Document
false--12-31Q220182018-07-010000026172YesLarge Accelerated Filer2.502.505000000005000000005000005000002224000002224000000.07480.05650.06750.071250.03650.048755670000059100000 0000026172 2018-01-01 2018-07-01 0000026172 us-gaap:AccountingStandardsUpdate201409Member 2018-01-01 2018-07-01 0000026172 cmi:PowerSystemsMember 2018-01-01 2018-07-01 0000026172 cmi:EngineMember 2018-01-01 2018-07-01 0000026172 cmi:DistributionMember 2018-01-01 2018-07-01 0000026172 cmi:ComponentsMember 2018-01-01 2018-07-01 0000026172 2018-07-01 0000026172 2018-04-02 2018-07-01 0000026172 2017-04-03 2017-07-02 0000026172 2017-01-01 2017-07-02 0000026172 2017-12-31 0000026172 2016-12-31 0000026172 2017-07-02 0000026172 us-gaap:ParentMember 2016-12-31 0000026172 us-gaap:TreasuryStockMember 2017-01-01 2017-07-02 0000026172 us-gaap:NoncontrollingInterestMember 2017-01-01 2017-07-02 0000026172 us-gaap:ParentMember 2017-01-01 2017-07-02 0000026172 us-gaap:RetainedEarningsMember 2016-12-31 0000026172 us-gaap:CommonStockMember 2018-07-01 0000026172 cmi:CommonStockHeldInTrustMember 2017-12-31 0000026172 us-gaap:AdditionalPaidInCapitalMember 2017-12-31 0000026172 us-gaap:RetainedEarningsMember 2017-07-02 0000026172 us-gaap:TreasuryStockMember 2016-12-31 0000026172 us-gaap:NoncontrollingInterestMember 2018-01-01 2018-07-01 0000026172 cmi:CommonStockHeldInTrustMember 2017-01-01 2017-07-02 0000026172 us-gaap:RetainedEarningsMember 2018-07-01 0000026172 us-gaap:CommonStockMember 2017-07-02 0000026172 us-gaap:RetainedEarningsMember 2018-01-01 2018-07-01 0000026172 us-gaap:AdditionalPaidInCapitalMember 2017-01-01 2017-07-02 0000026172 us-gaap:NoncontrollingInterestMember 2017-12-31 0000026172 us-gaap:NoncontrollingInterestMember 2017-07-02 0000026172 us-gaap:TreasuryStockMember 2017-07-02 0000026172 us-gaap:ParentMember 2018-01-01 2018-07-01 0000026172 us-gaap:ParentMember 2017-07-02 0000026172 us-gaap:TreasuryStockMember 2018-07-01 0000026172 us-gaap:RetainedEarningsMember 2017-01-01 2017-07-02 0000026172 us-gaap:AdditionalPaidInCapitalMember 2018-01-01 2018-07-01 0000026172 us-gaap:AdditionalPaidInCapitalMember 2018-07-01 0000026172 cmi:CommonStockHeldInTrustMember 2017-07-02 0000026172 cmi:CommonStockHeldInTrustMember 2018-01-01 2018-07-01 0000026172 us-gaap:AdditionalPaidInCapitalMember 2016-12-31 0000026172 cmi:CommonStockHeldInTrustMember 2016-12-31 0000026172 us-gaap:AdditionalPaidInCapitalMember 2017-07-02 0000026172 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2017-07-02 0000026172 us-gaap:ParentMember 2017-12-31 0000026172 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2016-12-31 0000026172 us-gaap:NoncontrollingInterestMember 2018-07-01 0000026172 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2017-12-31 0000026172 cmi:CommonStockHeldInTrustMember 2018-07-01 0000026172 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2017-01-01 2017-07-02 0000026172 us-gaap:NoncontrollingInterestMember 2016-12-31 0000026172 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-01-01 2018-07-01 0000026172 us-gaap:ParentMember 2018-07-01 0000026172 us-gaap:CommonStockMember 2017-12-31 0000026172 us-gaap:TreasuryStockMember 2018-01-01 2018-07-01 0000026172 us-gaap:TreasuryStockMember 2017-12-31 0000026172 us-gaap:RetainedEarningsMember 2017-12-31 0000026172 us-gaap:CommonStockMember 2016-12-31 0000026172 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-07-01 0000026172 us-gaap:AccountingStandardsUpdate201409Member 2018-01-01 2018-01-01 0000026172 2019-07-02 2018-01-01 2018-07-01 0000026172 2018-07-02 2018-07-01 0000026172 2018-07-02 2018-01-01 2018-07-01 0000026172 2019-07-02 2018-07-01 0000026172 2018-01-01 0000026172 2018-01-01 2018-01-01 0000026172 cmi:IndustrialMember 2018-04-02 2018-07-01 0000026172 cmi:GeneratortechnologiesMember 2018-04-02 2018-07-01 0000026172 cmi:IndustrialMember 2018-01-01 2018-07-01 0000026172 cmi:ExternalSalesMember cmi:PowerSystemsMember 2018-01-01 2018-07-01 0000026172 cmi:PSBUPowerGenerationMember 2018-01-01 2018-07-01 0000026172 cmi:ExternalSalesMember cmi:PowerSystemsMember 2018-04-02 2018-07-01 0000026172 cmi:GeneratortechnologiesMember 2018-01-01 2018-07-01 0000026172 cmi:PSBUPowerGenerationMember 2018-04-02 2018-07-01 0000026172 cmi:EmissionsolutionsMember 2018-01-01 2018-07-01 0000026172 cmi:FuelsystemsMember 2018-01-01 2018-07-01 0000026172 cmi:ExternalSalesMember cmi:ComponentsMember 2018-04-02 2018-07-01 0000026172 cmi:ExternalSalesMember cmi:ComponentsMember 2018-01-01 2018-07-01 0000026172 cmi:FiltrationMember 2018-01-01 2018-07-01 0000026172 cmi:TurbotechnologiesMember 2018-01-01 2018-07-01 0000026172 cmi:TurbotechnologiesMember 2018-04-02 2018-07-01 0000026172 cmi:EatonCumminsAutomatedTransmissionTechnologiesMember 2018-04-02 2018-07-01 0000026172 cmi:FiltrationMember 2018-04-02 2018-07-01 0000026172 cmi:FuelsystemsMember 2018-04-02 2018-07-01 0000026172 cmi:EatonCumminsAutomatedTransmissionTechnologiesMember 2018-01-01 2018-07-01 0000026172 cmi:EmissionsolutionsMember 2018-04-02 2018-07-01 0000026172 cmi:ServiceMember 2018-04-02 2018-07-01 0000026172 cmi:ExternalSalesMember cmi:DistributionMember 2018-04-02 2018-07-01 0000026172 cmi:EngineProductLineMember 