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CUMMINS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Cummins Inc. and its consolidated subsidiaries are hereinafter sometimes referred to as "Cummins," "we," "our" or "us." CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION Certain parts of this quarterly report contain forward-looking statements intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include those that are based on current expectations, estimates and projections about the industries in which we operate and management's beliefs and assumptions. Forward-looking statements are generally accompanied by words such as "anticipates," "expects," "forecasts," "intends," "plans," "believes," "seeks," "estimates," "could," "should" or words of similar meaning. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which we refer to as "future factors," which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Some future factors that could cause our results to differ materially from the results discussed in such forward-looking statements are discussed below and shareholders, potential investors and other readers are urged to consider these future factors carefully in evaluating forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. Future factors that could affect the outcome of forward-looking statements include the following: • a sustained slowdown or significant downturn in our markets; • a slowdown in infrastructure development; • unpredictability in the adoption, implementation and enforcement of emission standards around the world; • the actions of, and income from, joint ventures and other investees that we do not directly control; • changes in the engine outsourcing practices of significant customers; • a downturn in the North American truck industry or financial distress of a major truck customer; • a major customer experiencing financial distress; • any significant problems in our new engine platforms; • supply shortages and supplier financial risk, particularly from any of our single-sourced suppliers; •variability in material and commodity costs; • product recalls; • competitor pricing activity; • increasing competition, including increased global competition among our customers in emerging markets; • exposure to information technology security threats and sophisticated"cyber attacks;" • political, economic and other risks from operations in numerous countries; • changes in taxation; • global legal and ethical compliance costs and risks; • aligning our capacity and production with our demand; • product liability claims; • the development of new technologies; 25-------------------------------------------------------------------------------- Table of Contents • obtaining additional customers for our new light-duty diesel engine platform and avoiding any related write-down in our investments in such platform; • increasingly stringent environmental laws and regulations; • foreign currency exchange rate changes; • the price and availability of energy; • the performance of our pension plan assets; • labor relations; • changes in accounting standards; • our sales mix of products; • protection and validity of our patent and other intellectual property rights; • technological implementation and cost/financial risks in our increasing use of large, multi-year contracts; • the cyclical nature of some of our markets; • the outcome of pending and future litigation and governmental proceedings; • continued availability of financing, financial instruments and financial resources in the amounts, at the times and on the terms required to support our future business; • the consummation and integration of the planned acquisitions of our partially-owned United States and Canadian distributors; and • other risk factors described in our Form 10-K, Part I, Item 1A under the caption "Risk Factors" and in this Form 10-Q, Part II, Item 1A under the caption "Risk Factors." Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are made only as of the date of this quarterly report and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. 26-------------------------------------------------------------------------------- Table of Contents 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 accompanying Notes to Consolidated Financial Statements in the "Financial Statements" section of our 2013 Form 10-K. Our MD&A is presented in the following sections: •Executive Summary and Financial Highlights •Outlook •Results of Operations •Operating Segment Results •Liquidity and Capital Resources •Application of Critical Accounting Estimates •Recently Issued Accounting Pronouncements 27-------------------------------------------------------------------------------- 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 and engine-related component products, including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems and electric power generation systems. We sell our products to original equipment manufacturers (OEMs), distributors and other customers worldwide. We have long-standing relationships with many of the leading manufacturers in the markets we serve, including PACCAR Inc, Daimler Trucks North America, Chrysler Group, LLC (Chrysler), Volvo AB, Komatsu, Navistar International Corporation, Aggreko plc, Ford Motor Company and MAN Nutzfahrzeuge AG. We serve our customers through a network of over 600 company-owned and independent distributor locations and over 6,800 dealer locations in more than 190 countries and territories. Our reportable operating segments consist of the following: Engine, Components, Power Generation 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. Our engines are used in trucks of all sizes, buses and recreational vehicles, as well as in various industrial applications, including construction, mining, agriculture, marine, oil and gas, rail and military equipment. The Components segment sells filtration products, aftertreatment systems, turbochargers and fuel systems. The Power Generation segment is an integrated provider of power systems, which sells engines, generator sets and alternators. 