Edgar Filing: CUMMINS INC

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 26, 2010

Commission File Number 1-4949

CUMMINS INC.

(Exact name of registrant as specified in its charter)

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

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit and post such files). Yes x No 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 x		Accelerated filer o

Non-accelerated filer o		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 x

As of September 26, 2010, there were 197,809,683 shares of common stock outstanding with a par value of $2.50 per share.

Website Access to Company’s Reports

Cummins maintains an internet website at www.cummins.com. Investors can obtain copies of our filings from this website free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to the Securities and Exchange Commission.

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CUMMINS INC. AND SUBSIDIARIES

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QUARTERLY REPORT ON FORM 10-Q

		Page

	PART I. FINANCIAL INFORMATION

ITEM 1.	Condensed Consolidated Financial Statements (Unaudited)	3

	Condensed Consolidated Statements of Income for the three and nine months ended September 26, 2010, and September 27, 2009	3

	Condensed Consolidated Balance Sheets at September 26, 2010, and December 31, 2009	4

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 26, 2010, and September 27, 2009	5

	Condensed Consolidated Statements of Changes in Equity for the nine months ended September 26, 2010, and September 27, 2009	6

	Notes to Condensed Consolidated Financial Statements	7

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	44

ITEM 4.	Controls and Procedures	44

	PART II. OTHER INFORMATION

ITEM 1.	Legal Proceedings	44

ITEM 1A.	Risk Factors	45

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45

ITEM 6.	Exhibits	46

	Signatures	47

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PART I. FINANCIAL INFORMATION

ITEM 1. Condensed Consolidated Financial Statements

CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three months ended					Nine months ended
In millions, except per share amounts	September 26, 2010			September 27, 2009		September 26, 2010			September 27, 2009
NET SALES (a)	$	3,401		$	2,530	$	9,087		$	7,400
Cost of sales	2,571			2,027		6,903			6,004
GROSS MARGIN	830			503		2,184			1,396

OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses	375			304		1,064			891
Research, development and engineering expenses	103			90		291			254
Equity, royalty and interest income from investees (Note 4)	88			57		261			147
Restructuring and other charges (Note 14)	—			22		—			95
Other operating (expense) income, net	(5		)	3		(13		)	(6		)
OPERATING INCOME	435			147		1,077			297

Interest income	6			2		14			5
Interest expense	11			9		29			26
Other income (expense), net	8			6		25			(10		)
INCOME BEFORE INCOME TAXES	438			146		1,087			266

Income tax expense	129			36		338			72
CONSOLIDATED NET INCOME	309			110		749			194

Less: Net income attributable to noncontrolling interests	26			15		71			36
NET INCOME ATTRIBUTABLE TO CUMMINS INC.	$	283		$	95	$	678		$	158

EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
Basic	$	1.45		$	0.48	$	3.44		$	0.80
Diluted	$	1.44		$	0.48	$	3.43		$	0.80

WEIGHTED AVERAGE SHARES OUTSTANDING
Basic	$	195.8		$	197.4	$	197.0		$	197.1
Dilutive effect of stock compensation awards	$	0.5		$	0.4	$	0.4		$	0.3
Diluted	$	196.3		$	197.8	$	197.4		$	197.4

CASH DIVIDENDS DECLARED PER COMMON SHARE	$	0.2625		$	0.175	$	0.6125		$	0.525

(a) Includes sales to nonconsolidated equity investees of $580 million and $1,524 million and $428 million and $1,279 million for the three and nine months ended September 26, 2010 and September 27, 2009, respectively.

The accompanying notes are an integral part of the condensed consolidated financial statements.

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CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 26,			December 31,
In millions, except par value	2010			2009
ASSETS
Current assets
Cash and cash equivalents	$	937		$	930
Marketable securities	308			190
Accounts and notes receivable, net
Trade and other	1,938			1,730
Nonconsolidated equity investees	297			274
Inventories (Note 6)	1,910			1,341
Deferred income taxes	328			295
Prepaid expenses and other current assets	260			243
Total current assets	5,978			5,003
Long-term assets
Property, plant and equipment	4,838			4,765
Accumulated depreciation	(2,947		)	(2,879		)
Property, plant and equipment, net	1,891			1,886
Investments and advances related to equity method investees	689			574
Goodwill	365			364
Other intangible assets, net	219			228
Deferred income taxes	313			436
Other assets	417			325
Total assets	$	9,872		$	8,816

LIABILITIES
Current liabilities
Loans payable	$	98		$	37
Accounts payable (principally trade)	1,339			957
Current portion of accrued product warranty (Note 7)	396			426
Accrued compensation, benefits and retirement costs	452			366
Deferred revenue	166			128
Other accrued expenses	620			518
Total current liabilities	3,071			2,432
Long-term liabilities
Long-term debt	732			637
Pensions	362			514
Postretirement benefits other than pensions	448			453
Other liabilities and deferred revenue	765			760
Total liabilities	5,378			4,796

Commitments and contingencies (Note 8)	—			—

EQUITY
Cummins Inc. shareholders’ equity
Common stock, $2.50 par value, 500 shares authorized, 221.8 and 222.0 shares issued	1,922			1,860
Retained earnings	4,135			3,575
Treasury stock, at cost, 24.0 and 20.7 shares	(967		)	(731		)
Common stock held by employee benefits trust, at cost, 2.2 and 3.0 shares	(27		)	(36		)
Accumulated other comprehensive loss
Defined benefit postretirement plans	(778		)	(788		)
Other	(86		)	(107		)
Total accumulated other comprehensive loss	(864		)	(895		)
Total Cummins Inc. shareholders’ equity	4,199			3,773
Noncontrolling interests	295			247
Total equity	4,494			4,020
Total liabilities and equity	$	9,872		$	8,816

The accompanying notes are an integral part of the condensed consolidated financial statements.