2018-01-01 2018-07-01 0000026172 cmi:ExternalSalesMember cmi:DistributionMember 2018-01-01 2018-07-01 0000026172 cmi:ServiceMember 2018-01-01 2018-07-01 0000026172 cmi:EngineProductLineMember 2018-04-02 2018-07-01 0000026172 cmi:PartsMember 2018-04-02 2018-07-01 0000026172 cmi:DBUPowerGenerationDomain 2018-01-01 2018-07-01 0000026172 cmi:PartsMember 2018-01-01 2018-07-01 0000026172 cmi:DBUPowerGenerationDomain 2018-04-02 2018-07-01 0000026172 cmi:DistributionMember us-gaap:LatinAmericaMember 2018-04-02 2018-07-01 0000026172 cmi:DistributionMember country:RU 2018-01-01 2018-07-01 0000026172 cmi:DistributionMember us-gaap:NorthAmericaMember 2018-04-02 2018-07-01 0000026172 cmi:DistributionMember us-gaap:AfricaMember 2018-01-01 2018-07-01 0000026172 cmi:DistributionMember us-gaap:AsiaPacificMember 2018-01-01 2018-07-01 0000026172 cmi:DistributionMember country:IN 2018-01-01 2018-07-01 0000026172 cmi:DistributionMember country:RU 2018-04-02 2018-07-01 0000026172 cmi:DistributionMember us-gaap:AsiaPacificMember 2018-04-02 2018-07-01 0000026172 cmi:DistributionMember country:CN 2018-04-02 2018-07-01 0000026172 cmi:DistributionMember us-gaap:NorthAmericaMember 2018-01-01 2018-07-01 0000026172 cmi:DistributionMember us-gaap:LatinAmericaMember 2018-01-01 2018-07-01 0000026172 cmi:DistributionMember us-gaap:EuropeMember 2018-04-02 2018-07-01 0000026172 cmi:DistributionMember country:IN 2018-04-02 2018-07-01 0000026172 cmi:DistributionMember country:CN 2018-01-01 2018-07-01 0000026172 cmi:DistributionMember us-gaap:EuropeMember 2018-01-01 2018-07-01 0000026172 cmi:DistributionMember us-gaap:AfricaMember 2018-04-02 2018-07-01 0000026172 country:IN 2018-01-01 2018-07-01 0000026172 us-gaap:NonUsMember 2018-01-01 2018-07-01 0000026172 us-gaap:NonUsMember 2018-04-02 2018-07-01 0000026172 country:CN 2018-01-01 2018-07-01 0000026172 country:CN 2018-04-02 2018-07-01 0000026172 country:US 2018-04-02 2018-07-01 0000026172 country:US 2018-01-01 2018-07-01 0000026172 country:IN 2018-04-02 2018-07-01 0000026172 cmi:OnhighwayMember 2018-01-01 2018-07-01 0000026172 cmi:ExternalSalesMember cmi:EngineMember 2018-04-02 2018-07-01 0000026172 cmi:HeavydutytruckMember 2018-01-01 2018-07-01 0000026172 cmi:LightdutyautomotiveMember 2018-01-01 2018-07-01 0000026172 cmi:ExternalSalesMember cmi:EngineMember 2018-01-01 2018-07-01 0000026172 cmi:MediumdutytruckandbusMember 2018-04-02 2018-07-01 0000026172 cmi:MediumdutytruckandbusMember 2018-01-01 2018-07-01 0000026172 cmi:OffhighwayMember 2018-04-02 2018-07-01 0000026172 cmi:OnhighwayMember 2018-04-02 2018-07-01 0000026172 cmi:LightdutyautomotiveMember 2018-04-02 2018-07-01 0000026172 cmi:HeavydutytruckMember 2018-04-02 2018-07-01 0000026172 cmi:OffhighwayMember 2018-01-01 2018-07-01 0000026172 country:US us-gaap:PensionPlansDefinedBenefitMember 2018-04-02 2018-07-01 0000026172 us-gaap:OtherPostretirementBenefitPlansDefinedBenefitMember 2017-04-03 2017-07-02 0000026172 us-gaap:OtherPostretirementBenefitPlansDefinedBenefitMember 2018-04-02 2018-07-01 0000026172 country:US us-gaap:PensionPlansDefinedBenefitMember 2017-04-03 2017-07-02 0000026172 country:GB us-gaap:PensionPlansDefinedBenefitMember 2017-04-03 2017-07-02 0000026172 country:GB us-gaap:PensionPlansDefinedBenefitMember 2018-04-02 2018-07-01 0000026172 us-gaap:PensionPlansDefinedBenefitMember us-gaap:ScenarioForecastMember 2018-07-02 0000026172 us-gaap:OverfundedPlanMember us-gaap:PensionPlansDefinedBenefitMember us-gaap:ScenarioForecastMember 2018-07-02 0000026172 us-gaap:OtherPostretirementBenefitPlansDefinedBenefitMember 2017-01-01 2017-07-02 0000026172 country:GB us-gaap:PensionPlansDefinedBenefitMember 2018-01-01 2018-07-01 0000026172 us-gaap:OtherPostretirementBenefitPlansDefinedBenefitMember 2018-01-01 2018-07-01 0000026172 country:US us-gaap:PensionPlansDefinedBenefitMember 2017-01-01 2017-07-02 0000026172 country:US us-gaap:PensionPlansDefinedBenefitMember 2018-01-01 2018-07-01 0000026172 country:GB us-gaap:PensionPlansDefinedBenefitMember 2017-01-01 2017-07-02 0000026172 us-gaap:FundedPlanMember us-gaap:PensionPlansDefinedBenefitMember 2017-04-03 2017-07-02 0000026172 us-gaap:OverfundedPlanMember us-gaap:PensionPlansDefinedBenefitMember 2018-04-02 2018-07-01 0000026172 us-gaap:OverfundedPlanMember us-gaap:PensionPlansDefinedBenefitMember 2017-04-03 2017-07-02 0000026172 us-gaap:OverfundedPlanMember us-gaap:PensionPlansDefinedBenefitMember 2018-01-01 2018-07-01 0000026172 us-gaap:FundedPlanMember us-gaap:PensionPlansDefinedBenefitMember 2018-04-02 2018-07-01 0000026172 us-gaap:PensionPlansDefinedBenefitMember 2018-04-02 2018-07-01 0000026172 us-gaap:OtherPensionPlansDefinedBenefitMember 2017-04-03 2017-07-02 0000026172 us-gaap:FundedPlanMember us-gaap:PensionPlansDefinedBenefitMember 2017-01-01 2017-07-02 0000026172 us-gaap:PensionPlansDefinedBenefitMember 2017-01-01 2017-07-02 0000026172 us-gaap:FundedPlanMember us-gaap:PensionPlansDefinedBenefitMember 2018-01-01 2018-07-01 0000026172 us-gaap:PensionPlansDefinedBenefitMember 2017-04-03 2017-07-02 0000026172 us-gaap:OtherPensionPlansDefinedBenefitMember 2017-01-01 2017-07-02 0000026172 us-gaap:OtherPensionPlansDefinedBenefitMember 2018-04-02 2018-07-01 0000026172 