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. Our sales may also be impacted by OEM inventory levels and production schedules and stoppages. Economic downturns in markets we serve generally result in reduced sales of our products and can result in price reductions in certain products and/or markets. As a worldwide business, our operations are also affected by currency, political, economic and regulatory matters, including adoption and enforcement of environmental and emission standards, in the countries we serve. As part of our growth strategy, we invest in businesses in certain countries that carry high levels of these risks such as China, Brazil, India, Mexico, Russia and countries in the Middle East and Africa. At the same time, our geographic diversity and broad product and service offerings have helped limit the impact from a drop in demand in any one industry or customer or the economy of any single country on our consolidated results. Worldwide revenues increased 7 percent in the three months ended June 29, 2014, as compared to the same period in 2013, primarily due to improvements in North American on-highway demand. Revenue in the U.S. and Canada improved by 14 percent primarily due to higher demand in the North American on-highway markets driving sales in both the Engine and Components segments, as well as improved Distribution segment sales related to the consolidation of partially-owned North American distributors since March 30, 2013. These increases were partially offset by reduced demand in North American power generation. International economic uncertainty continued in the second quarter of 2014 and as a result, our international (excludes the U.S and Canada) revenues declined by 1 percent with sales down or relatively flat in most markets. Declines were led by the reduced international on-highway demand with decreased unit shipments of 30 percent and 19 percent in the heavy-duty and medium-duty truck markets, respectively, primarily in Brazil and India. These decreases were partially offset by improved demand in China. Worldwide revenues increased 9 percent in the first six months of 2014 as compared to the same period in 2013, primarily due to improvements in North American on-highway demand. Revenue in the U.S. and Canada improved by 19 percent primarily due to increased demand in the North American on-highway markets driving sales in both the Engine and Components segments, as well as improved Distribution segment sales related to the consolidation of partially-owned North American distributors since December 31, 2012. These increases were partially offset by the reduced demand in the North American power generation markets as well as most industrial markets. International economic uncertainty continued in the first half of 2014 and our international revenues declined by 1 percent with sales down or relatively flat in most markets. Declines were led by reduced power generation equipment demand and reduced on-highway demand with decreased unit shipments of 15 percent and 10 percent in the heavy-duty and medium-duty truck markets, respectively. These decreases were partially offset by improved demand in China. The following tables contain sales and earnings before interest expense, income taxes and noncontrolling interests (EBIT) results by operating segment for the three and six month periods ended June 29, 2014 and June 30, 2013. Refer to the section titled "Operating Segment Results" for a more detailed discussion of net sales and EBIT by operating segment, including the reconciliation of segment EBIT to income before taxes. 28-------------------------------------------------------------------------------- Table of Contents Three months ended Operating Segments June 29, 2014 June 30, 2013 Percent change Percent Percent 2014 vs. 2013 In millions Sales of Total EBIT Sales of Total EBIT Sales EBIT Engine $ 2,744 57 % $ 311 $ 2,656 59 % $ 339 3 % (8 )% Components 1,280 26 % 185 1,117 25 % 136 15 % 36 % Power Generation 743 15 % 61 814 18 % 76 (9 )% (20 )% Distribution 1,238 26 % 126 954 21 % 100 30 % 26 % Intersegment eliminations (1,170 ) (24 )% - (1,016 ) (23 )% - 15 % - Non-segment - - (26 ) - - (30 ) - (13 )% Total $ 4,835 100 % $ 657 $ 4,525 100 % $ 621 7 % 6 % Net income attributable to Cummins was $446 million, or $2.43 per diluted share, on sales of $4.8 billion for the three month interim reporting period ended June 29, 2014, versus the comparable prior year period with net income attributable to Cummins of $414 million, or $2.20 per diluted share, on sales of $4.5 billion. The increase in net income and earnings per share was driven by improved gross margin, partially offset by higher selling, general and administrative expenses. The improved gross margin was the result of higher volumes, lower material and commodity costs and improved Distribution segment sales related to the consolidation of partially-owned North American distributors since March 30, 2013, partially offset by unfavorable foreign currency fluctuations. Six months ended Operating Segments June 29, 2014 June 30, 2013 Percent change Percent Percent 2014 vs. 2013 In millions Sales of Total EBIT Sales of Total EBIT Sales EBIT Engine $ 5,307 57 % $ 580 $ 4,959 59 % $ 534 7 % 9 % Components 2,510 27 % 352 2,135 25 % 255 18 % 38 % Power Generation 1,382 15 % 86 1,560 18 % 127 (11 )% (32 )% Distribution 2,188 24 % 202 1,732 21 % 195 26 % 4 % Intersegment eliminations (2,146 ) (23 )% - (1,939 ) (23 )% - 11 % - Non-segment - - (35 ) - - (53 ) - (34 )% Total $ 9,241 100 % $ 1,185 $ 8,447 100 % $ 1,058 9 % 12 % Net income attributable to Cummins was $784 million, or $4.26 per diluted share, on sales of $9.2 billion for the six months ended June 29, 2014, versus the comparable prior year period with net income attributable to Cummins of $696 million, or $3.69 per diluted share, on sales of $8.4 billion. The increase in net income and earnings per share was driven by improved gross margin, partially offset by higher selling, general and administrative expenses. The improved gross margin was the result of higher volumes, lower material and commodity costs and improved Distribution segment sales related to the consolidation of partially-owned North American distributors since December 31, 2012, partially offset by unfavorable foreign currency fluctuations. Diluted earnings per share for the six months ended June 29, 2014, benefited $0.05 from lower shares outstanding, primarily due to purchases under the stock repurchase program. We generated $701 million of operating cash flows for the six months ended June 29, 2014, compared to $960 million for the same period in 2013. Refer to the section titled "Operating Activities" in the "Liquidity and Capital Resources" section for a discussion of items impacting cash flows. In September 2013, we announced our intention to acquire the equity that we do not already own in most of our partially-owned United States and Canadian distributors over the next three to five years. We plan to spend approximately $450 million to $550 million on distributor acquisitions and debt retirements in 2014. On May 5, 2014, we acquired the remaining 30 percent interest in Cummins Power Systems LLC (Power Systems) from the former distributor principal for consideration of approximately $14 million in cash. The entity was previously consolidated and, as a result, the acquisition was accounted for as an equity transaction instead of a business combination. On March 31, 2014, we acquired the remaining 50 percent interest in Cummins Southern Plains LLC (Southern Plains) from the former distributor