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CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine months ended
	September 26,			September 27,
In millions	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income	$	749		$	194
Adjustments to reconcile consolidated net income to net cash provided by operating activities:
Restructuring and other charges, net of cash payments	—			21
Depreciation and amortization	239			238
Gain on fair value adjustment for consolidated investee (Note 15)	(12		)	—
Deferred income taxes	83			(11		)
Equity in income of investees, net of dividends	(95		)	56
Pension contributions in excess of expense	(114		)	(49		)
Other post-retirement benefits payments in excess of expense	(22		)	(18		)
Stock-based compensation expense	17			16
Translation and hedging activities	10			33
Changes in current assets and liabilities, net of acquisitions and divestitures:
Accounts and notes receivable	(198		)	89
Inventories	(524		)	360
Other current assets	(16		)	32
Accounts payable	336			(155		)
Accrued expenses	102			(185		)
Changes in long-term liabilities	97			103
Other, net	(33		)	6
Net cash provided by operating activities	619			730

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures	(170		)	(204		)
Investments in internal use software	(28		)	(24		)
Proceeds from disposals of property, plant and equipment	46			8
Investments in and advances to equity investees	(17		)	(5		)
Acquisition of businesses, net of cash acquired (Note 15)	(77		)	(2		)
Investments in marketable securities—acquisitions	(560		)	(234		)
Investments in marketable securities—liquidations	452			171
Purchases of other investments	(54		)	(54		)
Cash flows from derivatives not designated as hedges	2			(21		)
Other, net	—			1
Net cash used in investing activities	(406		)	(364		)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings	163			11
Payments on borrowings and capital lease obligations	(64		)	(60		)
Net borrowings under short-term credit agreements	(4		)	(4		)
Distributions to noncontrolling interests	(21		)	(16		)
Dividend payments on common stock	(120		)	(106		)
Proceeds from sale of common stock held by employee benefit trust	52			54
Repurchases of common stock	(241		)	—
Other, net	25			1
Net cash used in financing activities	(210		)	(120		)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	4			14
Net increase in cash and cash equivalents	7			260
Cash and cash equivalents at beginning of year	930			426
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	937		$	686

The accompanying notes are an integral part of the condensed consolidated financial statements.

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CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

									Accumulated						Common						Total
			Additional						Other						Stock						Cummins Inc.
	Common		paid-in			Retained			Comprehensive			Treasury			Held in			Unearned			Shareholders’			Noncontrolling			Total
In millions	Stock		Capital			Earnings			Loss			Stock			Trust			Compensation			Equity			Interests			Equity
BALANCE AT DECEMBER 31, 2008	$	554	$	1,239		$	3,288		$	(1,066	)	$	(715	)	$	(61	)	$	(5	)	$	3,234		$	246		$	3,480
Comprehensive income:
Net income						158															158			36			194
Other comprehensive income (loss) (Note 11)									204												204			9			213
Total comprehensive income																					362			45			407
Issuance of shares	1		6																		7			—			7
Cash dividends on common stock						(106		)													(106		)	—			(106		)
Employee benefits trust activity			40												18						58			—			58
Distribution to noncontrolling interests																					—			(16		)	(16		)
Stock option exercises			(1		)							2									1			—			1
Conversion to capital lease																					—			(35		)	(35		)
Other shareholder transactions			3															4			7			—			7
BALANCE AT SEPTEMBER 27, 2009	$	555	$	1,287		$	3,340		$	(862	)	$	(713	)	$	(43	)	$	(1	)	$	3,563		$	240		$	3,803

BALANCE AT DECEMBER 31, 2009	$	555	$	1,306		$	3,575		$	(895	)	$	(731	)	$	(36	)	$	(1	)	$	3,773		$	247		$	4,020
Comprehensive income:
Net income						678															678			71			749
Other comprehensive income (loss) (Note 11)									31												31			9			40
Total comprehensive income																					709			80			789
Issuance of shares			5																		5			—			5
Employee benefits trust activity			58												9						67			—			67
Acquisition of shares												(241		)							(241		)	—			(241		)
Cash dividends on common stock						(120		)													(120		)	—			(120		)
Distribution to noncontrolling interests																					—			(23		)	(23		)
Stock option exercises												5									5			—			5
Deconsolidation of variable interest entity (Note 3)																					—			(11		)	(11		)
Other shareholder transactions			(2		)	2												1			1			2			3
BALANCE AT SEPTEMBER 26, 2010	$	555	$	1,367		$	4,135		$	(864	)(1)	$	(967	)	$	(27	)	$	—		$	4,199		$	295		$	4,494

(1)Comprised of defined benefit postretirement plans of $(778) million, foreign currency translation adjustments of $(98) million, unrealized gain on marketable securities of $4 million and unrealized gain on derivatives of $8 million.