us-gaap:OverfundedPlanMember us-gaap:PensionPlansDefinedBenefitMember 2017-01-01 2017-07-02 0000026172 us-gaap:PensionPlansDefinedBenefitMember 2018-01-01 2018-07-01 0000026172 us-gaap:OtherPensionPlansDefinedBenefitMember 2018-01-01 2018-07-01 0000026172 cmi:DongfengCumminsEngineCompanyLtdMember 2017-04-03 2017-07-02 0000026172 cmi:KomatsuCumminsChileLtdaMember 2017-04-03 2017-07-02 0000026172 cmi:AllOtherManufacturersMember 2017-01-01 2017-07-02 0000026172 cmi:KomatsuCumminsChileLtdaMember 2017-01-01 2017-07-02 0000026172 cmi:DongfengCumminsEngineCompanyLtdMember 2017-01-01 2017-07-02 0000026172 cmi:AllOtherManufacturersMember 2017-04-03 2017-07-02 0000026172 cmi:DongfengCumminsEngineCompanyLtdMember 2018-01-01 2018-07-01 0000026172 cmi:CumminsWestportInc.Member 2017-01-01 2017-07-02 0000026172 cmi:KomatsuCumminsChileLtdaMember 2018-01-01 2018-07-01 0000026172 cmi:ChongqingCumminsEngineCompanyLtdMember 2017-01-01 2017-07-02 0000026172 cmi:BeijingFotonCumminsEngineCompanyMember 2018-04-02 2018-07-01 0000026172 cmi:ChongqingCumminsEngineCompanyLtdMember 2017-04-03 2017-07-02 0000026172 cmi:KomatsuCumminsChileLtdaMember 2018-04-02 2018-07-01 0000026172 cmi:BeijingFotonCumminsEngineCompanyMember 2018-01-01 2018-07-01 0000026172 cmi:DongfengCumminsEmissionSolutionsCo.Ltd.Member 2018-01-01 2018-07-01 0000026172 cmi:ChongqingCumminsEngineCompanyLtdMember 2018-04-02 2018-07-01 0000026172 cmi:CumminsWestportInc.Member 2017-04-03 2017-07-02 0000026172 cmi:DongfengCumminsEngineCompanyLtdMember 2018-04-02 2018-07-01 0000026172 cmi:DongfengCumminsEmissionSolutionsCo.Ltd.Member 2018-04-02 2018-07-01 0000026172 cmi:AllOtherManufacturersMember 2018-01-01 2018-07-01 0000026172 cmi:AllOtherManufacturersMember 2018-04-02 2018-07-01 0000026172 cmi:DongfengCumminsEmissionSolutionsCo.Ltd.Member 2017-04-03 2017-07-02 0000026172 cmi:BeijingFotonCumminsEngineCompanyMember 2017-04-03 2017-07-02 0000026172 cmi:DongfengCumminsEmissionSolutionsCo.Ltd.Member 2017-01-01 2017-07-02 0000026172 cmi:CumminsWestportInc.Member 2018-04-02 2018-07-01 0000026172 cmi:ChongqingCumminsEngineCompanyLtdMember 2018-01-01 2018-07-01 0000026172 cmi:CumminsWestportInc.Member 2018-01-01 2018-07-01 0000026172 cmi:BeijingFotonCumminsEngineCompanyMember 2017-01-01 2017-07-02 0000026172 us-gaap:ScenarioForecastMember 2018-07-02 2018-07-02 0000026172 us-gaap:FixedIncomeFundsMember 2018-07-01 0000026172 us-gaap:CertificatesOfDepositMember 2018-07-01 0000026172 us-gaap:EquityFundsMember 2017-12-31 0000026172 us-gaap:ForeignGovernmentDebtMember 2018-07-01 0000026172 us-gaap:FixedIncomeFundsMember 2017-12-31 0000026172 us-gaap:EquityFundsMember 2018-07-01 0000026172 us-gaap:CertificatesOfDepositMember 2017-12-31 0000026172 us-gaap:ForeignGovernmentDebtMember 2017-12-31 0000026172 us-gaap:CertificatesOfDepositMember us-gaap:MaximumMember 2018-01-01 2018-07-01 0000026172 us-gaap:CertificatesOfDepositMember us-gaap:MinimumMember 2018-01-01 2018-07-01 0000026172 cmi:Debentures5.65PercentDue2098Member 2018-07-01 0000026172 cmi:Debentures6.75PercentDue2027Member 2017-12-31 0000026172 cmi:OtherLongTermDebtMember 2017-12-31 0000026172 cmi:SeniorNotes4.875PercentDue2043Member 2017-12-31 0000026172 cmi:Debentures7.125PercentDue2028Member 2018-07-01 0000026172 cmi:Debentures7.125PercentDue2028Member 2017-12-31 0000026172 cmi:SeniorNotes4.875PercentDue2043Member 2018-07-01 0000026172 cmi:SeniorNotes3.65PercentDue2023Member 2017-12-31 0000026172 cmi:Debentures6.75PercentDue2027Member 2018-07-01 0000026172 cmi:Debentures5.65PercentDue2098Member 2017-12-31 0000026172 cmi:SeniorNotes3.65PercentDue2023Member 2018-07-01 0000026172 cmi:OtherLongTermDebtMember 2018-07-01 0000026172 us-gaap:CommercialPaperMember 2017-12-31 0000026172 us-gaap:RevolvingCreditFacilityMember 2015-11-13 0000026172 us-gaap:CommercialPaperMember 2018-07-01 0000026172 us-gaap:DomesticLineOfCreditMember 2017-09-05 0000026172 cmi:AccountingStandardsUpdate201613Member 2018-01-01 2018-07-01 0000026172 cmi:AccountingStandardsUpdate201707Member 2018-01-01 2018-07-01 0000026172 cmi:AccountingStandardsUpdate201801Member 2018-01-01 2018-07-01 0000026172 us-gaap:AccountingStandardsUpdate201601Member 2018-01-01 2018-07-01 0000026172 us-gaap:AccountingStandardsUpdate201602Member 2018-01-01 2018-07-01 0000026172 us-gaap:AccountingStandardsUpdate201615Member 2018-01-01 2018-07-01 0000026172 us-gaap:OtherCurrentLiabilitiesMember 2017-12-31 0000026172 us-gaap:OtherNoncurrentLiabilitiesMember 2017-12-31 0000026172 us-gaap:OtherNoncurrentLiabilitiesMember 2018-07-01 0000026172 us-gaap:OtherCurrentLiabilitiesMember 2018-07-01 0000026172 us-gaap:MaximumMember 2018-01-01 2018-07-01 0000026172 cmi:EngineMember 2018-01-01 2018-04-01 0000026172 cmi:ComponentsMember 2018-01-01 2018-04-01 0000026172 2017-01-01 2017-12-31 0000026172 2018-01-01 2018-04-01 0000026172 cmi:ComponentsMember 2018-04-02 2018-07-01 0000026172 cmi:EngineMember 2018-04-02 2018-07-01 0000026172 us-gaap:ParentMember 2017-04-03 2017-07-02 0000026172 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2018-04-02 2018-07-01 0000026172 us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2017-04-03 2017-07-02 0000026172 us-gaap:NoncontrollingInterestMember 