Cummins Inc. (CMI) Q4 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 Cummins Inc. Earnings Conference Call. My name is Jasmine, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, to Mr. Mark Smith, Executive Director, Investor Relations. You may proceed.

Thank you, Jasmine. Good morning, everyone, and welcome to our teleconference today to discuss Cummins' results for the fourth quarter and full year 2011. Participating with me today are our Chairman and Chief Executive Officer, Tom Linebarger; and our Chief Financial Officer, Pat Ward. We will all be available for your questions at the end of the teleconference. Before we start, please note that some of the information that you will hear or be given today will consist of forward-looking statements within the meaning of the Securities Exchange Act of 1934. Such statements express our forecasts, expectations, hopes, beliefs and intentions on strategies regarding the future. Our actual future results could differ materially from those projected in such forward-looking statements because there are a number of risks and uncertainties. More information regarding such risks and uncertainties is available in the forward-looking disclosure statement in the slide deck and our filings with the Securities and Exchange Commission, particularly the Risk Factors section of our most recently filed annual report on Form 10-K and any subsequently filed quarterly reports on Form 10-Q. During the course of this call, we will be discussing certain non-GAAP financial measures, and we refer you to our website for the reconciliation of those measures to GAAP financial measures. Our press release with the copy of the financial statements and a copy of today's webcast presentation are available on our website at www.cummins.com under the heading of Investors and Media. With that out of the way, we'll begin with our Chairman and CEO, Tom Linebarger.