The accompanying notes are an integral part of the condensed consolidated financial statements.

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CUMMINS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. NATURE OF OPERATIONS

Cummins Inc. (“Cummins,” “the Company,” “we,” “our,” or “us”) is a leading global power provider that designs, manufactures, distributes and services diesel and natural gas engines, electric power generation systems and engine-related component products, including filtration and emissions solutions, fuel systems, controls and air handling systems. We were founded in 1919 as one of the first manufacturers of diesel engines and are headquartered in Columbus, Indiana. We sell our products to Original Equipment Manufacturers (OEMs), distributors and other customers worldwide. We serve our customers through a network of more than 500 company-owned and independent distributor locations and approximately 5,200 dealer locations in more than 190 countries and territories.

NOTE 2. BASIS OF PRESENTATION

The unaudited Condensed Consolidated Financial Statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of operations, financial position and cash flows. All such adjustments are of a normal recurring nature. The Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted as permitted by such rules and regulations. Certain reclassifications have been made to prior period amounts to conform to the presentation of the current period condensed financial statements.

Our reporting period usually ends on the Sunday closest to the last day of the quarterly calendar period. The third quarters of 2010 and 2009 ended on September 26, and September 27, respectively. The interim periods for both 2010 and 2009 contain 13 weeks. Our fiscal year ends on December 31, regardless of the day of the week on which December 31 falls.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts in the Condensed Consolidated Financial Statements. Significant estimates and assumptions in these Condensed Consolidated Financial Statements require the exercise of judgment and are used for, but not limited to, allowance for doubtful accounts, estimates of future cash flows and other assumptions associated with goodwill and long-lived asset impairment tests, useful lives for depreciation and amortization, warranty programs, determination of discount and other rate assumptions for pension and other postretirement benefit expenses, restructuring costs, income taxes and deferred tax valuation allowances, lease classifications and contingencies. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be different from these estimates.

In preparing our Condensed Consolidated Financial Statements, we evaluated subsequent events through the date our quarterly report was filed with the Securities and Exchange Commission.

The weighted-average diluted common shares outstanding exclude the anti-dilutive effect of certain stock options since such options had an exercise price in excess of the monthly average market value of our common stock. The options excluded from diluted earnings per share for the three and nine month periods ended September 26, 2010, and September 27, 2009, were as follows:

	Three months ended		Nine months ended
	September 26,	September 27,	September 26,	September 27,
	2010	2009	2010	2009
Options excluded	3,795	28,717	9,993	61,585

You should read these interim condensed financial statements in conjunction with the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2009. Our interim period financial results for the three and nine month interim periods presented are not necessarily indicative of results to be expected for any other interim period or for the entire year. The year-end Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.

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NOTE 3. RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Accounting Pronouncements Recently Adopted

In January 2010, the Financial Accounting Standards Board (FASB) amended its standards related to fair value measurements and disclosures, which are effective for interim and annual fiscal periods beginning after December 15, 2009, except for disclosures about certain Level 3 activity which will not become effective until interim and annual periods beginning after December 15, 2010. The new standard requires us to disclose transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers as well as activity in Level 3 fair value measurements. The new standard also requires a more detailed level of disaggregation of the assets and liabilities being measured as well as increased disclosures regarding inputs and valuation techniques of the fair value measurements. Our disclosures related to the new standard are included in Note 9.

In June 2009, the FASB amended its standards for accounting for transfers of financial assets, which was effective for interim and annual fiscal periods beginning after November 15, 2009. The new standard removes the concept of a qualifying special-purpose entity from GAAP. The new standard modifies the financial components approach used in previous standards and limits the circumstances in which a financial asset, or portion of a financial asset, should be derecognized. The new standard also requires enhanced disclosure regarding transfers of financial interests and a transferor’s continuing involvement with transferred assets. The new standard requires us to report any activity under our receivable sales program as secured borrowings. As of September 26, 2010, there were no outstanding amounts under our receivable sales program and there was no significant activity during the quarter.

In June 2009, the FASB amended its existing standards related to the consolidation of variable interest entities, which was effective for interim and annual fiscal periods beginning after November 15, 2009. The new standard requires entities to analyze whether their variable interests give it a controlling financial interest of a variable interest entity (VIE) and outlines what defines a primary beneficiary. The new standard amends GAAP by: (a) changing certain rules for determining whether an entity is a VIE; (b) replacing the quantitative approach previously required for determining the primary beneficiary with a more qualitative approach; and (c) requiring entities to continuously analyze whether they are the primary beneficiary of a VIE among other amendments. The new standard also requires enhanced disclosures regarding an entity’s involvement in a VIE. The only significant impact of the adoption of this standard was to deconsolidate Cummins Komatsu Engine Corporation (CKEC) as of January 1, 2010 and to account for CKEC under GAAP accounting for equity method investees. The impact of the deconsolidation on our Condensed Consolidated Statements of Income was minimal as all sales were eliminated in consolidation in the past. The most significant impacts on our Condensed Consolidated Balance Sheets were to decrease current assets by $9 million, decrease long-term assets by $10 million, increase investments and advances related to equity method investees by $11 million and decrease noncontrolling interest by $11 million.