2018-04-02 2018-07-01 0000026172 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2018-07-01 0000026172 us-gaap:AccumulatedTranslationAdjustmentMember 2018-04-02 2018-07-01 0000026172 us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2018-07-01 0000026172 us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2018-04-02 2018-07-01 0000026172 us-gaap:AccumulatedTranslationAdjustmentMember 2018-04-01 0000026172 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2017-04-03 2017-07-02 0000026172 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2018-07-01 0000026172 us-gaap:AccumulatedTranslationAdjustmentMember 2017-07-02 0000026172 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2018-04-02 2018-07-01 0000026172 us-gaap:AccumulatedTranslationAdjustmentMember 2017-04-03 2017-07-02 0000026172 us-gaap:ParentMember 2018-04-02 2018-07-01 0000026172 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2017-07-02 0000026172 us-gaap:NoncontrollingInterestMember 2017-04-03 2017-07-02 0000026172 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2017-04-03 2017-07-02 0000026172 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2018-04-01 0000026172 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2017-04-02 0000026172 us-gaap:AccumulatedTranslationAdjustmentMember 2017-04-02 0000026172 us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2018-04-01 0000026172 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2017-04-02 0000026172 us-gaap:ParentMember 2017-04-02 0000026172 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2017-07-02 0000026172 us-gaap:ParentMember 2018-04-01 0000026172 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2018-04-01 0000026172 us-gaap:AccumulatedTranslationAdjustmentMember 2018-07-01 0000026172 us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2017-07-02 0000026172 us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2017-04-02 0000026172 us-gaap:AccumulatedTranslationAdjustmentMember 2018-01-01 2018-07-01 0000026172 us-gaap:AccumulatedTranslationAdjustmentMember 2016-12-31 0000026172 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2016-12-31 0000026172 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2018-01-01 2018-07-01 0000026172 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2018-01-01 2018-07-01 0000026172 us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2018-01-01 2018-07-01 0000026172 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2017-01-01 2017-07-02 0000026172 us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2017-12-31 0000026172 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2017-01-01 2017-07-02 0000026172 us-gaap:AccumulatedTranslationAdjustmentMember 2017-01-01 2017-07-02 0000026172 us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2016-12-31 0000026172 us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2017-01-01 2017-07-02 0000026172 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2016-12-31 0000026172 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2017-12-31 0000026172 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2017-12-31 0000026172 us-gaap:AccumulatedTranslationAdjustmentMember 2017-12-31 0000026172 cmi:ElectrifiedPowerMember 2018-01-01 2018-07-01 0000026172 cmi:IntersegmentsalesMember cmi:EngineMember 2018-01-01 2018-07-01 0000026172 cmi:ElectrifiedPowerMember 2017-01-01 2017-07-02 0000026172 cmi:DistributionMember 2017-01-01 2017-07-02 0000026172 cmi:ExternalSalesMember 2018-01-01 2018-07-01 0000026172 cmi:TotalSegmentMember 2018-01-01 2018-07-01 0000026172 cmi:IntersegmentsalesMember cmi:TotalSegmentMember 2017-01-01 2017-07-02 0000026172 cmi:EngineMember 2017-01-01 2017-07-02 0000026172 cmi:ExternalSalesMember cmi:TotalSegmentMember 2017-01-01 2017-07-02 0000026172 cmi:IntersegmentsalesMember cmi:ElectrifiedPowerMember 2017-01-01 2017-07-02 0000026172 cmi:ComponentsMember 2017-01-01 2017-07-02 0000026172 cmi:IntersegmentsalesMember us-gaap:IntersegmentEliminationMember 2017-01-01 2017-07-02 0000026172 us-gaap:IntersegmentEliminationMember 2018-01-01 2018-07-01 0000026172 cmi:PowerSystemsMember 2017-01-01 2017-07-02 0000026172 us-gaap:CorporateNonSegmentMember 2018-01-01 2018-07-01 0000026172 cmi:ExternalSalesMember cmi:DistributionMember 2017-01-01 2017-07-02 0000026172 cmi:TotalSegmentMember 2017-01-01 2017-07-02 0000026172 cmi:IntersegmentsalesMember cmi:DistributionMember 2017-01-01 2017-07-02 0000026172 us-gaap:CorporateNonSegmentMember 2017-01-01 2017-07-02 0000026172 cmi:IntersegmentsalesMember cmi:ComponentsMember 2017-01-01 2017-07-02 0000026172 cmi:IntersegmentsalesMember cmi:ElectrifiedPowerMember 2018-01-01 2018-07-01 0000026172 cmi:IntersegmentsalesMember cmi:ComponentsMember 2018-01-01 2018-07-01 0000026172 cmi:IntersegmentsalesMember cmi:EngineMember 2017-01-01 2017-07-02 0000026172 cmi:IntersegmentsalesMember cmi:PowerSystemsMember 2018-01-01 2018-07-01 0000026172 cmi:IntersegmentsalesMember cmi:PowerSystemsMember 2017-01-01 2017-07-02 0000026172 cmi:IntersegmentsalesMember cmi:TotalSegmentMember 2018-01-01 2018-07-01 0000026172 cmi:ExternalSalesMember cmi:ElectrifiedPowerMember 2018-01-01 2018-07-01 0000026172 