Thank you, Mark, and good morning, everyone. Well, as my first teleconference as Chief Executive, I'm conscious of my now retired boss' parting piece of advice which is, don't screw it up. I'll start with a summary of our fourth quarter and full year results, and then I'll also talk about our outlook for 2012. Pat will then take you through more details of the fourth quarter financial performance and our current forecast for the year. We delivered strong performance in the fourth quarter, finishing off an outstanding year for the company. Revenues for the fourth quarter were $4.9 billion, an increase of 19% over the fourth quarter of 2010 and a new quarterly record. Fourth quarter EBIT, excluding onetime items, was $677 million, an increase of 25% over the same quarter last year, continuing our trend of increasing profits faster than sales. Including onetime items, EBIT was $768 million. All 4 businesses reported higher sales than Q4 2010, and the Engines, Components and Distribution businesses all reported record sales in the fourth quarter. Our fourth quarter EBIT percent was 13.8% with the Engine and Components businesses delivering significant improvement from a year ago. The Distribution and Power Gen businesses had declines in EBIT percent from a year ago due to currency, commodity costs and a number of onetime items that we do not expect to repeat. As a result, we expect to see margins improve in both businesses in the first half of 2012. For the full year, Cummins sales topped $18 billion, an increase of 36% year-over-year, which is terrific performance given the economic uncertainty in a number of regions in 2011. Our revenues have grown a total of the 67% over the last 2 years, and we ended 2011 with revenues 26% above our pre-recession peak. Full year EBIT margin, excluding special items, reached 14.2% in 2011 and was also a new annual record. All 4 businesses delivered double-digit EBIT margins for the year, with the Engine and Components businesses delivering record EBIT percent. In addition to strong revenues and profits, we also had a solid cash flow performance in 2011. Cash from operations totaled $2.1 billion, driven by both our strong earnings results and improvement in our working capital efficiency. Our strong cash flow performance has allowed us to continue to fund our investments in future growth, while increasing returns to shareholders. We increased our dividend by 52% in the third quarter and repurchased 6.4 million shares during 2011. Our strong performance was also recognized by all 3 major credit rating agencies, with all 3 upgrading our rating during the year. Before I turn to our outlook for 2012, I'd like to make a few comments about some of our key markets in 2011. Let me start with North America. Our revenues in North America grew 50% in 2011. The North American heavy-duty truck market reached approximately 230,000 units in 2011, an increase of 77% over 2010 levels. Working very closely with our key OEMs and supply chain partners, we were able to quickly ramp up shipments of our heavy-duty engines while increasing our full year market share to 38%. Fourth quarter shipments of 15-liter engines to the U.S. and Canada were just 14 engines short of our all-time record. Total 15-liter shipments to all markets globally did reach a new record. The U.S. medium-duty truck market size reached approximately 98,000 units in 2011, an increase of almost 40%. We maintained our leadership position in 2011 with market share above 50% for the fourth quarter and the full year, and we ended the year with very encouraging order trends. As we approach the launch of our engines for EPA 2010, we said that it would take 18 to 24 months for the market to assess the different technologies and competitive offerings. We were confident in our technology then, and now, 24 months later, we are delighted with the strong customer acceptance of our products. We believe that our market position demonstrates that we delivered on our promise to provide significant fuel economy benefits, while meeting the toughest performance and emission standards in the world. In addition to delivering industry-leading fuel economy, our engines are proving to be extremely reliable. And our warranty costs, as a percentage of sales in 2011, were the lowest we have experienced in more than 15 years. We take a long-term approach to our technology development to ensure that we deliver the right technology to the market. For example, 10 years ago this month, we announced the formation of our Emission Solutions business to develop after-treatment products, well ahead of market demand for the technology. This business has been a key enabler to the success of our Engine business and now has leading market share in the U.S. and Europe, achieving revenues of more than $1.2 billion in 2011. Today, we have shipped over 209,000 engines equipped with our Selective Catalytic Reduction or SCR systems, and customer feedback continues to be extremely positive. Our international revenues increased by 27% in 2011. We achieved record full year revenues in Australia, in China, India, Latin America and Russia. We received a lot of questions over the past few months about market conditions in China and India. In China, demand softened in construction markets in the fourth quarter, while sales of truck engines improved modestly from third quarter levels. As a point of reference, during 2011, the truck market in China for heavy- and medium-duty trucks combined declined 9% to just under 1.2 million units, still 3.5x the size of the U.S. market. Our market share in 2011 in China was 11%. The excavator market in China continued to weaken in the fourth quarter, although the full year market size of 174,000 units was 5% higher than 2010 and this still remains the largest single market for construction equipment. Across all construction segments, our market share reached 13% in 2011. The market for Power Generation equipment increased 25% in 2011, driven in part by power shortages in the country. Our revenue increased by 40% over 2010 levels. In the fourth quarter, demand for Power Generation equipment came in a little ahead of our third quarter guidance, offsetting weaker demand for excavators. Full year revenues from our China operations, including joint ventures, reached $3.7 billion in 2011, an increase of 21% year-over-year and in line with the guidance we gave during the third quarter earnings call. In India, the truck market remained strong all year, with the industry sales growing by 12% to 370,000 units. Our market share reached 44% in the fourth quarter. As expected, our sales of Power Generation equipment declined in the fourth quarter in India, although new order intake has already started to improve. Full year revenues from our India operations overall, including joint ventures, were $2.3 billion, also up 21%. Now I would like to provide our overall outlook for 2012 and then comment on individual regions and end markets. We are currently forecasting total company revenue growth of 10% in 2012, and we expect EBIT to be in the range of 14.5% to 15% of sales. This would represent good progress towards our 2015 goals of reaching $30 billion in sales and 18% EBIT. In North America, we expect strong demand to continue in 2012 in a number of end markets. We expect that the market size for heavy-duty trucks will increase 21% to 278,000 units, and the medium-duty truck market is expected to grow 25% to 117,000 units. Mining and oil and gas markets are expected to remain strong, with OEMs reporting stronger order backlogs. Shipments of our engines for the Dodge Ram pickup are expected to grow by more than 10%. Power Generation revenues are expected to grow by 20% in North America, driven by data center demand, improving nonresidential construction and the launch of some new products. We expect our consolidated revenues in Latin America will decline by approximately 6% next year. The decline in revenues is driven by an expected 5% decline in the Brazilian truck market and the impact of the MAN engine transition that we discussed during our third quarter earnings call. Growth in the Components and Power Generation businesses will partially offset the decline in on-highway engine revenues. In China, we expect domestic revenues to be flat in 2012, with demand for construction equipment and trucks projected to be stronger in the second half of the year than the first. For the full year, we expect the truck market, heavy and medium combined, to be down 5% from 2011 and the excavator market to be about flat year-over-year. Inflation concerns appear to be moderating in China, and there's a growing expectation that the government will start to ease monetary policy, which would be a positive move for our end markets. Demand for Power Generation equipment and mining engines remain strong, and we expect good growth in engines for oil and gas applications in 2012. In India, the market for commercial vehicles remained strong throughout 2011, and we expect the commercial vehicle market size to grow a further 7% in 2012 to 398,000 units. Order trends for Power Generation have improved recently. And after relatively soft first quarter, we now expect 2012 revenues to grow by 10% driven by continued government investment in infrastructure. Inflation concerns in India also appear to be moderating. We do not have a clear picture of full year 2012 demand patterns across our end markets in Europe. Our current expectation is that our full year revenues in Europe may be down 5% year-over-year, with demand for trucks and construction equipment expected to decline. We do expect to some segments in end markets such as mining and Power Generation in Russia to show good growth. In 2011, our European revenues accounted for less than 15% of total company revenues, and we have very limited exposure to Southern Europe. We expect -- we continue to make progress in the execution of our growth strategy in Africa. In 2011, our revenues grew by 49%. For 2012, we expect to generate growth of further 30%, driven by -- primarily by our Power Generation and Distribution businesses in Africa. Cummins delivered good performance in 2011, and we continue to benefit from our leadership position in a number of end markets and geographies. As we have discussed, we have plans in place to generate continued strong growth, and we remain focused on further improving profitability across our businesses. None of this would have been possible without the commitment of our customers and partners, and I would like to personally thank them for their confidence in Cummins. I would also like to thank all of our employees around the world for their dedication and hard work in 2011. I want to give special recognition to the Cummins employees in our manufacturing plants, parts and logistics operations and our supply chain organizations, whose dedication enabled us to meet rapidly growing customer demand in several regions and end markets. Now I'll turn it over to Pat, who will cover our 2011 performance and 2012 guidance in more detail.