Accounting Pronouncements Issued But Not Yet Effective

In July 2010, the FASB amended its standards regarding the disclosures for credit quality of financing receivables and the allowance for credit losses. The objective of the amendment is to provide a greater level of disaggregated information about the credit quality of financing receivables, the allowance for credit losses, and timely recognition of such losses. Specifically, the amendment requires an entity to disclose credit quality indicators, past due information and modifications of its financing receivables. The new rules are effective for us beginning December 31, 2010. We are in the process of evaluating the impact that this amendment will have on our Consolidated Financial Statements.

In October 2009, the FASB amended its rules regarding the accounting for multiple element revenue arrangements. The objective of the amendment is to allow vendors to account for revenue for different deliverables separately as opposed to part of a combined unit when those deliverables are provided at different times. Specifically, this amendment addresses how to separate deliverables and simplifies the process of allocating revenue to the different deliverables when more than one deliverable exists. The new rules are effective for us beginning January 1, 2011. We are in the process of evaluating the impact that this amendment will have on our Consolidated Financial Statements.

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NOTE 4. EQUITY, ROYALTY AND INTEREST INCOME FROM INVESTEES

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

	Three months ended					Nine months ended
	September 26,		September 27,			September 26,		September 27,
In millions	2010		2009			2010		2009
Distribution Entities
North American distributors	$	26	$	25		$	72	$	74
All other distributors	5		4			13		11

Manufacturing Entities
Dongfeng Cummins Engine Company, Ltd.	24		11			76		18
Chongqing Cummins Engine Company, Ltd.	12		8			35		28
Tata Cummins, Ltd.	4		2			11		2
Shanghai Fleetguard Filter Co., Ltd.	3		2			9		5
Valvoline Cummins, Ltd.	2		3			7		5
All other manufacturers	5		(2		)	16		(7		)
Cummins share of net income	81		53			239		136
Royalty and interest income	7		4			22		11
Equity, royalty and interest income from investees	$	88	$	57		$	261	$	147

NOTE 5. PENSION AND OTHER POSTRETIREMENT BENEFITS

We sponsor funded and unfunded domestic and foreign defined benefit pension and other postretirement plans. Cash contributions to these plans were as follows:

	Three months ended				Nine months ended
	September 26,		September 27,		September 26,		September 27,
In millions	2010		2009		2010		2009
Defined benefit pension and other postretirement plans:
Voluntary pension	$	11	$	55	$	106	$	100
Mandatory pension	5		8		61		22
Defined benefit pension contributions	16		63		167		122
Other postretirement plans	20		13		37		40
Total defined benefit plans	$	36	$	76	$	204	$	162
Defined contribution pension plans	$	10	$	9	$	33	$	32

We presently anticipate contributing approximately $220 million to our defined benefit pension plans in 2010 and paying approximately $53 million in claims and premiums for other postretirement benefits. The $220 million of contributions for the full year include voluntary contributions of approximately $108 million. These contributions and payments may be made from trusts or company funds either to increase pension assets or to make direct benefit payments to plan participants.

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The components of net periodic pension and other postretirement benefit cost under our plans consisted of the following:

	Pension
	U.S. Plans						Non-U.S. Plans						Other Postretirement Benefits
	Three months ended
	September 26,			September 27,			September 26,			September 27,			September 26,			September 27,
In millions	2010			2009			2010			2009			2010			2009
Service cost	$	11		$	11		$	5		$	5		$	—		$	—
Interest cost	29			28			14			15			7			7
Expected return on plan assets	(36		)	(34		)	(18		)	(16		)	—			—
Amortization of prior service (credit) cost	(1		)	—			1			1			(2		)	(2		)
Recognized net actuarial loss	9			8			4			5			—			—
Net periodic benefit cost	12			$	13		$	6		$	10		$	5		$	5
Curtailment loss	—			6			—			—			—			6
Net periodic benefit cost after curtailment losses	$	12		$	19		$	6		$	10		$	5		$	11

	Pension
	U.S. Plans						Non-U.S. Plans						Other Postretirement Benefits
	Nine months ended
	September 26,			September 27,			September 26,			September 27,			September 26,			September 27,
In millions	2010			2009			2010			2009			2010			2009
Service cost	$	34		$	34		$	14		$	13		$	—		$	—
Interest cost	84			85			43			42			21			22
Expected return on plan assets	(110		)	(104		)	(53		)	(44		)	—			—
Amortization of prior service (credit) cost	(1		)	(1		)	2			3			(6		)	(6		)
Recognized net actuarial loss	27			23			13			15			—			—
Other	—			1			—			—			—			—
Net periodic benefit cost	34			38			19			29			15			16
Curtailment loss	—			6			—			—			—			6
Net periodic benefit cost after curtailment losses	$	34		$	44		$	19		$	29		$	15		$	22

As disclosed in Note 14, we have executed many restructuring actions in 2008 and 2009. As a result, our U.S. pension and other postretirement benefit plans were remeasured at September 27, 2009 and we recognized curtailment losses as prescribed under U.S. GAAP pension and other postretirement benefit standards due to the significant reduction in the expected aggregate years of future service of the employees affected by the actions. In the third quarter of 2009, we recorded net curtailment losses of $6 million and $6 million related to the pension and other postretirement plans, respectively. The curtailment losses include recognition of the change in the projected benefit obligation (PBO) or accumulated postretirement benefit obligation (APBO) and a portion of the previously unrecognized prior service cost reflecting the reduction in expected future service.