cmi:ExternalSalesMember cmi:ElectrifiedPowerMember 2017-01-01 2017-07-02 0000026172 cmi:ExternalSalesMember cmi:TotalSegmentMember 2018-01-01 2018-07-01 0000026172 cmi:ExternalSalesMember cmi:ComponentsMember 2017-01-01 2017-07-02 0000026172 cmi:IntersegmentsalesMember cmi:DistributionMember 2018-01-01 2018-07-01 0000026172 cmi:IntersegmentsalesMember us-gaap:IntersegmentEliminationMember 2018-01-01 2018-07-01 0000026172 cmi:ExternalSalesMember cmi:EngineMember 2017-01-01 2017-07-02 0000026172 cmi:ExternalSalesMember 2017-01-01 2017-07-02 0000026172 cmi:ExternalSalesMember cmi:PowerSystemsMember 2017-01-01 2017-07-02 0000026172 us-gaap:IntersegmentEliminationMember 2017-01-01 2017-07-02 0000026172 cmi:IntersegmentsalesMember cmi:PowerSystemsMember 2017-04-03 2017-07-02 0000026172 cmi:DistributionMember 2017-04-03 2017-07-02 0000026172 cmi:ExternalSalesMember 2017-04-03 2017-07-02 0000026172 cmi:EngineMember 2017-04-03 2017-07-02 0000026172 cmi:PowerSystemsMember 2018-04-02 2018-07-01 0000026172 cmi:ComponentsMember 2017-04-03 2017-07-02 0000026172 cmi:IntersegmentsalesMember cmi:PowerSystemsMember 2018-04-02 2018-07-01 0000026172 cmi:PowerSystemsMember 2017-04-03 2017-07-02 0000026172 cmi:ElectrifiedPowerMember 2017-04-03 2017-07-02 0000026172 cmi:ElectrifiedPowerMember 2018-04-02 2018-07-01 0000026172 us-gaap:IntersegmentEliminationMember 2018-04-02 2018-07-01 0000026172 cmi:DistributionMember 2018-04-02 2018-07-01 0000026172 cmi:IntersegmentsalesMember cmi:DistributionMember 2018-04-02 2018-07-01 0000026172 cmi:IntersegmentsalesMember cmi:ComponentsMember 2018-04-02 2018-07-01 0000026172 cmi:TotalSegmentMember 2017-04-03 2017-07-02 0000026172 cmi:ExternalSalesMember cmi:PowerSystemsMember 2017-04-03 2017-07-02 0000026172 cmi:IntersegmentsalesMember cmi:ElectrifiedPowerMember 2017-04-03 2017-07-02 0000026172 cmi:TotalSegmentMember 2018-04-02 2018-07-01 0000026172 cmi:IntersegmentsalesMember cmi:EngineMember 2017-04-03 2017-07-02 0000026172 cmi:IntersegmentsalesMember us-gaap:IntersegmentEliminationMember 2017-04-03 2017-07-02 0000026172 cmi:ExternalSalesMember cmi:DistributionMember 2017-04-03 2017-07-02 0000026172 cmi:ExternalSalesMember cmi:ElectrifiedPowerMember 2018-04-02 2018-07-01 0000026172 us-gaap:CorporateNonSegmentMember 2017-04-03 2017-07-02 0000026172 cmi:IntersegmentsalesMember cmi:DistributionMember 2017-04-03 2017-07-02 0000026172 cmi:ExternalSalesMember cmi:EngineMember 2017-04-03 2017-07-02 0000026172 cmi:ExternalSalesMember cmi:ComponentsMember 2017-04-03 2017-07-02 0000026172 cmi:ExternalSalesMember cmi:TotalSegmentMember 2017-04-03 2017-07-02 0000026172 cmi:ExternalSalesMember 2018-04-02 2018-07-01 0000026172 cmi:IntersegmentsalesMember cmi:TotalSegmentMember 2018-04-02 2018-07-01 0000026172 cmi:IntersegmentsalesMember cmi:ComponentsMember 2017-04-03 2017-07-02 0000026172 us-gaap:IntersegmentEliminationMember 2017-04-03 2017-07-02 0000026172 cmi:IntersegmentsalesMember us-gaap:IntersegmentEliminationMember 2018-04-02 2018-07-01 0000026172 us-gaap:CorporateNonSegmentMember 2018-04-02 2018-07-01 0000026172 cmi:IntersegmentsalesMember cmi:TotalSegmentMember 2017-04-03 2017-07-02 0000026172 cmi:ExternalSalesMember cmi:ElectrifiedPowerMember 2017-04-03 2017-07-02 0000026172 cmi:IntersegmentsalesMember cmi:EngineMember 2018-04-02 2018-07-01 0000026172 cmi:IntersegmentsalesMember cmi:ElectrifiedPowerMember 2018-04-02 2018-07-01 0000026172 cmi:ExternalSalesMember cmi:TotalSegmentMember 2018-04-02 2018-07-01 0000026172 cmi:AccountingStandardsUpdate201707Member cmi:IncomelossbeforeincometaxMember 2017-04-03 2017-07-02 0000026172 cmi:AccountingStandardsUpdate201707Member us-gaap:SellingGeneralAndAdministrativeExpensesMember 2017-04-03 2017-07-02 0000026172 cmi:AccountingStandardsUpdate201707Member us-gaap:SellingGeneralAndAdministrativeExpensesMember 2017-01-01 2017-04-02 0000026172 cmi:AccountingStandardsUpdate201707Member us-gaap:OtherNonoperatingIncomeExpenseMember 2017-01-01 2017-04-02 0000026172 cmi:AccountingStandardsUpdate201707Member us-gaap:CostOfSalesMember 2017-01-01 2017-04-02 0000026172 cmi:AccountingStandardsUpdate201707Member us-gaap:ResearchAndDevelopmentExpenseMember 2017-04-03 2017-07-02 0000026172 cmi:AccountingStandardsUpdate201707Member us-gaap:OtherNonoperatingIncomeExpenseMember 2017-04-03 2017-07-02 0000026172 cmi:AccountingStandardsUpdate201707Member us-gaap:CostOfSalesMember 2017-04-03 2017-07-02 0000026172 cmi:AccountingStandardsUpdate201707Member cmi:IncomelossbeforeincometaxMember 2017-01-01 2017-04-02 0000026172 cmi:AccountingStandardsUpdate201707Member us-gaap:OperatingIncomeLossMember 2017-01-01 2017-04-02 0000026172 cmi:AccountingStandardsUpdate201707Member us-gaap:ResearchAndDevelopmentExpenseMember 2017-01-01 2017-04-02 0000026172 cmi:AccountingStandardsUpdate201707Member us-gaap:OperatingIncomeLossMember 2017-04-03 2017-07-02 0000026172 us-gaap:AccountingStandardsUpdate201601Member 2018-01-01 2018-04-01 utreg:Rate iso4217:USD xbrli:shares xbrli:shares cmi:country xbrli:pure iso4217:USD cmi:location
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
cumminslogo.jpg
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended July 1, 2018
 