Thank you, Tom, and good morning, everyone. The results which we are reporting today represent the best year in our company's history in terms of revenue, profitability and operating cash flow. We experienced strong growth across all 4 business segments and in every major region. In fact, the company saw record revenue in the U.S., China, India and Brazil, which represents a significant achievement when we consider the uncertain macroeconomic environment that we faced in 2011. Full year revenues for the company were $18 billion, an increase of 36% over the prior year. Earnings before interest and tax, excluding the gains from the divestiture of 2 businesses and from the flood insurance settlement, increased 54% in the year to over $2.5 billion or 14.3% of sales, up from 12.5% in the previous year. Net income was $1.85 billion or $9.55 per share. Excluding the gains from the divestiture of the 2 businesses and from the flood insurance settlement, net earnings were $1.75 billion or $9.07 a share, up from $1 billion or $5.28 a share in 2010. We finished the year with a strong fourth quarter, with revenues of $4.9 billion, 19% higher than the previous year and 6% higher than the third quarter. Year-over-year growth was driven by stronger demand from on-highway markets in North America and Brazil, in construction and Power Generation markets in China, as well as in oil and gas and mining markets globally. Compared to the prior quarter, we benefited from growth in the heavy-duty truck market in North America, increased shipments to Chrysler and Power Generation demand in North America and in Latin America, offsetting the lower demand in China and India and the negative impact of currency as the U.S. dollar strengthened. Gross margins for the quarter were 25.2% of sales, up from 23.8% last year due to better operating leverage, lower product coverage cost improved price realization. Sequentially, the margins decreased 0.5 points from the third quarter's record level, primarily the result of a lower mix of aftermarket products, unfavorable currency movement and some one-off costs are not expected to repeat. Selling, admin and research and development costs increased compared to both the prior year and the prior quarter, primarily due to additional spending on research and development and on our strategic growth initiatives. Joint venture income was $101 million, 12% higher than last year and on par with the prior quarter. The improvement over the prior year was driven by the North American Distribution business and increased earnings at Tata Cummins in India. Earnings before interest and tax, excluding the gain on the sale of the Light Duty Filtration business and the flood insurance settlement, increased 25% to $677 million or 13.8% of sales, up from 13.1% last year and on par with the prior quarter. Currency fluctuations did not have a material impact on earnings for the company in total. Net earnings for the quarter were $548 million or $2.86 a share. Excluding the onetime items mentioned earlier, the fourth quarter net earnings were $491 million or $2.56 a share, which included a lower tax rate of 22.8% as a result of certain discrete tax adjustments that we booked in the fourth quarter. Moving on to the operating segments. Let me highlight their performance in the year and in the fourth quarter and conclude with the revenue and profitability expectations for each of them in 2012. Starting in the Engine segment, full year sales were $11.3 billion, up 43% from last year. EBIT increased 71% to $1.4 billion or 12.2% of sales, compared to 10.3% of sales last year. Fourth quarter revenues were $3.1 billion, an increase of 23% over last year and 4% over the prior quarter. Stronger demand for on-highway engines in North America, as well as for oil and gas and mining engines offset weaker demand in China for construction equipment. Segment EBIT margins were 12% in the quarter compared to 10.3% last year and 11.8% in the third quarter. Compared to the prior year, stronger volume and higher joint venture income more than offset additional investment in research and development. In 2012, we expect 10% revenue growth in this segment as a result of strong demand in North America truck markets and signs of improving demand for engines used in nonresidential construction. In addition, oil and gas and mining markets continue to be strong around the world. While some markets are clearly strengthening, we anticipate construction markets in China to be relatively flat with 2011. And as you heard from Tom, we expect year-over-year revenue in Brazil to decline following the introduction of the Euro 5 emissions and the changes at MAN that we discussed in our third quarter call. 2012 EBIT margins are forecast to be in the range of 12% to 13% of sales, and pre-volume leverage and joint venture contribution will be partially offset by continued investment in new products. In the Components segment, full year revenue was a record $4 billion, up 33% from last year as the truck markets strengthened in North America. EBIT for the year increased by 69% to $470 million with EBIT margins improving to 11.6% of sales, up from 9.1% last year. Fourth quarter sales were $1.1 billion, an increase of 19% over the prior year, driven by stronger demand in the North America on-highway markets. Sequentially, revenues increased 8%, driven by continued strong demand for components in North America and improved demand for turbochargers in China. EBIT margins for the quarter were a record 12.1% of sales compared to 9% in the prior year and 11.1% in the third quarter. The improvement in margins was driven primarily from higher volumes, improved productivity and lower product coverage costs. We expect revenue growth of 12% in 2012 as a result of strength in North America on-highway markets, additional content in Brazil for Euro 5 emissions and strong aftermarket sales. EBIT margins are expected to be in the range of 11.5% to 12.5% of sales, with the additional volume and continued productivity improvements in our plants being partially offset by increased spending on new product development. In the Power Generation segment, full year sales were $3.5 billion, up 20% over the prior year. EBIT increased by 25% to $373 million, with EBIT margins improving to 10.7% of sales, up from 10.2% of sales last year. Fourth quarter sales were $920 million, an increase of 2% from last year, as improved demand in China and North America was partially offset by weaker demand in India. Compared to the prior quarter, revenue increased 5% driven by the improved demand in North America and Latin America, offset by weaker demand in both China and in India. EBIT margins were 9.5% in the quarter compared to 10.2% last year and 10.5% in the prior quarter. Compared to last year, improved pricing and joint venture income were offset by investments being made for new growth initiatives and the impact of commodity price movements. Sequentially, the benefits of increased volume were offset by higher product coverage costs, more joint venture income due to typical seasonality in the Middle East and the impact of commodity price movements. For 2012, we expect the Power Generation segment to grow 10% as a result of improving demand in North America, Europe, Latin America and India. Demand in China will remain relatively flat with 2011 levels. We expect EBIT margins to improve and to be in the range of 11% to 12% of sales. The benefits of increased volume and better efficiency at our assembly plants will be partially offset by further investment in growth initiatives. And finally, for the Distribution segment, full year revenues were $3 billion, up 31% compared to the prior year. EBIT increased by 30% to $386 million and remained relatively flat at 12.7% of sales for the year. Fourth quarter revenues were $834 million, an increase of 19% over the prior year. This increase was driven by strong growth in the Asia-Pacific region, Power Generation demand in North America and from oil and gas and mining markets, as well as from pre-buy activity in Europe ahead of the Tier 4 Interim emissions change. Compared to the prior quarter, sales increased 7%, driven by strong growth across several regions, which more than offset unfavorable currency movements, which had a negative 4% impact on segment revenue. EBIT margins for the quarter were 10.4% compared to 11.7% last year and 13.3% last quarter. Compared to the prior year, margins were impacted by a mix shift away from the aftermarket towards whole goods from unfavorable currency movements, increased spending as we expand our footprint and upgrade certain facilities and lower joint venture income as a percent of sales. Sequentially, the margin decreased due to the same factors, with currency even more of a headwind relative to third quarter levels. For 2012, we are forecasting 20% growth over the prior year with approximately 9% of this growth coming from acquisitions. We expect EBIT margins in the range of 12.5% to 13.5% of sales. As Tom mentioned, we're projecting total Cummins revenues to be up 10% in 2012. And similar to last year, we anticipate the second half of the year to be slightly stronger than the first as on-highway markets in Brazil normalize following the Euro 5 implementation and as the China construction and truck markets strengthen in the second half of the year. Gross margins will improve as a result of a stronger volume and from price realization of between 0.5% and 1%. Material costs are currently projected to be flat relative to 2011, and warranty costs are forecast to increase slightly to 2.5% due to the mix of product sales in 2012. The benefits from our forecasted growth will be partially offset by continued investment in new product platforms and other growth initiatives across the company. Joint venture income is expected to grow 10% and remain flat at 2.3% of sales. And as a result, we are projecting an EBIT margin of between 14.5% and 15% of sales, which at the midpoint means 21% incremental EBIT margins year-over-year. We are currently projecting the tax rate to be around 29% in 2012, excluding any onetime discrete items. Finally, let me turn to the balance sheet and cash flow. As you've already heard from Tom, we had a very strong year from a cash flow perspective, generating a record $2 billion in cash from operating activities and then using that cash to reinvest back into the company and also to return value to our shareholders. Our balance sheet remains strong. Our pension plans remain very well-funded and our debt-to-capital position at the end of 2011 was 11.8%. Our strong balance sheet allows us to increase the level of investment we make in the research and development of new products and technologies, on strategic growth initiatives and on capital expenditure programs. We plan to increase our capital expenditure from $622 million in 2011 to between $800 million and $850 million in 2012. The majority of this investment will continue to be targeted towards capacity expansion and new product development such as expanding our natural gas offerings and developing new large displacement engines. In addition to investing for future growth, we remain committed to returning value to our shareholders through share repurchases and sustainable dividend growth. 2011 was a terrific year for the company, and we look forward to continuing our track record of profitable growth in 2012. Now let me turn it back over to Mark.