The remeasurement of these pension and other postretirement benefit plans generated a decrease in the 2009 annual net periodic benefit cost for pension plans of $3 million and a zero net change in the 2009 annual net periodic benefit cost for other postretirement benefit plans. The decrease was recognized in the fourth quarter of 2009. Further, the pension plans’ PBO and plan assets increased from December 31, 2008, by $22 million and $181 million, respectively (net of $138 million in benefit payments and plan assets reflecting a contribution of $100 million). The other postretirement benefit plans’ APBO increased by $3 million, due to the remeasurement.

Additionally, in the third quarter of 2009, we recorded a credit of $87 million for pension plans and a charge of $11 million for other postretirement benefit plans to accumulated other comprehensive loss in accordance with the provisions of U.S. GAAP pension and other postretirement benefit standards due to the remeasurement of the curtailed plans.

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NOTE 6. INVENTORIES

Inventories included the following:

	September 26,			December 31,
In millions	2010			2009
Finished products	$	964		$	785
Work-in-process and raw materials	1,036			638
Inventories at FIFO cost	2,000			1,423
Excess of FIFO over LIFO	(90		)	(82		)
Total inventories	$	1,910		$	1,341

NOTE 7. PRODUCT WARRANTY LIABILITY

We charge the estimated costs of warranty programs, other than product recalls, to income at the time products are shipped to customers. We use historical claims experience to develop the estimated liability. We review product recall programs on a quarterly basis and, if necessary, record a liability when we commit to an action. We also sell extended warranty coverage on several engines. The following is a tabular reconciliation of the product warranty liability, including the deferred revenue related to our extended warranty coverage:

	Nine months ended
	September 26,			September 27,
In millions	2010			2009
Balance, beginning of period	$	989		$	962
Provision for warranties issued	250			241
Deferred revenue on extended warranty contracts sold	78			77
Payments	(310		)	(352		)
Amortization of deferred revenue on extended warranty contracts	(64		)	(54		)
Changes in estimates for pre-existing warranties	(16		)	67
Foreign currency translation	—			12
Balance, end of period	$	927		$	953

Warranty related deferred revenue, supplier recovery receivables and the long-term portion of the warranty liability on our September 26, 2010, balance sheet were as follows:

	September 26,
In millions	2010		Balance Sheet Locations
Deferred revenue related to extended coverage programs:
Current portion	$	86	Deferred revenue
Long-term portion	189		Other liabilities and deferred revenue
Total	$	275

Receivables related to estimated supplier recoveries:
Current portion	$	7	Trade and other receivables
Long-term portion	5		Other assets
Total	$	12

Long-term portion of warranty liability	$	256	Other liabilities and deferred revenue

NOTE 8. COMMITMENTS AND CONTINGENCIES

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

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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.

We conduct significant business operations in Brazil that are subject to the Brazilian federal, state and local labor, social security, tax and customs laws. While we believe we comply with such laws, they are complex, subject to varying interpretations and we are often engaged in litigation regarding the application of these laws to particular circumstances. In the third quarter of 2010, it was determined that we overpaid a Brazilian revenue based tax during the period 2004-2008. Our results include a pre-tax recovery of $32 million recorded in cost of sales ($21 million after-tax) related to tax credits on imported products 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 quarter.

In June 2008, four of our sites in Southern Indiana, including our Technical Center, experienced extensive flood damage. We have submitted a claim for $220 million to our insurance carriers, which includes a claim for business interruption. As of September 26, 2010, we have received $92 million in recoveries from the insurance carriers. Our insurance carriers have disputed certain aspects of our claim and the parties have filed suit against each other. Although we believe that we are insured against the full amount of our claim, there is no assurance that we will be successful recovering the amounts we believe are due under the policies.

U.S. Distributor Commitments

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 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.

Residual Value Guarantees

We have various residual value guarantees on equipment leased under operating leases. The total amount of these residual value guarantees at September 26, 2010, was $8 million.

Other Guarantees and Commitments

In addition to the guarantees discussed above, from time to time we enter into other guarantee arrangements, including guarantees of non-U.S. distributor financing and other miscellaneous guarantees of third-party obligations. As of September 26, 2010, the maximum potential loss related to these other guarantees is $79 million ($46 million of which relates to the Beijing Foton guarantee discussed below and $32 million relates to the Cummins Olayan Energy Limited guarantee discussed below).

We have arrangements with certain suppliers that require us to purchase minimum volumes or be subject to monetary penalties. The penalty amounts are less than our purchase commitments and essentially allow the supplier to recover their tooling costs in most instances. As of September 26, 2010, if we were to stop purchasing from each of these suppliers, the amount of the penalty would be approximately $65 million, of which $59 million relates to a contract with an engine parts supplier that extends to 2013. This arrangement enables us to secure critical components. We do not currently anticipate paying any penalties under these contracts.