Commission File Number 1-4949
CUMMINS INC.
(Exact name of registrant as specified in its charter)
Indiana
(State of Incorporation)
 
35-0257090
 (IRS Employer Identification No.)
500 Jackson Street
Box 3005
Columbus, Indiana 47202-3005
(Address of principal executive offices)
 
Telephone (812) 377-5000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit and post such files).  Yes x  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.  (Check one):
Large accelerated filer x
 
Accelerated filer o
 
Non-accelerated filer o
Smaller reporting company o
 
Emerging growth company o
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o   No x
 
As of July 1, 2018, there were 163,311,209 shares of common stock outstanding with a par value of $2.50 per share.

 
 


Table of Contents

CUMMINS INC. AND SUBSIDIARIES
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
 
 
 
Page
 
 
 
Condensed Consolidated Statements of Income for the three and six months ended July 1, 2018 and July 2, 2017
 
Condensed Consolidated Statements of Comprehensive Income for the three and six months ended July 1, 2018 and July 2, 2017
 
Condensed Consolidated Balance Sheets at July 1, 2018 and December 31, 2017
 
Condensed Consolidated Statements of Cash Flows for the six months ended July 1, 2018 and July 2, 2017
 
Condensed Consolidated Statements of Changes in Equity for the six months ended July 1, 2018 and July 2, 2017
 
 
 
 

2

Table of Contents

PART I.  FINANCIAL INFORMATION 
ITEM 1.  Condensed Consolidated Financial Statements 
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

 
 
Three months ended
 
Six months ended
In millions, except per share amounts 
 
July 1,
2018
 
July 2,
2017
 
July 1,
2018
 
July 2,
2017
NET SALES (a) (Note 3)
 
$
6,132

 
$
5,078

 
$
11,702

 
$
9,667

Cost of sales
 
4,692

 
3,827

 
9,062

 
7,284

GROSS MARGIN
 
1,440

 
1,251

 
2,640

 
2,383

OPERATING EXPENSES AND INCOME
 
 

 
 

 
 

 
 

Selling, general and administrative expenses
 
613

 
606

 
1,190

 
1,153

Research, development and engineering expenses
 
219

 
175

 
429

 
333

Equity, royalty and interest income from investees (Note 5)
 
110

 
98

 
225

 
206

Other operating income (expense), net
 
4

 
18

 
6

 
23

OPERATING INCOME
 
722

 
586

 
1,252

 
1,126

Interest income
 
10

 
5

 
17

 
7

Interest expense
 
28

 
21

 
52

 
39

Other income, net
 
11

 
29

 
21

 
53

INCOME BEFORE INCOME TAXES
 
715

 
599

 
1,238

 
1,147

Income tax expense (Note 6)
 
161

 
158

 
359

 
301

CONSOLIDATED NET INCOME
 
554

 
441

 
879

 
846

Less: Net income attributable to noncontrolling interests
 
9

 
17

 
9

 
26

NET INCOME ATTRIBUTABLE TO CUMMINS INC.
 
$
545

 
$
424

 
$
870

 
$
820

 
 
 
 
 
 
 
 
 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
 
 

 
 

 
 

 
 

Basic
 
$
3.33

 
$
2.53

 
$
5.30

 
$
4.90

Diluted
 
$
3.32

 
$
2.53

 
$
5.27

 
$
4.88

 
 
 
 
 
 
 
 
 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
 
 

 
 

 
 

 
 

Basic
 
163.8

 
167.3

 
164.3

 
167.4

Dilutive effect of stock compensation awards
 
0.5

 
0.5

 
0.7

 
0.5

Diluted
 
164.3

 
167.8

 
165.0

 
167.9

 
 
 
 
 
 
 
 
 
CASH DIVIDENDS DECLARED PER COMMON SHARE
 
$
1.08

 
$
1.025

 
$
2.16

 
$
2.05

____________________________________
(a) Includes sales to nonconsolidated equity investees of $340 million and $637 million and $283 million and $550 million for the three and six months ended July 1, 2018 and July 2, 2017, respectively.
 
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

3

Table of Contents

CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
 
Three months ended
 
Six months ended
In millions 
 
July 1,
2018
 
July 2,
2017
 
July 1,
2018
 
July 2,
2017
CONSOLIDATED NET INCOME
 
$
554

 
$
441

 
$
879

 
$
846

Other comprehensive income (loss), net of tax (Note 13)
 
 

 
 

 
 

 
 

Change in pension and other postretirement defined benefit plans
 
13

 
15

 
21

 
36

Foreign currency translation adjustments
 
(299
)
 
102

 
(215
)
 
182

Unrealized gain on marketable securities
 

 
1

 

 
1

Unrealized gain on derivatives
 

 

 
7

 
1

Total other comprehensive income (loss), net of tax
 
(286
)
 
118

 
(187
)
 
220

COMPREHENSIVE INCOME
 
268

 
559

 
692

 
1,066

Less: Comprehensive (loss) income attributable to noncontrolling interests
 
(7
)
 
18

 
(14
)
 
40

COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC.
 