Thank you, Pat. We're about ready for questions. [Operator Instructions] So with that, we'll turn it over for questions.

[Operator Instructions] And your first question comes from the line of Henry Kirn with UBS.

As you look out to 2012, could you give some color on what you expect for seasonality?

Yes, I think –- Henry, the seasonality is not [ph] going to work unlike what we seen in 2011. First quarter tends to be a little bit quieter for demand in our Power Generation business and parts of the Distribution business given the holidays in Asia. So that tends to be the weakest quarter of the year relative to the other 3. And as I said in my comments, I would expect revenues in the second half of the year to be slightly stronger than the first. I think last year, there was like a 47-53 spit. This year, it's going to be very similar to that.

And the related follow up, was there any impact to your expectations for first quarter demand as a result of brake supplier issues?

No, no change.

Your next question comes from the line of Andrew Kaplowitz with Barclays Capital.

Tom, in Power Generation, it seems like your tone actually has gone quite a bit better, I'd say, over the last 3 months, especially in North America. What are you seeing specifically in North America that maybe has changed your tone? And how does it look in '12 in general?

It's mostly just been driven by better order intake. We -- I think we discussed on previous calls, we started to see a little improvement in maybe the second quarter of 2011, and we thought things were going to get better, and then they kind of didn't. We just -- U.S. economy just seemed to go back flat again. And then what we saw towards the end of the year was better order intake in North America. So we're still -- it's still a tenuous recovery, as you well know, in nonresidential construction. But it's just looking better, and our tone’s matching that improved order intake.

Okay, that's fair. And -- sorry, and then in North America in general, Tom, your visibility around the oil and gas markets in particular, I mean, natural prices have gone down, but we know you're doing oil shales and all kinds of business like that. So how do we sort of view that market in '12?

Yes, we are -- of course, reading the same stories with interest about natural gas prices going down. And we -- our view is it can't help but have an effect on demand. We will see effect on demand in North America. But what we're seeing as the upside is that international markets are getting going in the oil and gas markets. Examples are China, Argentina’s another where exploration is really getting going. So we're kind of looking across the world and saying, "Hey, we think it looks better." But I do agree that the prices and the stuff you're hearing in North America can't help but temper demand.

Your next question comes from the line of Ann Duignan with JPMorgan. Michael Shlisky - JP Morgan Chase & Co, Research Division: It's Mike Shlisly filling in for Ann Duignan. Just a quick question on pricing in 2012. I did notice there were some gains in pricing you had in 2011. I was wondering sort of globally if you could just kind of maybe just walk us through [Audio Gap] pricing in the various regions over the next couple of quarters?

Yes, overall, we're looking at pricing of between 0.5% and 1% of sales. That's not too dissimilar to what we've seen back in 2011. Most of the placing actions you're going to see in the parts and service business, in our industrial business with mining, oil and gas, commercial marine, less so on the on-highway businesses be they in North America or anywhere else.