principal. The purchase consideration was $92 million, which included $41 million in cash and an additional $48 million paid to eliminate outstanding debt. As a result of this transaction, Distribution segment results included 29-------------------------------------------------------------------------------- Table of Contents a $13 million gain, as we were required to re-measure our pre-existing 50 percent ownership interest in Southern Plains to fair value in accordance with GAAP for the three and six months ended June 29, 2014. On February 14, 2014, we acquired the remaining 62.2 percent interest in Cummins Mid-South LLC (Mid-South) from the former distributor principal. The purchase consideration was $118 million, which included $32 million in cash, $61 million to eliminate outstanding debt, and $4 million payable in future periods. As a result of this transaction, Distribution segment results for the six months ended included a $7 million gain, as we were required to re-measure our pre-existing 37.8 percent ownership interest in Mid-South to fair value in accordance with GAAP. We repurchased $430 million of stock under the 2012 Board of Directors authorized plan during the first half of 2014. In July 2014, our Board of Directors authorized the acquisition of up to $1 billion of additional common stock upon the completion of the 2012 repurchase plan. Our debt to capital ratio (total capital defined as debt plus equity) at June 29, 2014, was 17.2 percent, compared to 18.1 percent at December 31, 2013. As of the date of filing this Quarterly Report on Form 10-Q, we had an 'A' credit rating with a 'Stable' outlook from Standard & Poor's Rating Services, an 'A' credit rating with a 'Stable' outlook from Fitch Ratings and an 'A3' credit rating with a 'Stable' outlook from Moody's Investors Service, Inc. In addition to the $2.4 billion in cash and marketable securities on hand, we also have access to our credit facilities, if necessary, to meet currently anticipated investment and funding needs. In July 2014, the Board of Directors authorized a dividend increase of approximately 25 percent from $0.625 per share to $0.78 per share on a quarterly basis. Our global pension plans, including our unfunded and non-qualified plans, were 107 percent funded at December 31, 2013. Our U.S. qualified plan, which represents approximately 55 percent of the worldwide pension obligation, was 121 percent funded and our United Kingdom (U.K.) plan was 106 percent funded. We expect to contribute $205 million to our global pension plans in 2014. We anticipate pension and other postretirement benefit cost in 2014 to decrease by approximately $36 million pre-tax, or approximately $0.12 per diluted share, when compared to 2013 due to reduced loss amortization resulting from improved U.S. asset performance and a higher discount rate, Refer to Note 4, "PENSION AND OTHER POSTRETIREMENT BENEFITS" for additional information regarding our pension plans. We expect our effective tax rate for the full year of 2014 to approximate 28 percent, excluding any one-time tax items that may arise, compared to 25.1 percent for 2013. 30-------------------------------------------------------------------------------- Table of Contents OUTLOOK Near-Term In the second quarter of 2014, demand remained strong in several end markets in North America compared to the same period in the prior year, led by strong North American on-highway demand. Demand remained weak in most international markets due to lower on-highway demand. We currently expect the following positive trends for the remainder of 2014: • Market share gains in the North American medium-duty truck and bus markets are expected to continue in 2014 and should positively impact sales in both the Engine and Components segments. • Demand in the North American heavy-duty truck market is expected to continue to improve. • We plan to continue acquiring our partially-owned North American distributors, which will increase our Distribution segment revenues and EBIT dollars , however, will be dilutive to Distribution EBIT as a percentage of sales. • The new Euro VI regulations, effective January 1, 2014, are expected to continue to positively impact sales for aftertreatment products. We currently expect the following challenges to our business that may reduce our earnings potential for the remainder of 2014: • Power generation markets are expected to remain weak. • Demand in most end markets in India is expected to remain weak. • Weak economic growth in Brazil could continue to negatively impact our on-highway and power generation businesses. • Demand in certain European markets could remain weak due to continued economic uncertainty. • Growth in emerging markets could be negatively impacted if emission regulations are not strictly enforced. • Foreign currency volatility could continue to put pressure on earnings. Long-Term We believe that, over the longer term, there will be economic improvements in most of our current markets and that our opportunities for long-term profitable growth will continue as the result of the following four macroeconomic trends that should benefit our businesses: • tightening emissions controls across the world; • infrastructure needs in emerging markets; • energy availability and cost issues and • globalization of industries like ours. 31-------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS Three months ended Favorable/ Six months ended Favorable/ (Unfavorable) (Unfavorable)In millions (except per share amounts) June 29, 2014 June 30, 2013 Amount Percent June 29, 2014 June 30, 2013 Amount Percent NET SALES $ 4,835 $ 4,525 $ 310 7 % $ 9,241 $ 8,447 $ 794 9 % Cost of sales 3,608 3,372 (236 ) (7 )% 6,898 6,337 (561 ) (9 )% GROSS MARGIN 1,227 1,153 74 6 % 2,343 2,110 233 11 % OPERATING EXPENSES AND INCOME Selling, general and administrative expenses 535 484 (51 ) (11 )% 1,037 928 (109 ) (12 )% Research, development and engineering expenses 179 177 (2 ) (1 )% 369 359 (10 ) (3 )% Equity, royalty and interest income from investees 105 108 (3 ) (3 )% 195 190 5 3 % Other operating income (expense), net (6 ) 10 (16 ) NM (7 ) 11 (18 ) NM OPERATING INCOME 612 610 2 - % 1,125 1,024 101 10 % Interest income 6 10 (4 ) (40 )% 11 15 (4 ) (27 )% Interest expense 15 8 (7 ) (88 )% 32 14 (18 ) NM Other income (expense), net 39 1 38 NM 49 19 30 NM INCOME BEFORE INCOME TAXES 642 613 29 5 % 1,153 1,044 109 10 % Income tax expense 170 172 2 1 % 323 291 (32 ) (11 )% CONSOLIDATED NET INCOME 472 441 31 7 % 830 753 77 10 % Less: Net income attributable to noncontrolling interests 26 27 1 4 % 46 57 11 19 % NET INCOME ATTRIBUTABLE TO CUMMINS INC. $ 446 $ 414 $ 32 8 % $ 784 $ 696 $ 88 13 % Diluted earnings per common share attributable to Cummins Inc. $ 2.43 $ 2.20 $ 0.23 10 % $ 4.26 $ 3.69 $ 0.57 15 % "NM" - not meaningful information Three months ended Favorable/ Six months ended Favorable/ (Unfavorable) June 30, (Unfavorable) Percent of sales June 29, 2014 June 30, 2013 Percentage Points June 29, 2014 2013 Percentage Points Gross margin 25.4 % 25.5 % (0.1 ) 25.4 % 25.0 % 0.4 Selling, general and administrative expenses 11.1 % 10.7 % (0.4 ) 11.2 % 11.0 % (0.2 ) Research, development and engineering expenses 3.7 % 3.9 % 0.2 4.0 % 4.3 % 0.3 Net Sales Net sales for the three months ended June 29, 2014, increased versus the comparable period in 2013, primarily due to higher demand and the impact from the acquisitions of the partially-owned North American distributors since March 31, 2013. The primary drivers by segment were as follows: • Distribution segment sales increased by 30 percent primarily due to the acquisitions of North American distributors. • Components segment sales increased by 15 percent and increased in all businesses and in most markets primarily due to higher demand in the North American on-highway markets and increased demand in Europe and China. • Engine segment sales increased by 3 percent due to higher demand in the North American on-highway markets. These increases were partially offset by the following: • Power Generation segment sales decreased by 9 percent mainly due to lower volumes within the power systems and the power products businesses. • Foreign currency fluctuations unfavorably impacted sales. Net sales for the six months ended June 29, 2014, increased versus the comparable period in 2013, primarily due to higher demand and the impact from the acquisitions of the partially-owned North American distributors since December 31, 2012. The primary drivers by segment were as follows: 32-------------------------------------------------------------------------------- Table of Contents • Distribution segment sales increased by 26 percent primarily due to the acquisitions of North American distributors. • Components segment sales increased by 18 percent and increased in all businesses and in most markets primarily due to higher demand in on-highway markets in North America, Europe and China. • Engine segment sales increased by 7 percent due to higher demand in the North American on-highway markets, partially offset by lower demand in industrial markets. These increases were partially offset by the following: • Power Generation segment sales decreased by 11 percent and decreased in all businesses, mainly due to lower volumes within the power systems and the power products businesses. • Foreign currency fluctuations unfavorably impacted sales. A more detailed discussion of sales by segment is presented in the "OPERATING SEGMENT RESULTS" section. Sales to international markets, based on location of customers, for the three and six months ended June 29, 2014, were 44 percent of total net sales for both periods compared with 48 percent of total net sales for both of the comparable periods in 2013. A more detailed discussion of sales by segment is presented in the "OPERATING SEGMENT RESULTS" section. Gross Margin Gross margin increased for the three months ended June 29, 2014, versus the comparable period in 2013, and decreased as a percentage of sales by 0.1 percentage points as higher volumes, lower material and commodity costs and improved Distribution segment sales related to the consolidation of partially-owned North American distributors since March 30, 2013, were partially offset by higher warranty costs and unfavorable foreign currency fluctuations. Gross margin increased for the six months ended June 29, 2014, versus the comparable period in 2013, and increased as a percentage of sales by 0.4 percentage points as higher volumes, lower material and commodity costs and improved Distribution segment sales related to the consolidation of partially-owned North American distributors since December 31, 2012, were partially offset by higher warranty costs and unfavorable foreign currency fluctuations. The provision for base warranties issued as a percent of sales for the three and six months ended June 29, 2014, were 2.3 percent and 2.1 percent, respectively, compared to 2.2 percent and 2.3 percent for the comparable periods in 2013. 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 for the three months ended June 29, 2014, increased versus the comparable period in 2013, primarily due to higher compensation and related expenses of $14 million, higher consulting expenses and acquisition costs in our Distribution segment. Selling, general and administrative expenses for the six months ended June 29, 2014, increased versus the comparable period in 2013 due to higher compensation and related expenses of $32 million, higher consulting expenses and acquisition costs in our Distribution segment. Compensation and related expenses include salaries, fringe benefits and variable compensation. Research, Development and Engineering Expenses Research, development and engineering expenses for the three months ended June 29, 2014, increased versus the comparable period in 2013, primarily due to higher compensation and related expenses of $6 million, partially offset by increased expense recovery of $10 million and decreased consulting expenses of $3 million. Research, development and engineering expenses for the six months ended June 29, 2014, increased versus the comparable period in 2013 primarily due to higher compensation and related expenses of $14 million, partially offset by increased expense recovery of $9 million and decreased consulting expenses of $7 million. Compensation and related expenses include salaries, fringe benefits and variable compensation. 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 decreased for the three months ended June 29, 2014, versus the comparable period in 2013. Equity, royalty and interest income from investees for the six months ended June 29, 2014, increased versus the comparable period in 2013. The primarily drivers were as follows: 33-------------------------------------------------------------------------------- Table of Contents Increase/(Decrease) June 29, 2014 vs. June 30, 2013 In millions Three months ended Six months ended Cummins Westport, Inc. $ (3 ) $ (2 ) Chongqing Cummins Engine Company, Ltd. (2 ) (3 ) Beijing Foton Cummins Engine Co., Ltd. (Light-duty) (1 ) 4 Beijing Foton Cummins Engine Co., Ltd. (Heavy-duty) - (3 ) North American distributors 1 (2 ) Komatsu Cummins Chile, Ltda. 2 3 Dongfeng Cummins Engine Company, Ltd. 2 4 Other equity income (1 ) 3 Cummins share of net income (2 ) 4 Royalty and interest income (1 ) 1 Equity, royalty and interest income from investees $ (3 ) $ 5 The overall decrease for the three months ended June 29, 2014, was primarily due to higher warranty costs at Cummins Westport, Inc. and decreased earnings at Chongqing Cummins Engine Company, Ltd., which was partially offset by Komatsu Cummins Chile, Ltda. and Dongfeng Cummins Engine