$
275

 
$
541

 
$
706

 
$
1,026

 
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

4

Table of Contents

CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
In millions, except par value
 
July 1,
2018
 
December 31,
2017
ASSETS
 
 

 
 

Current assets
 
 

 
 

Cash and cash equivalents
 
$
1,318

 
$
1,369

Marketable securities (Note 7)
 
214

 
198

Total cash, cash equivalents and marketable securities
 
1,532

 
1,567

Accounts and notes receivable, net
 
 
 
 
Trade and other
 
3,794

 
3,311

Nonconsolidated equity investees
 
301

 
307

Inventories (Note 8)
 
3,559

 
3,166

Prepaid expenses and other current assets
 
649

 
577

Total current assets
 
9,835

 
8,928

Long-term assets
 
 

 
 

Property, plant and equipment
 
7,982

 
8,058

Accumulated depreciation
 
(4,158
)
 
(4,131
)
Property, plant and equipment, net
 
3,824

 
3,927

Investments and advances related to equity method investees
 
1,303

 
1,156

Goodwill
 
1,079

 
1,082

Other intangible assets, net
 
940

 
973

Pension assets
 
1,022

 
1,043

Other assets
 
912

 
966

Total assets
 
$
18,915

 
$
18,075

 
 
 
 
 
LIABILITIES
 
 

 
 

Current liabilities
 
 

 
 

Accounts payable (principally trade)
 
$
2,981

 
$
2,579

Loans payable (Note 9)
 
55

 
57

Commercial paper (Note 9)
 
802

 
298

Accrued compensation, benefits and retirement costs
 
468

 
811

Current portion of accrued product warranty (Note 10)
 
464

 
454

Current portion of deferred revenue
 
479

 
500

Other accrued expenses (Note 11)
 
806

 
915

Current maturities of long-term debt (Note 9)
 
49

 
63

Total current liabilities
 
6,104

 
5,677

Long-term liabilities
 
 

 
 

Long-term debt (Note 9)
 
1,556

 
1,588

Postretirement benefits other than pensions
 
289

 
289

Pensions
 
331

 
330

Other liabilities and deferred revenue (Note 11)
 
2,441

 
2,027

Total liabilities
 
$
10,721

 
$
9,911

 
 
 
 
 
Commitments and contingencies (Note 12)
 


 


 
 
 

 
 

EQUITY
 
 
 
 
Cummins Inc. shareholders’ equity
 
 

 
 

Common stock, $2.50 par value, 500 shares authorized, 222.4 and 222.4 shares issued
 
$
2,239

 
$
2,210

Retained earnings
 
12,009

 
11,464

Treasury stock, at cost, 59.1 and 56.7 shares
 
(5,276
)
 
(4,905
)
Common stock held by employee benefits trust, at cost, 0.5 and 0.5 shares
 
(6
)
 
(7
)
Accumulated other comprehensive loss (Note 13)
 
(1,667
)
 
(1,503
)
Total Cummins Inc. shareholders’ equity
 
7,299

 
7,259

Noncontrolling interests
 
895

 
905

Total equity
 
$
8,194

 
$
8,164

Total liabilities and equity
 
$
18,915

 
$
18,075


The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

5

Table of Contents

CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Six months ended
In millions
 
July 1,
2018
 
July 2,
2017
CASH FLOWS FROM OPERATING ACTIVITIES
 
 

 
 

Consolidated net income
 
$
879

 
$
846

Adjustments to reconcile consolidated net income to net cash provided by operating activities
 
 

 
 

Depreciation and amortization
 
308

 
284

Deferred income taxes
 
(21
)
 

Equity in income of investees, net of dividends
 
(163
)
 
(132
)
Pension contributions under (in excess of) expense, net (Note 4)
 
25

 
(44
)
Other post retirement benefits payments in excess of expense, net (Note 4)
 

 
(8
)
Stock-based compensation expense
 
28

 
23

Loss contingency payments
 
(65
)
 

Translation and hedging activities
 
(21
)
 
31

Changes in current assets and liabilities
 
 
 
 

Accounts and notes receivable
 
(555
)
 
(488
)
Inventories
 
(475
)
 
(264
)
Other current assets
 
(42
)
 
21

Accounts payable
 
442

 
403

Accrued expenses
 
94

 
132

Changes in other liabilities and deferred revenue
 
5

 
103

Other, net
 
34

 
(81
)
Net cash provided by operating activities
 
473

 
826

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 

 
 

Capital expenditures
 
(186
)
 
(182
)
Investments in internal use software
 
(35
)
 
(40
)
Investments in and advances to equity investees
 
(15
)
 
(64
)
Investments in marketable securities—acquisitions (Note 7)
 
(143
)
 
(69
)
Investments in marketable securities—liquidations (Note 7)
 
116

 
162

Cash flows from derivatives not designated as hedges
 
(9
)
 
19

Other, net
 
36

 
14

Net cash used in investing activities
 
(236
)
 
(160
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 

 
 

Net borrowings (payments) of commercial paper (Note 9)
 
504

 
(78
)
Payments on borrowings and capital lease obligations
 
(33
)
 
(29
)
Distributions to noncontrolling interests
 
(11
)
 
(10
)
Dividend payments on common stock
 
(355
)
 
(343
)
Repurchases of common stock
 
(379
)
 
(120
)
Other, net
 
21

 
36

Net cash used in financing activities
 
(253
)
 
(544
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
 
(35
)
 
51

Net (decrease) increase in cash and cash equivalents
 
(51
)
 
173

Cash and cash equivalents at beginning of year
 
1,369

 
1,120

CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
1,318

 
$
1,293


 The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

6

Table of Contents

CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
 
In millions
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Common
Stock
Held in
Trust
 
Accumulated
Other
Comprehensive
Loss
 
Total
Cummins Inc.
Shareholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
BALANCE AT DECEMBER 31, 2016
 
$
556

 
$
1,597

 
$
11,040

 
$
(4,489
)
 
$
(8
)
 
$
(1,821
)
 
$
6,875

 
$
299

 
$
7,174

Net income
 


 


 
820

 


 


 


 
820

 
26

 
846

Other comprehensive income (loss), net of tax (Note 13)
 


 


 


 


 


 
206

 
206

 
14

 
220

Issuance of common stock 
 


 
3

 


 


 


 


 
3

 

 
3

Employee benefits trust activity
 


 
12

 


 


 
1

 


 
13

 

 
13

Repurchases of common stock
 


 


 


 
(120
)
 


 


 
(120
)
 

 
(120
)
Cash dividends on common stock
 


 


 
(343
)
 


 


 


 
(343
)
 

 
(343
)
Distributions to noncontrolling interests
 


 