And if I know, that structure there -- so with OEMs, we typically have structure agreements that go over the period of an emission cycle or something like that. So there, we do not see price realization within the cycle, whereas Power Gen aftermarket and things like that, our Distribution sold businesses, they go right to end-user customers. And there, we have more pricing flexibility. So where we see costs increasing, we are able to pass on some price increases assuming the markets accept -- can accept it.

Your next question comes from the line of Rob Wertheimer with Vertical Research Partners.

Two quick questions. One is just on materials. I think I heard materials impact on Power Gen margins. Engine margins are pretty good. Was there something just timing-wise in materials spend or commodity and is the outlook comparable to that too?

We took a lot of overhead in the fourth quarter and some copper price movements with regards to our forward contracts. But other than that, there wasn't anything significant with material with regards to the fourth quarter. As we look into 2012, again, back to the remarks I made in the script year-over-year. We're looking at material costs being flat, which probably means in the first half of the year, they will be a little bit better than the first half of 2011. And our expectation is metal markets will appreciate as we go into the second half of the year and the comparisons will not be as good, second half to second half.

Great. And if I can just do 2 on the warranty, I know we'll see this when the K comes out, but did you -- where did you end up on warranty expense, warranty experience? And do you have a cushion going into next year if experience was better than you thought? And if you wouldn't mind, oil and gas, are you having positive conversation with people on the QSK95 and on offshore, or is that too soon?

Yes, I don't think I’ve got any cushions going to next year. On warranty, it turned out to be really good. I think the quality of the new products that we launched in 2010 in North America has been terrific. And if you look on warranty expense last year in total for the company, it was 3% of sales. This is 2010, sorry. 2011, that dropped to 2.3% of sales. As we look forward into 2012, we're projecting a slight increase to 2.5% and naturally just due to the mix of products in 2012 relative to 2011 as the growth in products carry a slightly higher warranty rate than the mix we experienced in 2011. But overall, warranty, I'm really, really pleased with the performance of those new products that came out last year. And then sorry the question on oil and gas, again, was what?

It was just whether you're having any conversations on -- what the reception was for the engine launch if you're having conversation on planning out of sort of offshore rigs that might be built over next several years really?

Well, again, we're still in, as you know, in the middle of that program. We announced the program and the timing and -- but we are having discussions across our segments, including oil and gas, on 95, and the reception was terrific. I mean, I personally attended the events and met with the -- I mean, 70 or 80 customers from around the world, including many from oil and gas and people were really excited about the engine. As we talked about it, it will be the largest high-speed engine. And so for places like oil and gas where getting more power in a single package is a big focus, they're excited about that. So my expectation is that we'll have very good reception, and we're now committed to meeting targets in timing on that Engine.

Your next question comes from the line of Jerry Revich with Goldman Sachs.

Can you, gentlemen, talk about the major pieces of your CapEx program? Any new capacity expansion or new product plans beyond what you discussed in September, or is the Africa distribution build out meaningful portion there?

I think it's very similar to what I talked about back in September. We're expanding capacity in North America. We're seeing increased demand for our heavy-duty products and we're ramping up capacity at our Jamestown plant, which manufactures our 15-meter engines. Elsewhere around the world, we're investing facilities in Brazil and Turkey and China and India, all pretty much focused on adding capacity given what we see ahead of us. And I think, Jerry, you're pretty familiar with the investments we're making in the development of the new larger displacement engines as one example of what we're doing from a new product development perspective. So I'd, say, what 70%, maybe 75% of our total capital in 2012 will be focused on new product development and capacity expansion.

And the only thing I'd add, Jerry, to Pat's comments is that there is a fair bit rate in [ph] new products, which again is capacity, but it's targeted. A lot of our investments in emerging markets are targeted at new products where we're launching in those markets, new -- cost reduced or new technology products to meet new emissions targets and so a lot of that investment is going in over the next couple of years in both India and China.

And on that note, we've got national 4-engine standards coming up. And obviously, you're investing capacity ahead of that. I wonder if you could talk about your market share expectations on the after-treatment side? And maybe talk about the light-duty diesel turbo product and how the uptake there is going if it's not too early to talk about those items?

It is early on both those items. As you maybe know, the NS4 deadline was actually announced by the government, which was both good news and bad. On the not as good news, they said they pushed it back to the middle of 2013, which -- and we were sort of -- I guess the industry was sort of anticipating January 2013, although we didn't know. The good news part of it is that the 2 rival government agencies who were the ones kind of battling with each other and was creating all the uncertainty jointly announced the deadline. So from our point of view, that adds certainty and sort of adds -- it makes you feel like it's actually going to happen that way, which is a big deal for us. So we now feel like we have a target to shoot at as do our customers, which we think helps drive the capacity investments, the target dates on new product releases, which is terrific. With regard to how much share we'll have and those kind of things, it's definitely premature. But you can bet that on both the turbocharger and the after-treatment side that we are in active discussion with just about every significant OEM there about how we can be a part of their technical solution.

Your next question comes from the line of David Raso with ISI Group.

Looking at the guidance, the industrial revenues, the up 5%, I wanted to discuss a little bit, the up 5%, you would think there could be a little upside there, but maybe we need to talk a little bit more about the base case you have for North America with oil and gas and maybe some capacity constraints? But I would think the up 5% looks beatable, while the medium-duty outlook, is there a little downside risk there just looking at Brazil down 9%? And maybe I'm overstating the MAN platform loss and -- but I'm trying to think through Brazil is a big piece of that international part of truck medium bus? So can you first discuss the industrial engine revenues, the up 5%? Is there more capacity constraint than I realize, or do you have more of a decline baked in for North America oil and gas in that piece? I'm not sure why that shouldn’t be up more in '12.