In July 2008, Beijing Foton Cummins Engine Company, a 50 percent owned entity accounted for under the equity method, entered into a line of credit agreement with a borrowing capacity of up to $180 million (at current exchange rates). The line will be used primarily to fund equipment purchases for a new manufacturing plant. As a part of this transaction, we guaranteed 50 percent of any outstanding borrowings up to a maximum guarantee of $90 million (at current exchange rates). As of September 26, 2010, outstanding borrowings under this agreement

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were $92 million and our guarantee was $46 million (at current exchange rates). We recorded a liability for the fair value of this guarantee. The amount of the liability was less than $1 million. The offset to this liability was an increase in our investment in the joint venture.

In February 2010, Cummins Olayan Energy Limited, a 49 percent owned entity accounted for under the equity method, executed a four-year $101 million (at current exchange rates) debt financing arrangement to acquire certain rental equipment assets. As a part of this transaction, we guaranteed 49 percent of the total outstanding loan amount or $49 million (at current exchange rates). As of September 26, 2010, outstanding borrowings under this agreement were $65 million and our guarantee was $32 million (at current exchange rates). We recorded a liability for the fair value of this guarantee. The amount of the liability was less than $1 million. The offset to this liability was an increase in our investment in the joint venture.

We have guarantees with certain customers that require us to satisfactorily honor contractual or regulatory obligations, or compensate for monetary losses related to nonperformance. These performance bonds and other performance-related guarantees at September 26, 2010, were $75 million.

Indemnifications

Periodically, we enter into various contractual arrangements where we agree to indemnify a third-party against certain types of losses. Common types of indemnifications include:

· product liability and license, patent or trademark indemnifications,

· asset sale agreements where we agree to indemnify the purchaser against future environmental exposures related to the asset sold and

· any contractual agreement where we agree to indemnify the counter-party for losses suffered as a result of a misrepresentation in the contract.

We regularly evaluate the probability of having to incur costs associated with these indemnifications and accrue for expected losses that are probable. Because the indemnifications are not related to specified known liabilities and due to their uncertain nature, we are unable to estimate the maximum amount of the potential loss associated with these indemnifications.

Joint Venture Commitments

As of September 26, 2010, we have committed to invest an additional $54 million into existing joint ventures of which $29 million will be funded in 2010.

NOTE 9. FAIR VALUE OF FINANCIAL INSTRUMENTS

The majority of the assets and liabilities we carry at fair value are available-for-sale (AFS) securities and derivatives. AFS securities are derived from level 1 or level 2 inputs. Derivative assets and liabilities are derived from level 2 inputs. The predominance of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. When material, we adjust the values of our derivative contracts for counter-party or our credit risk. There were no transfers into or out of Levels 2 or 3 in the first nine months of 2010.

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The following table summarizes our financial instruments recorded at fair value in our Condensed Consolidated Balance Sheets at September 26, 2010:

	Fair Value Measurements Using
	Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs
In millions	(Level 1)		(Level 2)		(Level 3)		Total
Available-for-sale debt securities:
Debt mutual funds	$	103	$	54	$	—	$	157
Bank debentures	—		80		—		80
Certificates of deposit	—		56		—		56
Government debt securities-non-U.S.	—		3		—		3
Corporate debt securities	—		2		—		2
Total available-for-sale debt securities	103		195		—		298

Available-for-sale equity securities:
Financial services industry	10		—		—		10
Total available-for-sale equity securities	10		—		—		10

Derivative assets:
Commodity swap contracts	—		15		—		15
Foreign currency forward contracts	—		1		—		1
Interest rate contracts	—		61		—		61
Total derivative assets	—		77		—		77
Total	$	113	$	272	$	—	$	385

The substantial majority of our assets were valued utilizing a market approach. A description of the valuation techniques and inputs used for our level 2 fair value measures are as follows:

Debt mutual funds — Assets in level 2 consist of exchange traded mutual funds that lack sufficient trading volume to be classified at level 1. The fair value measure for these investments is the daily net asset value published on a regulated governmental website. Daily quoted prices are available from the issuing brokerage and are used on a test basis to corroborate this level 2 input.

Bank debentures and Certificates of deposit — These investments provide us with a fixed rate of return and generally range in maturity from six months to one year. The counter-parties to these investments are reputable financial institutions with investment grade credit ratings. Since these instruments are not tradable and must be settled directly by Cummins with the respective financial institution, our fair value measure is the financial institutions’ month-end statement.

Government debt securities-non-U.S. and Corporate debt securities — The fair value measure for these securities are broker quotes received from reputable firms. These securities are infrequently traded on a national stock exchange and these values are used on a test basis to corroborate our level 2 input measure.

Foreign currency forward contracts — The fair value measure for these contracts are determined based on forward foreign exchange rates received from third-party pricing services. These rates are based upon market transactions and are periodically corroborated by comparing to third-party broker quotes.