Company, Ltd. The overall increase for the six months ended June 29, 2014, was primarily due to higher earnings at Beijing Foton Cummins Engine Co., Ltd. (Light-duty) and Dongfeng Cummins Engine Company, Ltd., partially offset by the decrease at Beijing Foton Cummins Engine Co., Ltd. (Heavy-duty) and the consolidation of the partially-owned North American distributors since December 31, 2012. As we execute our plan to acquire partially-owned distributors, we expect equity earnings for our North American distributors to decrease as the earnings will be included in our consolidated results. See Note 3, "ACQUISITIONS," to the Condensed Consolidated Financial Statements for further information. Other Operating Income (Expense), net Other operating income (expense) was as follows: Three months ended Six months ended In millions June 29, 2014 June 30, 2013 June 29, 2014 June 30, 2013 Loss on write off of assets $ (7 ) $ (2 ) $ (7 ) $ (2 ) Amortization of intangible assets (4 ) (3 ) (7 ) (5 ) Royalty expense (1 ) (1 ) (5 ) (1 ) Royalty income 7 6 13 10 Other, net (1 ) 10 (1 ) 9 Total other operating income (expense), net $ (6 ) $ 10 $ (7 ) $ 11 Interest Income Interest income for the three and six months ended June 29, 2014, decreased versus the comparable periods in 2013, primarily due to an interest income recovery of a loan previously deemed unrecoverable in the second quarter of 2013. Interest Expense Interest expense for the three and six months ended June 29, 2014, increased versus the comparable periods in 2013 and will continue to increase through the third quarter as a result of the $1 billion debt issuance in September 2013. 34-------------------------------------------------------------------------------- Table of Contents Other Income (Expense), net Other income (expense) was as follows: Three months ended Six months ended In millions June 29, 2014 June 30, 2013 June 29, 2014 June 30, 2013 Gain on fair value adjustment for consolidated investees(1) $ 14 $ 5 $ 20 $ 12 Gain (loss) on marketable securities, net 12 1 13 11 Change in cash surrender value of corporate owned life insurance 11 (7 ) 18 (2 ) Foreign currency gains (losses), net 2 (6 ) (3 ) (15 ) Dividend income - 1 1 3 Bank charges (3 ) (3 ) (5 ) (5 ) Other, net 3 10 5 15Total other income (expense), net $ 39 $ 1 $ 49 $ 19 _______________________________________________________________________ (1) See Note 3, "ACQUISITIONS," to the Condensed Consolidated Financial Statements for further information. Income Tax Expense Our effective tax rate for the year is expected to approximate 28 percent, excluding any one-time items that may arise. The expected tax rate does not include the benefits of the research tax credit which expired December 31, 2013 and has not yet been renewed by Congress. Our tax rate is generally less than 35 percent U.S. statutory income tax rate primarily due to lower tax rates on foreign income. The effective tax rates for the three and six month periods ended June 29, 2014, were 26.5 percent and 28 percent, respectively. The tax rate for the three months ended June 29, 2014, included a $2 million discrete tax benefit for the release of reserves for uncertain tax positions related to multiple state audit settlements. Additionally, the tax rate for the six month period included a $12 million discrete tax expense attributable primarily to state deferred tax adjustments, as well as a $6 million discrete net tax benefit resulting from a $70 million dividend paid from China earnings generated prior to 2012. Our effective tax rates for the three and six month periods ended June 30, 2013, were 28.1 percent and 27.9 percent, respectively. These tax rates included a discrete tax benefit of $28 million attributable to the 2012 research credit reinstated in January 2013, as well as a discrete tax expense of $17 million, which primarily related to the write-off of a deferred tax asset deemed unrecoverable. The decrease in the three month effective tax rate from 2013 to 2014 is primarily due to favorable changes in the jurisdictional mix of pre-tax income and the 2014 favorable discrete tax item related to state audit settlements. We anticipate that we may resolve tax matters related primarily to certain tax credits presently under examination in U.S. federal and state tax jurisdictions. As of June 29, 2014, we estimate that it is reasonably possible that unrecognized tax benefits may decrease in an amount ranging from $0 to $75 million in the next 12 months due to the resolution of these issues. We do not expect this resolution to have a material impact on our results of operations. 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 for the three months ended June 29, 2014, increased versus the comparable period in 2013, primarily due to higher gross margin, mainly driven by improved volumes, lower material and commodity costs, particularly in the Engine and Components segments, improved Distribution segment sales related to the consolidation of partially-owned North American distributors since March 30, 2013 and higher other income. These increases were partially offset by higher selling, general and administrative expenses and unfavorable foreign currency fluctuations. Net income and diluted earnings per share attributable to Cummins for the six months ended June 29, 2014, increased versus the comparable period in 2013, primarily due to higher gross margin, mainly driven by improved volumes and lower material and commodity costs, particularly in the Engine and Components segments, improved Distribution segment sales related to the consolidation of partially-owned North American distributors since December 31, 2012 and higher other income. These increases were partially offset by higher selling, general and administrative expenses and unfavorable foreign currency fluctuations. Diluted earnings per share for the six months ended June 29, 2014, benefited $0.05 from lower shares outstanding, primarily due to purchases under the stock repurchase program. 