Well, I think there's a couple of factors when you're looking at the global industrial demand, David, and number one, our base assumption is that China is flat year-over-year, which is an important market in this part of our consolidated revenues. The second piece, in Europe, we saw some pre-buy activity on some of the smaller engines around the Tier 4 Interim emissions regs, which we expect will be -- lead to some lower revenues in that segment. So those are down. Mining, we've got strong back order backlog in mining, clearly, globally, U.S. and international markets. Oil and gas remained strong. We've heard some rumblings of some tight capacity on the frac-ing rigs themselves, but the order rigs [ph] remained strong. So I think it's a combination of all those different factors that have us up 5%, which sounds less than your expectation.

Okay. And then on the medium, the -- you say up 7% in total. But Brazil truck shipment’s down 9%. Is that an -- I'm sorry, maybe I missed it. Was that an industry comment? I'm just thinking some share loss?

Yes. Brazil truck, our assumption is down 5%. We talked about the MAN transition with our new engines ramping up in the second half of the year.

So you're down 5% for the industry, and you're down 9% for yourself even with some platform loss?

Right, with some different factors in there, yes.

Okay, then I'll just wrap up with the balance sheet. Obviously, we are [Audio Gap] very strong net cash here over $1 billion. The share repo for the quarter was actually a little less than I would have thought. How should we think about the balance sheet usage for '12?

Well, David, if you think it was similar to what I said before. That somewhere between 65% and 70% will go back into the Company in the form of capital investment programs, joint venture investments, working capital, and then the 30% that's left, we will look to return to shareholders in the form of share repurchases and growing the dividend. So the reason why the share repurchases may have looked a little bit low in the fourth quarter was that we're fairly hefty in the third quarter. We bought back 6 million shares in 2011, which is a higher number than what we've done in the past. So when you look at what we did from a share repurchase perspective and what we did with the dividend in 2011 and compare that to total profit after-tax, about 30% [ph] of what we earned after tax we returned to the shareholder in one of those 2 forms. So we felt quite good about that.

And those percentages you were giving, those were of what, of your expected cash flow for the year?

Of my cash flow.

Well, that's I'm saying. The balance sheet is net cash $1 billion. I'm not even considering any future cash generation.

Yes, I like having a strong balance sheet, David. My intent is to keep a strong balance sheet.

Your next question comes from the line of Andrew Casey with Wells Fargo Securities.

The model seems pretty strong with formal baton toss, so, Tom, I'm sure you'll adhere to Tim's wisdom. So a couple of questions. If I could return to the last question that David just asked, if you have roughly $5.5 in net cash today and you could add maybe another $5 after CapEx in dividends next year, can you give us an idea as to what metrics you're looking at to manage your cash level? And how strong is strong, I guess, is the question?

Yes. Well, again, we don't have plans to grow our cash balance indefinitely. So we're very conscious of the fact and we talked to our investors all the time. And what they look for us to do is, first and foremost, reinvest back into the company where we think we've got good profitable growth opportunities. They see the track record, and that's the feedback we get any time without talking to investors. Obviously, we look to increase the dividend. We look to buy back stock when it makes sense, and we did a little bit more of that in the third quarter, given where the price dropped to. When I look at our plan over the next 4 or 5 years and what it takes to get to $30 billion in sales and what that means for capacity investments, and we've got that quite well modeled out. Now as we talked through in our September analyst day, there are different scenarios that can come into play here. So I think we've got good plans with regards to cash management. We watch that relative to our peer companies to make sure it doesn't get out of sync. I think the balance sheet is in good shape. Just know that pensions are incredibly well-funded, and our goal is to keep it that way and invest back into the Company where we see these really good opportunities for future profitable growth.

Okay. Thanks for that, Pat. And then if I could turn back to, I guess, a little more near term, the 2012 guidance. When you talk about some of the emerging markets strengthening in the back half of the year, can you indicate whether that's due to more comparisons, or if you're including an assumption that the various economies reaccelerate?

Yes. I think that's -- Andy, that's really related to the comments we made about interest rates and moderating of inflation. So our view is China has got a couple of things going that suggests that GDP will begin to improve again. Number one is that, as I mentioned, inflation is starting to moderate and we're just watching a lot of signs that suggest that the government may begin to ease cash flow restrictions. Of course, they'll do what they're going to do, but that's what it looks like. And the second thing is they've got a new government coming in. And again, I think it's going to be -- and a whole bunch of things they want to do like add to the housing stock and things like that, that I think is going to be able to drive demand. China, like every other economy, has its own set of challenges and has to manage them. But I think those signs point to improvement in the economy in the second half. The India story is a little bit more complicated in the sense that they don't have as clear signals about moderating inflation, but there are some signals there. And again, what our folks are telling us and what I'm reading and seeing suggest that, again, we'll start to see improvement in the Indian economy as inflation moderates, interest rates come down. And that allows economic growth. And again, their government is also continuing their infrastructure build-out, especially in roads, which is, of course, pumping investment in the economy. So both those things are telling us that markets -- those markets just look stronger in the second half.

Would the same be true of Brazil?

Well, Brazil, the main issue there is that the truck market had a pre-buy, and so we think they've just got to swallow that for one. And, as you know, it's a pretty big one. They're going from Euro 3 to Euro 5, pretty big change in technology. So there's a little bit of -- that affects us pretty significantly there separate from the economy. So there's the economic trend going on there, but there's also that -- one of our heavy end markets is having that sort of non-economic driver as well.