Commodity swap contracts — The fair value measure for these contracts are current spot market data adjusted for the appropriate current forward curves provided by external financial institutions. The current spot price is the most significant component of this valuation and is based upon market transactions. We use third-party pricing services for the spot price component of this valuation which is periodically corroborated by market data from broker quotes.

Interest rate contracts — We currently have only one interest rate contract. We utilize the month-end statement from the issuing financial institution as our fair value measure for this investment. We corroborate this valuation through the use of a third-party pricing service for similar assets and liabilities.

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Fair Value of Other Financial Instruments

Based on borrowing rates currently available to us for bank loans with similar terms and average maturities, considering our risk premium, the fair value and carrying value of total debt, including current maturities, at September 26, 2010 and December 31, 2009, was as follows:

	September 26,		December 31,
In millions	2010		2009
Fair value of total debt	$	920	$	674
Carrying value of total debt	853		703

NOTE 10. DERIVATIVES

We are exposed to financial risk resulting from volatility in foreign exchange rates, commodity prices and interest rates. This risk is closely monitored and managed through the use of financial derivative instruments including foreign currency forward contracts, commodity swap contracts and interest rate swaps. As stated in our policies and procedures, financial derivatives are used expressly for hedging purposes, and under no circumstances are they used for speculative purposes. When material, we adjust the value of our derivative contracts for counter-party or our credit risk. The results and status of our hedging transactions are reported to senior management on a monthly and quarterly basis.

Foreign Exchange Rates

As a result of our international business presence, we are exposed to foreign currency exchange risks. We transact business in foreign currencies and, as a result, our income experiences some volatility related to movements in foreign currency exchange rates. To help manage our exposure to exchange rate volatility, we use foreign exchange forward contracts on a regular basis to hedge forecasted intercompany and third-party sales and purchases denominated in non-functional currencies. Our internal policy allows for managing anticipated foreign currency cash flows for up to one year. These foreign currency forward contracts are designated and qualify as foreign currency cash flow hedges under GAAP. The effective portion of the unrealized gain or loss on the forward contract is deferred and reported as a component of “accumulated other comprehensive loss” (AOCL). When the hedged forecasted transaction (sale or purchase) occurs, the unrealized gain or loss is reclassified into income in the same line item associated with the hedged transaction in the same period or periods during which the hedged transaction affects income. The ineffective portion of the hedge, unrealized gain or loss, if any, is recognized in current income during the period of change. As of September 26, 2010, the amount we expect to reclassify from AOCL to income over the next year is less than $1 million. For the nine month periods ended September 26, 2010 and September 27, 2009, there were no circumstances that would have resulted in the discontinuance of a foreign currency cash flow hedge.

To minimize the income volatility resulting from the remeasurement of net monetary assets and payables denominated in a currency other than the functional currency, we enter into foreign currency forward contracts, which are considered economic hedges. The objective is to offset the gain or loss from remeasurement with the gain or loss from the fair market valuation of the forward contract. These derivative instruments are not designated as hedges under GAAP.

The table below summarizes our outstanding foreign currency forward contracts. Only the U.S. dollar forward contracts are designated and qualify for hedge accounting as of each period presented below. The currencies in this table represent 97 percent and 96 percent of the notional amounts of contracts outstanding as of September 26, 2010 and December 31, 2009, respectively.

	Notional amount in millions
	September 26,	December 31,
Currency denomination	2010	2009
United States Dollar (USD)	170	107
British Pound Sterling (GBP)	113	70
Euro (EUR)	32	12
Singapore Dollar (SGD)	15	15
Indian Rupee (INR)	2,127	616
Japanese Yen (JPY)	4,067	1,335
Romanian Leu (RON)	—	44
Canadian Dollar (CAD)	22	—
South Korea Won (KRW)	19,443	2,115
Chinese Renmimbi (CNY)	129	39

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Commodity Price Risk

We are exposed to fluctuations in commodity prices due to contractual agreements with component suppliers. In order to protect ourselves against future price volatility and, consequently, fluctuations in gross margins, we periodically enter into commodity swap contracts with designated banks to fix the cost of certain raw material purchases with the objective of minimizing changes in inventory cost due to market price fluctuations. The swap contracts are derivative contracts that are designated as cash flow hedges under GAAP. The effective portion of the unrealized gain or loss is deferred and reported as a component of AOCL. When the hedged forecasted transaction (purchase) occurs, the unrealized gain or loss is reclassified into income in the same line item associated with the hedged transaction in the same period or periods during which the hedged transaction affects income. The ineffective portion of the hedge, if any, is recognized in current income in the period in which the ineffectiveness occurs. As of September 26, 2010, we expect to reclassify an unrealized net gain of $9 million from AOCL to income over the next year. For the nine month period ended September 26, 2010, there were no material circumstances that would have resulted in the discontinuance of a cash flow hedge. For the nine month period ended September 27, 2009, we discontinued hedge accounting on certain contracts where the forecasted transactions were no longer probable. The amount reclassified to income as a result of this action was a loss of $4 million for the nine months ended September 27, 2009. Our internal policy allows for managing these cash flow hedges for up to three years.