35-------------------------------------------------------------------------------- Table of Contents OPERATING SEGMENT RESULTS Our reportable operating segments consist of the following: Engine, Components, Power Generation and Distribution. This reporting structure is organized according to the products and markets each segment serves. We use segment EBIT as the primary basis for the chief operating decision-maker to evaluate the performance of each operating segment. Following is a discussion of results for each of our operating segments. Engine Segment Results Financial data for the Engine segment was as follows: Three months ended Favorable/ Six months ended Favorable/ June 29, June 30, (Unfavorable) June 29, June 30, (Unfavorable) In millions 2014 2013 Amount Percent 2014 2013 Amount Percent External sales $ 2,178 $ 2,209 $ (31 ) (1 )% $ 4,268 $ 4,094 $ 174 4 % Intersegment sales 566 447 119 27 % 1,039 865 174 20 % Total sales 2,744 2,656 88 3 % 5,307 4,959 348 7 % Depreciation and amortization 52 51 (1 ) (2 )% 103 103 - - % Research, development and engineering expenses 105 102 (3 ) (3 )% 221 207 (14 ) (7 )% Equity, royalty and interest income from investees 45 52 (7 ) (13 )% 77 75 2 3 % Interest income 4 7 (3 ) (43 )% 6 9 (3 ) (33 )% Segment EBIT 311 339 (28 ) (8 )% 580 534 46 9 % Percentage Points Percentage Points Segment EBIT as a percentage of total sales 11.3 % 12.8 % (1.5 ) 10.9 % 10.8 % 0.1 Engine segment net sales by market were as follows: Three months ended Favorable/ Six months ended Favorable/ June 29, June 30, (Unfavorable) June 29, June 30, (Unfavorable) In millions 2014 2013 Amount Percent 2014 2013 Amount Percent Heavy-duty truck $ 796 $ 723 $ 73 10 % $ 1,518 $ 1,377 $ 141 10 % Medium-duty truck and bus 646 595 51 9 % 1,247 1,043 204 20 % Light-duty automotive and RV 336 345 (9 ) (3 )% 697 605 92 15 % Total on-highway 1,778 1,663 115 7 % 3,462 3,025 437 14 % Industrial 757 762 (5 ) (1 )% 1,457 1,476 (19 ) (1 )% Stationary power 209 231 (22 ) (10 )% 388 458 (70 ) (15 )% Total sales $ 2,744 $ 2,656 $ 88 3 % $ 5,307 $ 4,959 $ 348 7 % Unit shipments by engine classification (including unit shipments to Power Generation) were as follows: Three months ended Favorable/ Six months ended Favorable/ June 29, June 30, (Unfavorable) June 29, June 30, (Unfavorable) 2014 2013 Amount Percent 2014 2013 Amount Percent Midrange 118,700 121,900 (3,200 ) (3 )% 237,600 216,500 21,100 10 % Heavy-duty 30,300 28,300 2,000 7 % 59,100 53,200 5,900 11 % High-horsepower 3,900 3,600 300 8 % 7,300 7,800 (500 ) (6 )% Total unit shipments 152,900 153,800 (900 ) (1 )% 304,000 277,500 26,500 10 % Sales Engine segment sales for the three months ended June 29, 2014, increased versus the comparable period in 2013. The following were the primary drivers by market: • Heavy-duty truck engine sales increased due to improved demand in the North American heavy-duty truck market with increased engine shipments of 20 percent. 36-------------------------------------------------------------------------------- Table of Contents • Medium-duty truck and bus sales increased primarily due to higher demand in the North American medium-duty truck and bus markets primarily due to market share gains. The increases above were partially offset by the following: • Stationary power engine sales decreased due to lower demand in power generation markets. • Foreign currency fluctuations unfavorably impacted sales. Total on-highway-related sales for the three months ended June 29, 2014, were 65 percent of total engine segment sales, compared to 63 percent for the comparable period in 2013. Engine segment sales for the six months ended June 29, 2014, increased versus the comparable period in 2013. The following were the primary drivers by market: • Medium-duty truck and bus sales increased primarily due to market share gains in the North American medium-duty truck and bus markets, partially offset by weaker international demand. • Heavy-duty truck sales increased primarily due to higher demand in the North American heavy-duty truck market with increased engine shipments of 23 percent. • Light-duty automotive and RV sales increased primarily due to the 9 percent improvement in units shipped to Chrysler. The increases above were partially offset by the following: • Stationary power engine sales decreased due to lower demand in power generation markets. • Foreign currency fluctuations unfavorably impacted sales. Total on-highway-related sales for the six months ended June 29, 2014, were 65 percent of total engine segment sales, compared to 61 percent for the comparable period in 2013. Segment EBIT Engine segment EBIT for the three months ended June 29, 2014, decreased versus the comparable period in 2013 primarily due to higher selling, general and administrative expenses and lower equity, royalty and interest income from investees. Engine segment EBIT for the six months ended June 29, 2014, increased versus the comparable period in 2013 primarily due to higher gross margin and higher equity, royalty and interest income from investees, partially offset by higher selling, general and administrative expenses and higher research, development and engineering expenses. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows: Three months ended Six months ended June 29, 2014 vs. June 30, 2013 June 29, 2014 vs. June 30, 2013 Favorable/(Unfavorable) Change Favorable/(Unfavorable) Change Percentage point Percentage point change as a percent change as a percent In millions Amount Percent of total sales Amount Percent of total sales Gross margin $ (4 ) (1 )% (0.9 ) $ 101 10 % 0.5 Selling, general and administrative expenses (13 ) (7 )% (0.3 ) (33 ) (9 )% (0.1 ) Research, development and engineering expenses (3 ) (3 )% - (14 ) (7 )% - Equity, royalty and interest income from investees (7 ) (13 )% (0.4 ) 2 3 % - The decrease in gross margin for the three months ended June 29, 2014, versus the comparable period in 2013, was primarily due to higher warranty costs and higher managed expenses, partially offset by improved volumes and favorable mix. The increase in selling, general and administrative expenses was primarily due to increased headcount and higher discretionary spending. The decrease in equity, royalty and interest income from investees was primarily due to decreased earnings at Cummins Westport Inc. The increase in gross margin for the six months ended June 29, 2014, versus the comparable period in 2013, was primarily due to higher volumes, favorable mix and lower material and commodity costs, partially offset by increased warranty costs. The increase in selling, general and administrative expenses was primarily due to increased headcount, higher discretionary spending and higher variable compensation. The increase in research, development and engineering expenses was primarily due to increased investment to support new product initiatives. 