Your next question comes from the line of Tim Denoyer with Wolfe Trahan. Timothy J. Denoyer - Wolfe Trahan & Co.: A quick question on Emission Solutions in the quarter. I'm not sure if I missed this earlier, but it was up about, I think, 22% quarter-to-quarter. Can you talk about what drove that? I'm guessing that it's not really anything in terms of Brazil Euro 5 related yet, is it?

No, that was North America truck demand that drove that. Timothy J. Denoyer - Wolfe Trahan & Co.: Okay. So that's -- even though it grew 20% and North America grew sequentially 10%, it's just you're getting just more content there?

Yes. It's primarily North America.

Yes. We can get some timing issues there. But, yes, it's North America. Timothy J. Denoyer - Wolfe Trahan & Co.: Okay. And then just as a follow up to -- can you give a sense of your expectations for next year in terms of North America heavy-duty market share?

Yes, we still expect to stay in that sort of -- we've kind of said we think we'll be 35% to 40%, and that's still –- of course, we ended with that 38% for the year. And that's still the range we're expecting to be in. A lot of it depends on the success of our customers. So the more successful our customers are, the more [indiscernible] of our share. So we're really working really hard to make sure our customers do better. Those are our partners like PACCAR and others, making sure they're winning share in the market using our engines.

Your next question comes from the line of Jeff Kauffman with Sterne Agee. Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division: My question has been answered.

Your next question will come from the line of Eli Lustgarten with Longbow.

Tom, you let your numbers do the talking. You don't have to worry about anything else. Just a couple of minor fine points. Pat [ph], what was the FX impact on the fourth quarter both in top line and bottom line? And what are your assumption for the impact –- until you guys have some foreign currency assumptions in 2012?

That's a good question. So let me take you through the fourth quarter, and then I'll talk about 2012. So the fourth quarter relative to a year ago, we had about $40 million, $45 million impact in the top line, so a little bit less than 1%. And that was below $10 million in the bottom, so it was not significant at all. It was more significant on the top line relative to the third quarter. If you remember, the rates in Q3 compared to Q4 were very different. The impact on revenues in the fourth quarter was about $130 million lower because of FX. But again, given the mix of currencies and how we operate around the world, it was less than $10 million in the bottom line. So not significant year-over-year, quarter-over-quarter from an EBIT perspective. From -- let me just backup for a second. There was one exception to that and that was Distribution. So within the 4 segments in total, we're okay. Distribution, though, are very exposed to currency given that it tend to have a cost structure U.S. dollars and revenue in all local currencies. So they took a bigger hit and that was one of the reasons why their margin suffered a little bit in the fourth quarter. In terms of 2012, for guidance, based on the rates we were seeing about 10 days ago, we were looking at a $300 million headwind in currencies on the top line year-over-year. And again, probably less than 0.1 point impact on EBIT. So not material year-over-year from an EBIT perspective, but about, as I say, $300 million on the top line, so 1.5% of sales.

And just a follow up, you talked about pre-buys in Europe and pre-buys in Brazil. Did you see any evidence of any pre-buys in the United States from the tax issues?

No, not significant, Eli.

Industry was pretty busy.

Your next question is a follow up from Mr. Jerry Revich with Goldman Sachs.

Just 2 quick ones. First, on the Brazil side, Mark, it sounds like you've picked up some market share relative to, I guess, what you were afraid you'd lose on the MAN platform. Can you just talk about where you're picking up the incremental business from? And just give us some more context there?

Maybe I mischaracterized things, Jerry. So the market is down 5%. We will be down more than that because of the engine change. There's really been no change in which platforms we're on. Of course, we're getting more content on the Components side with the SCR system going into Euro 5. And in general, we've said in Latin America, our revenues will be down about 6%. Trucks will be down more than 5%, but the content for Components plus continued growth in Power Gen and some other on-highway markets get us back to about down 6%.

Remember, Jerry, the basic structure we -- with MAN is that we're launching a smaller engine with them and larger engine with them. And in the 6, 7 there -- we are 6, 7 which has been kind of the mainstay of our business with them over many years. They are using their own engine to replace that. So that's why we talked about the transition that we're building volume on the small engine and the large engine and -- but we're losing a bunch of volume in the 6, 7. And so that's what's happening over the course of the next 4 quarters or 6 quarters. And our hope again as we -- or our plan is to grow business with them over the years and surpass any peak we ever had. But we've got to transition here where we've got to build demand for those -- on those other engines.

Sure. Pat, can you talk about now your expectations for SG&A and engineering spending growth this year relative to sales growth? And also touch on your input cost assumptions? I think last year, you delivered 50 basis points from productivity improvement. Are you dialing that in into your base case guidance as well?

Yes, we are. I mean, we continue to push our manufacturing plants to continue to look for further productivity improvements. So that's a given every year. With regards to selling admin and research and development, as we look forward into 2012 -- I mean, we're going to go at 10% next year on the top line. We're going to grow our SAR at a faster rate than sales next year. And that's deliberate -- that's choices we are making that we think are important for our future growth in 2013, '14 and '15. So I would expect our SAR to increase as a percent of sales by maybe just over 0.5 point of sales. The research and development part in particular, I think for 2011, we ended up at 3.5% of sales, and our forecast for 2012 call that to increase to 3.8% for the full year.

Okay. And lastly, for the Distribution business, can you step us through the mechanism through which you're going to get the margin back? Is that -- are you pushing pricing over the next couple of quarters, or just help us understand how you drive that back into balance in '12?