The following table summarizes our outstanding commodity swap contracts that were entered into to hedge the cost of certain raw material purchases:

Dollars in millions	September 26, 2010				December 31, 2009
Commodity	Notional Amount		Quantity		Notional Amount		Quantity
Copper	$	48	7,216 metric tons	(1)	$	77	11,372 metric tons	(1)
Platinum	8		8,442 troy ounces	(2)	14		15,986 troy ounces	(2)
Palladium	1		1,678 troy ounces	(2)	1		3,161 troy ounces	(2)

(1)A metric ton is a measurement of mass equal to 1,000 kilograms.

(2)A troy ounce is a measurement of mass equal to approximately 31 grams.

Interest Rate Risk

We are exposed to market risk from fluctuations in interest rates. We manage our exposure to interest rate fluctuations through the use of interest rate swaps. The objective of the swaps is to more effectively balance our borrowing costs and interest rate risk.

In November 2005, we entered into an interest rate swap to effectively convert our $250 million debt issue, due in 2028, from a fixed rate of 7.125% to a floating rate based on a LIBOR spread. The terms of the swap mirror those of the debt, with interest paid semi-annually. This swap qualifies as a fair value hedge under GAAP. The gain or loss on this derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current income as “interest expense.” The following table summarizes these gains and losses for the three and nine month interim reporting periods presented below:

	Three months ended										Nine months ended
In millions	September 26, 2010					September 27, 2009					September 26, 2010					September 27, 2009
Income Statement Classification	Gain/(Loss) on Swaps		Gain/(Loss) on Borrowings			Gain/(Loss) on Swaps		Gain/(Loss) on Borrowings			Gain/(Loss) on Swaps		Gain/(Loss) on Borrowings			Gain/(Loss) on Swaps			Gain/(Loss) on Borrowings
Interest expense	$	14	$	(14	)	$	6	$	(6	)	$	36	$	(36	)	$	(40	)	$	40

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Cash Flow Hedging

The following table summarizes the effect on our Condensed Consolidated Statements of Income for derivative instruments classified as cash flow hedges for the three and nine month interim reporting periods presented below. The table does not include amounts related to ineffectiveness as it was not material for the periods presented.

		Three months ended											Nine months ended
In millions Derivatives in Cash	Location of Gain/(Loss) Reclassified into Income	Amount of Gain/(Loss) Recognized in AOCL on Derivative (Effective Portion)					Amount of Gain/(Loss) Reclassified from AOCL into Income (Effective Portion)						Amount of Gain/(Loss) Recognized in AOCL on Derivative (Effective Portion)					Amount of Gain/(Loss) Reclassified from AOCL into Income (Effective Portion)
Flow Hedging	(Effective	September 26,		September 27,			September 26,			September 27,			September 26,			September 27,		September 26,			September 27,
Relationships	Portion)	2010		2009			2010			2009			2010			2009		2010			2009
Foreign currency forward contracts	Net sales	$	2	$	(1	)	$	(1	)	$	5		$	(5	)	$	8	$	(5	)	$	(3	)
Commodity swap contracts	Cost of sales	8		14			1			(5		)	4			43		5			(22		)
Total		$	10	$	13		$	—		$	—		$	(1	)	$	51	$	—		$	(25	)

Derivatives Not Designated as Hedging Instruments

The following table summarizes the effect on our Condensed Consolidated Statements of Income for derivative instruments that are not classified as hedges for the three and nine month interim reporting periods presented below.

		Three months ended						Nine months ended
In millions	Location of Gain/(Loss)	Amount of Gain/(Loss) Recognized in Income on Derivatives						Amount of Gain/(Loss) Recognized in Income on Derivatives
Derivatives Not Designated as	Recognized in Income	September 26,			September 27,			September 26,			September 27,
Hedging Instruments	on Derivatives	2010			2009			2010			2009
Foreign currency forward contracts	Cost of sales	$	(6	)	$	2		$	(4	)	$	2
Foreign currency forward contracts	Other income (expense), net	12			(8		)	6			10

Fair Value Amount and Location of Derivative Instruments

The following tables summarize the location and fair value of derivative instruments on our Condensed Consolidated Balance Sheets:

	Derivative assets
	Fair Value
	September 26,		December 31,
In millions	2010		2009		Balance Sheet Location
Derivatives Designated as Hedging Instruments
Commodity swap contracts	$	14	$	9	Prepaid expenses and other current assets
Commodity swap contracts	1		8		Other assets
Interest rate contract	61		25		Other assets
Total Derivatives Designated as Hedging Instruments	76		42

Derivatives Not Designated as Hedging Instruments
Foreign currency forward contracts	1		—		Prepaid expenses and other current assets
Total Derivatives Not Designated as Hedging Instruments	1		—

Total derivative assets	$	77	$	42

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NOTE 11. COMPREHENSIVE INCOME

The table below provides a summary of total comprehensive income and the allocation of total comprehensive income between the shareholders of Cummins Inc. and the non-controlling interests for the three and nine month periods ended September 26, 2010 and September 27, 2009.

Three months ended

September 26, 2010

September 27, 2009

In millions

Attributable to
Cummins Inc.

Attributable to
Noncontrolling
Interests

Total
Consolidated

Attributable to
Cummins Inc.

Attributable to
Noncontrolling
Interests

Total
Consolidated

Net income

283

309