37-------------------------------------------------------------------------------- Table of Contents Components Segment Results Financial data for the Components segment was as follows: Three months ended Favorable/ Six months ended Favorable/ June 29, June 30, (Unfavorable) June 29, June 30, (Unfavorable) In millions 2014 2013 Amount Percent 2014 2013 Amount Percent External sales $ 953 $ 786 $ 167 21 % $ 1,875 $ 1,508 $ 367 24 % Intersegment sales 327 331 (4 ) (1 )% 635 627 8 1 % Total sales 1,280 1,117 163 15 % 2,510 2,135 375 18 % Depreciation and amortization 26 23 (3 ) (13 )% 52 47 (5 ) (11 )% Research, development and engineering expenses 53 57 4 7 % 106 114 8 7 % Equity, royalty and interest income from investees 9 9 - - % 18 16 2 13 % Interest income 1 - 1 100 % 2 1 1 100 % Segment EBIT 185 136 49 36 % 352 255 97 38 % Percentage Points Percentage Points Segment EBIT as a percentage of total sales 14.5 % 12.2 % 2.3 14.0 % 11.9 % 2.1 Sales for our Components segment by business were as follows: Three months ended Favorable/ Six months ended Favorable/ June 29, June 30, (Unfavorable) June 29, June 30, (Unfavorable) In millions 2014 2013 Amount Percent 2014 2013 Amount Percent Emission solutions $ 582 $ 444 $ 138 31 % $ 1,125 $ 844 $ 281 33 % Turbo technologies 307 294 13 4 % 620 560 60 11 % Filtration 275 271 4 1 % 540 526 14 3 % Fuel systems 116 108 8 7 % 225 205 20 10 % Total sales $ 1,280 $ 1,117 $ 163 15 % $ 2,510 $ 2,135 $ 375 18 % Sales Components segment sales for the three months ended June 29, 2014, increased versus the comparable period in 2013 in all lines of businesses and across most markets. The following were the primary drivers by business: • Emission solutions business sales increased primarily due to improved demand in the North American on-highway markets and increased demand for our products in Europe and China to meet new emission requirements. The increases were partially offset by lower demand in Brazil. • Turbo technologies business sales increased as a result of improved on-highway demand in Europe. Components segment sales for the six months ended June 29, 2014, increased versus the comparable period in 2013 in all lines of business and across most markets. The following were the primary drivers by business: • Emission solutions business sales increased primarily due to improved demand in North America and increased demand for our products in Europe and China to meet new emission requirements. The increases were partially offset by lower demand in Brazil. • Turbo technologies business sales increased as a result of improved on-highway demand in Europe and North America. 38-------------------------------------------------------------------------------- Table of Contents Segment EBIT Components segment EBIT for the three and six months ended June 29, 2014, increased versus the comparable periods in 2013, primarily due to higher gross margin and lower research, development and engineering expenses, partially offset by higher selling, general and administrative expenses. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows: Three months ended Six months ended June 29, 2014 vs. June 30, 2013 June 29, 2014 vs. June 30, 2013 Favorable/(Unfavorable) Change Favorable/(Unfavorable) Change Percentage point Percentage point change as a percent change as a percent In millions Amount Percent of total sales Amount Percent of total sales Gross margin $ 53 21 % 1.3 $ 101 21 % 0.7 Selling, general and administrative expenses (11 ) (16 )% (0.1 ) (22 ) (17 )% - Research, development and engineering expenses 4 7 % 1.0 8 7 % 1.1 Equity, royalty and interest income from investees - - % (0.1 ) 2 13 % - The increase in gross margin for the three and six months ended June 29, 2014, versus the comparable periods in 2013, was primarily due to higher volumes, mainly in the emission solutions and turbo technologies businesses and lower material and commodity costs, partially offset by unfavorable foreign currency fluctuations. The increase in selling, general and administrative expenses was primarily due to increased headcount and higher discretionary spending. The decrease in research, development and engineering expenses was primarily due to increased expense recovery and improved efficiency, partially offset by increased headcount. Power Generation Segment Results Financial data for the Power Generation segment was as follows: Three months ended Favorable/ Six months ended Favorable/ June 29, June 30, (Unfavorable) June 29, June 30, (Unfavorable) In millions 2014 2013 Amount Percent 2014 2013 Amount Percent External sales $ 475 $ 583 $ (108 ) (19 )% $ 927 $ 1,122 $ (195 ) (17 )% Intersegment sales 268 231 37 16 % 455 438 17 4 % Total sales 743 814 (71 ) (9 )% 1,382 1,560 (178 ) (11 )% Depreciation and amortization 13 12 (1 ) (8 )% 25 24 (1 ) (4 )% Research, development and engineering expenses 18 17 (1 ) (6 )% 37 35 (2 ) (6 )% Equity, royalty and interest income from investees 9 10 (1 ) (10 )% 17 17 - - % Interest income 1 2 (1 ) (50 )% 2 4 (2 ) (50 )% Segment EBIT 61 76 (15 ) (20 )% 86 127 (41 ) (32 )% Percentage Points Percentage Points Segment EBIT as a percentage of total sales 8.2 % 9.3 % (1.1 ) 6.2 % 8.1 % (1.9 ) Sales for our Power Generation segment by business were as follows: Three months ended Favorable/ Six months ended Favorable/ June 29, June 30, (Unfavorable) June 29, June 30, (Unfavorable) In millions 2014 2013 Amount Percent 2014 2013 Amount Percent Power products $ 445 $ 474 $ (29 ) (6 )% $ 818 $ 883 $ (65 ) (7 )% Power systems 141 187 (46 ) (25 )% 278 366 (88 ) (24 )% Alternators 126 125 1 1 % 231 251 (20 ) (8 )% Power solutions 31 28 3 11 % 55 60 (5 ) (8 )% Total sales $ 743 $ 814 $ (71 ) (9 )% $ 1,382 $ 1,560 $ (178 ) (11 )% 39-------------------------------------------------------------------------------- Table of Contents Sales Power Generation segment sales for the three months ended June 29, 2014, decreased versus the comparable period in 2013 across most markets primarily due to lower industrial activity. The following were the primary drivers by business: • Power systems sales decreased primarily due to reduced demand in North America, China, Europe and Brazil, partially offset by higher demand in Latin America and Africa. • Power products sales decreased primarily due to lower demand in North America driven by declining military sales and lower demand in the Middle East and India, partially offset by higher demand in China, Africa and Europe. Power Generation segment sales for the six months ended June 29, 2014, decreased versus the comparable period in 2013 in all lines of businesses and across most markets primarily due to lower industrial activity. The following were the primary drivers by business: • Power systems sales decreased primarily due to reduced demand in North America, Asia, Europe and India. • Power products sales decreased primarily due to lower demand in North America driven by declining military sales and lower demand in India and Mexico, partially offset by increases in China and Europe. Segment EBIT Power Generation segment EBIT for the three and six months ended June 29, 2014, decreased versus the comparable period in 2013 primarily due to lower gross margin and higher selling, general and administrative expenses. Three months ended Six months ended June 29, 2014 vs. June 30, 2013 June 29, 2014 vs. June 30, 2013 Favorable/(Unfavorable) Change Favorable/(Unfavorable) Change Percentage point Percentage point change as a percent change as a percent In millions Amount Percent of total sales Amount Percent of total sales Gross margin $ (7 ) (5 )% 0.8 $ (25 ) (9 )% 0.5 Selling, general and administrative expenses (3 ) (4 )% (1.3 ) (8 ) (6 )% (1.7 ) Research, development and engineering expenses (1 ) (6 )% (0.3 ) (2 ) (6 )% (0.5 ) Equity, royalty and interest income from investees (1 ) (10 )% - - - % 0.1 The decrease in gross margin for the three and six months ended June 29, 2014, versus the comparable periods in 2013, was primarily due to lower volumes and unfavorable foreign currency fluctuations, partially offset by favorable product mix. The increase in selling, general and administrative expenses was primarily due to higher facilities spending, strategic growth initiatives and legal costs. Distribution Segment Results Financial data for the Distribution segment was as follows: Three months ended Favorable/ Six months ended Favorable/ June 29, June 30, (Unfavorable) June 29, June 30, (Unfavorable) In millions 2014 2013 Amount Percent 2014 2013 Amount Percent External sales $ 1,229 $ 947 $ 282 30 % $ 2,171 $ 1,723 $ 448 26 % Intersegment sales 9 7 2 29 % 17 9 8 89 % Total sales 1,238 954 284 30 % 2,188 1,732 456 26 % Depreciation and amortization 20 15 (5 ) (33 )% 36 25 (11 ) (44 )% Research, development and engineering expenses 3 1 (2 ) NM 5 3 (2 ) (67 )% Equity, royalty and interest income from investees 42 37 5 14 % 83 82 1 1 % Interest income - 1 (1 ) (100 )% 1 1 - - % Segment EBIT (1) 126 100 26 26 % 202 195 7 4 % Percentage Points Percentage Points Segment EBIT as a percentage of total sales(2) 10.2 % 10.5 % (0.3 ) 9.2 % 11.3 % (2.1 ) 40-------------------------------------------------------------------------------- Table of Contents _______________________________________________________________________ (1) Segment EBIT for the three and six months ended June 29, 2014 and June 30, 2013, included a $14 million and $5 million gain and a $20 million and $12 million gain on the fair value adjustments resulting from the acquisitions of controlling interests in North American distributors. See Note 3, "ACQUISITIONS," to the Condensed Consolidated Financial Statements for further information. (2) North American distributor acquisitions will increase distribution segment EBIT, however it will be dilutive to EBIT as a percentage of sales. Sales for our Distribution segment by region were as follows: Three months ended Favorable/ Six months ended Favorable/ June 29, June 30, (Unfavorable) June 29, June 30, (Unfavorable) In millions 2014 2013 Amount Percent 2014 2013 Amount Percent North & Central America $ 641 $ 360 $ 281 78 % $ 1,085 $ 633 $ 452 71 % NE/SE Asia / South Pacific 201 199 2 1 % 363 374 (11 ) (3 )% Europe and Middle East 194 195 (1 ) (1 )% 370 357 13 4 % China 76 82 (6 ) (7 )% 135 143 (8 ) (6 )% Africa 46 32 14 44 % 87 66 21 32 % India 40 47 (7 ) (15 )% 74 87 (13 ) (15 )% South America 40 39 1 3 % 74 72 2 3 % Total sales $ 1,238 $ 954 $ 284 30 % $ 2,188 $ 1,732 $ 456 26 % Sales for our Distribution segment by product were as follows: Three months ended Favorable/ Six months ended Favorable/ June 29, June 30, (Unfavorable) June 29, June 30, (Unfavorable) In millions 2014 2013 Amount Percent 2014 2013 Amount Percent Parts and filtration $ 461 $ 369 $ 92 25 % $ 843 $ 691 $ 152 22 % Power generation 278 241 37 15 % 471 404 67 17 % Service 250 161 89 55 % 451 302 149 49 % Engines 249 183 66 36 % 423 335 88 26 % Total sales $ 1,238 $ 954 $ 284 30 % $ 2,188 $ 1,732 $ 456 26 % Sales Distribution segment sales for the three months ended June 29, 2014, increased versus the comparable period in 2013 primarily due to $253 million of segment sales related to the consolidation of partially-owned North American distributors since March 30, 2013, $10 million of segment sales related to the 2013 acquisition of a partially-owned international distributor and $45 million of organic sales growth primarily in North America, Asia Pacific, and Africa. These increases were partially offset by decreased demand in India and China and unfavorable foreign currency fluctuations. Distribution segment sales for the six months ended June 29, 2014, increased versus the comparable period in 2013, primarily due to $403 million of segment sales related to the consolidation of partially-owned North American distributors since December 31, 2012, $20 million of segment sales related to the 2013 acquisition of a partially-owned international distributor and $66 million of organic sales growth primarily in North America, Africa and Europe. These increases were partially offset by decreased demand in India and Asia Pacific and unfavorable foreign currency fluctuations. Segment EBIT Distribution segment EBIT for the three months ended June 29, 2014, increased versus the comparable period in 2013 primarily due to acquisitions of North American distributors, partially offset by unfavorable foreign currency fluctuations. The consolidation of North American distributors increased gross margin and selling, general and administrative expenses. We expected a reduction in equity, royalty and interest income from investees as a result of these acquisitions, however, strong performance from the remaining unconsolidated equity investees increased overall equity income for the quarter. The acquisitions resulted in a $14 million and $5 million gain for the three months ended June 29, 2014 and June 30, 2013, respectively, related to the remeasurement of our pre-existing ownership interests in accordance with GAAP. EBIT as a percentage of sales for the three months ended June 29, 2014, was 10.2 percent compared to 10.5 percent for the comparable period in 2013. 41-------------------------------------------------------------------------------- Table of Contents Distribution segment EBIT for the six months ended June 29, 2014, increased versus the comparable period in 2013 primarily due to acquisitions of North American distributors, partially offset by unfavorable foreign currency fluctuations. The acquisitions resulted in a $20 million and $12 million gain for the six months ended June 29, 2014 and June 30, 2013, respectively, related to the remeasurement of our pre-existing ownership interests in accordance with GAAP. EBIT as a percentage of sales for the six months ended June 29, 2014, was 9.2 percent compared to 11.3 percent for the comparable period in 2013. The gains are included in Other income (expense), net in the Condensed Consolidated Statements of Income. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows: Three months ended Six months ended June 29, 2014 vs. June 30, 2013 June 29, 2014 vs. June 30, 2013 Favorable/(Unfavorable) Change Favorable/(Unfavorable) Change Percentage point Percentage point change as a percent change as a percent In millions Amount Percent of total sales Amount Percent of total sales Gross margin $ 39 20 % (1.5 ) $ 52 14 % (2.0 ) Selling, general and administrative expenses (24 ) (17 )% 1.5 (46 ) (17 )% 1.1 Equity, royalty and interest income from investees 5 14 % (0.5 ) 1 1 % (0.9 ) |