Yes, well to keep that in perspective, distribution had a terrific year overall. I mean, record sales, record profits. And for the first 3 quarters of the year, they were performing north of 13% of sales. In the fourth quarter, they were impacted by the -- there were really 3 items in the fourth quarter. One was the impact on foreign exchange, which as I described earlier on, was far more significant for them than any of the other 3 business segments. So that was probably a 1 point-of-sale impact for them. Secondly, there was a mix shift from aftermarket to whole goods. Through the first 3 quarters, somewhere around 55% of their sales were aftermarket, and that dropped to 50% in the fourth quarter. So between the mix shift, foreign exchange and then some onetime costs that we had in Distribution around some warranty issues, some severance costs that we took in Europe, that was really the drop in Q3 to Q4. And we expect most of that will kick back right away in Q1. So I expect the first quarter to be much better for Distribution than what you've seen in the fourth quarter.

Your next question comes from the line of Jamie Cook with Crédit Suisse. Jamie L. Cook - Crédit Suisse AG, Research Division: Just 2 quick follow-up questions. Most have been answered. One, just back on the market share in North America, your market share was -- I mean, I know you ended at 38, but the first 2 months of the quarter was exceptional. Can you talk about what drove it? Was it constraints from -- some of the other truck OEs on the engine side that we heard about, or was it issues with other concerns on engines with running out of emissions, credits, et cetera? And then just a quick follow up, Pat, you talked about seasonality, but what about seasonality with regards to the JV income line? Just with everything that's going on in China, et cetera, I just want to make sure there's no surprises in the first half.

Yes. So, Jamie, let me just talk about market share. It is a little difficult from where we sit, sort out all the month-to-month changes because as you know, OEM build schedules, how they're dealing with backlog, a whole bunch of that stuff plays in there. And so we -- that's why we're pretty careful about saying which are real market share gains and which are not. So, again, I feel like the more average numbers are more instructive. So my view is 38 is a good number. The month-to-month ones were aberrations. They have lots to do with production. I don't see a lot of these big -- the things you mentioned, all of those reasons, they all may have had some effect, but they're not all visible to me how they play out. And again, our view was that the challenge for the industry through most of this year was trying to ramp up to meet the demand and do it in a cost effective way. And I think we feel good about how we did that. We think we helped our OEM customers across the board ramp up, and we dealt with our own constraints in supply chain and work through them and, of course, we tried -- did everything we could to help them be flexible to work through their constraints. So we feel pretty good about that. And I'm sure it helped that we were ramping up quickly, but how much, in which month, I just don't -- can't say.

And on the JV question, Jamie, last year, we were 2.3% of sales. It's not going to move an awful lot off that mark each quarter in 2012. So there'll be fluctuations in different areas, but we've got joint ventures in China, India, a substantial footprint in North America, as you know, so somewhere between 2.3%, plus or minus, 0.1 point is what you would expect through the year.

Your next question is a follow up from David Raso with ISI Group.

The question is on the JV income. I thought it's pretty impressive that the Chongqing growth could offset the Dongfeng decline, and really looking at the whole year, it's kind of how it played out, right? Chongqing was always there to kind of offset the Dongfeng declines. When you look at '12 JV income for those 2 businesses, can you give us a little color on that? How are you thinking of those businesses year-over-year maybe in the context at a minimum of the up 10% for total JV growth?

I think year-over-year, David, Chongqing will continue to grow. CCEC will continue to grow for us. I mean, that's been a remarkable story. It’s one of the JVs that doesn't get any of the spotlight, but their performance over the past few years and their growth, top line and bottom line, has just been terrific. So I would expect them to continue to expand their contribution to the company. With the Dongfeng-Cummins joint venture, year-over-year, I think that's going to be fairly flat. We expect volumes to improve in the second half of the year from where we are in the first half of the year. So, all-in, it's going to be around the same type of number that we've seen in 2011.

I think just to add a little color to the Chongqing, David, so the Chongqing engine plant, its primary customer base is off-highway, construction markets and Power Gen market, and it's a joint venture that we manage. And what we've been able to do there is figure out a way to adapt our technology to local market requirements, I think, pretty effectively. Whether it was, we've kept cost down. We've kept moving technology but at a rate and pace that at least allows us to be competitive from a cost point of view. And I think that's really the primary driver of the success of our business there. So, again, as Pat said, it really has been a terrific joint venture and our view as it will continue to grow and have success.

And lastly, the nat gas strategy. There's obviously some off-highway aspect to it, but particularly on the on-highway from big-bore to the smaller engines. Can you take us through -- obviously, Pat's alluded to some pretty heavy investment around it. So either it be through Westport, independent, just give us a little color on how the company is thinking about the nat gas opportunity, particularly on-highway?

Right. So, first of all, a significant amount of our investment, as you guess, is off-highway in things like Hedgehog and things like that. There's a lot of investment there and technology driving off-highway. In fact, the market is more significant for Cummins off-highway today than on-highway. But, as you know, there's a fair bit of momentum building on-highway. It's historically been primarily a bus market in North America from an on-highway point of view. And now there is growing interest from truck companies to see if given the low prices of natural gas, this can be a way to reduce cost of trucking. And we're excited about that because we're -- we've been in it for 10 years now, and from -- so we've got a bit of a lead over others and we work -- we've been working most of our efforts in that through our Cummins Westport joint venture, and that's still the way we're doing it. And our view is, although it's still a relatively small market, just to give you a sense, it's less than 5% of our North American truck sales today are natural gas. So it's not a big number today, and it's unlikely to have a big effect on 2012 revenues or profits. We consider it an area of growth and opportunity for us and for our customers.

Okay. I think that's the end of the hour now. I appreciate your questions and I will be available later.

Thank you very much. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.