plan assets has been eliminated. 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, we believe an investment return

65


Table of Contents


assumption of 7.0 percent in 2011 for U.K. pension assets is reasonable. Our pension plan asset allocation at December 31, 2010 and 2009 and target allocation for 2011 are as follows:

 
  U.S. Plans   U.K. Plans  
 
   
  Percentage of
Plan Assets
at December 31,
   
  Percentage of
Plan Assets
at December 31,
 
 
  Target Allocation
2011
  Target Allocation
2011
 
Investment description
  2010   2009   2010   2009  

Equity securities

    45.0 %   46.8 %   59.4 %   55.0 %   57.0 %   58.5 %

Fixed income

    40.0 %   41.2 %   32.6 %   40.0 %   40.0 %   38.2 %

Real estate/other

    15.0 %   12.0 %   8.0 %   5.0 %   3.0 %   3.3 %
                           
 

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 expense over five years. The table below sets forth the expected return assumptions used to develop our pension expense for the period 2008-2010 and our expected rate for 2011.

<