 


 


 


 


 

 
(10
)
 
(10
)
Stock based awards
 


 


 


 
23

 


 


 
23

 

 
23

Other shareholder transactions
 


 
16

 


 


 


 


 
16

 

 
16

BALANCE AT JULY 2, 2017
 
$
556

 
$
1,628

 
$
11,517

 
$
(4,586
)
 
$
(7
)
 
$
(1,615
)
 
$
7,493

 
$
329

 
$
7,822

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE AT DECEMBER 31, 2017
 
$
556

 
$
1,654

 
$
11,464

 
$
(4,905
)
 
$
(7
)
 
$
(1,503
)
 
$
7,259

 
$
905

 
$
8,164

Impact of adopting accounting standards (Notes 3 and 14)
 


 


 
30

 


 


 


 
30

 

 
30

Net income
 


 


 
870

 


 


 


 
870

 
9

 
879

Other comprehensive income (loss), net of tax (Note 13)
 


 


 
 
 


 


 
(164
)
 
(164
)
 
(23
)
 
(187
)
Issuance of common stock 
 


 
8

 


 


 


 


 
8

 

 
8

Employee benefits trust activity
 


 
8

 


 


 
1

 


 
9

 

 
9

Repurchases of common stock
 


 


 


 
(379
)
 


 


 
(379
)
 

 
(379
)
Cash dividends on common stock
 


 


 
(355
)
 


 


 


 
(355
)
 

 
(355
)
Distributions to noncontrolling interests
 


 


 


 


 


 


 

 
(11
)
 
(11
)
Stock based awards
 


 
(4
)
 


 
8

 


 


 
4

 

 
4

Other shareholder transactions
 


 
17

 


 


 


 


 
17

 
15

 
32

BALANCE AT JULY 1, 2018
 
$
556

 
$
1,683

 
$
12,009

 
$
(5,276
)
 
$
(6
)
 
$
(1,667
)
 
$
7,299

 
$
895

 
$
8,194

 
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

7

Table of Contents

CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. NATURE OF OPERATIONS
Cummins Inc. (“Cummins,” “we,” “our” or “us”) was founded in 1919 as Cummins Engine Company, a corporation in Columbus, Indiana, and one of the first diesel engine manufacturers. In 2001, we changed our name to Cummins Inc. 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, transmissions, electric power generation systems, batteries and electrified power systems. We sell our products to original equipment manufacturers (OEMs), distributors and other customers worldwide. We serve our customers through a network of approximately 500 wholly-owned and independent distributor locations and over 7,500 dealer locations in more than 190 countries and territories.
NOTE 2. BASIS OF PRESENTATION
Interim Condensed Financial Statements
The unaudited Condensed Consolidated Financial Statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of operations, financial position and cash flows. All such adjustments are of a normal recurring nature. The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles in the United States of America (GAAP) pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial information. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted as permitted by such rules and regulations.
These interim condensed financial statements should be read in conjunction with the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2017. Our interim period financial results for the three and six month periods presented are not necessarily indicative of results to be expected for any other interim period or for the entire year. The year-end Condensed Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.
Reclassifications
Certain amounts for prior year periods have been reclassified to conform to the presentation of the current year.
Use of Estimates in Preparation of Financial Statements
Preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts presented and disclosed in our Condensed Consolidated Financial Statements. Significant estimates and assumptions in these Condensed Consolidated Financial Statements require the exercise of judgment and are used for, but not limited to, allowance for doubtful accounts, estimates of future cash flows and other assumptions associated with goodwill and long-lived asset impairment tests, useful lives for depreciation and amortization, warranty programs, determination of discount rate and other assumptions for pension and other postretirement benefit costs, income taxes and deferred tax valuation allowances, lease classification and contingencies. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be different from these estimates.
Reporting Period
Our reporting period usually ends on the Sunday closest to the last day of the quarterly calendar period. The second quarters of 2018 and 2017 ended on July 1 and July 2, respectively. Our fiscal year ends on December 31, regardless of the day of the week on which December 31 falls.

8

Table of Contents

Weighted-Average Diluted Shares Outstanding
The weighted-average diluted common shares outstanding excludes the anti-dilutive effect of certain stock options since such options had an exercise price in excess of the monthly average market value of our common stock. The options excluded from diluted earnings per share were as follows:
 
 
Three months ended
 
Six months ended
 
July 1,
2018
 
July 2,
2017
 
July 1,
2018
 
July 2,
2017
Options excluded
909,394

 
6,155

 
458,130

 
61,345


NOTE 3. REVENUE RECOGNITION
Revenue Recognition Accounting Pronouncement Adoption
In May 2014, the Financial Accounting Standards Board (FASB) amended its standards related to revenue recognition to replace all existing revenue recognition guidance and provide a single, comprehensive model for all contracts with customers. The revised standard contains principles to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that we recognize revenue to depict the transfer of goods or services to customers at an amount that we expect to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of the time value of money in the transaction price and allowing estimation of variable consideration to be recognized before contingencies are resolved in certain circumstances. The amendment also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in those judgments as well as assets recognized from costs incurred to fulfill these contracts.
The standard allows either full or modified retrospective adoption effective for annual and interim periods beginning January 1, 2018. We adopted the standard using the modified retrospective approach. We elected to apply this guidance retrospectively only to contracts that were not completed at January 1, 2018.
We identified a change in the manner in which we account for certain license income. We license certain technology to our unconsolidated joint ventures that meets the definition of functional under the standard, which requires that revenue be recognized at a point in time rather than the previous requirement of recognizing it over the license term. Using the modified retrospective adoption method, we recorded an adjustment to our opening equity balance at January 1, 2018, to account for the differences between existing license income recorded and what would have been recorded under the new standard for contracts for which we started recognizing revenue prior to the adoption date. There was not a material impact on any individual year from this change.
We also identified transactions where revenue recognition was historically limited to the amount of billings not contingent on our future performance. With the allocation provisions of the new model, we accelerated the timing of revenue recognition for amounts related to satisfied performance obligations that would be delayed under the historical guidance. The impact of this change was not material.
On an ongoing basis, this amendment is not expected to have a material impact on our Condensed Consolidated Financial Statements, including our internal controls over financial reporting, but will result in expanded disclosures in the Notes to our Condensed Consolidated Financial Statements.

We recorded a net increase to opening retained earnings of $28 million, net of tax, as of January 1, 2018, due to the cumulative impact of adopting the new revenue standard, with the impact primarily related to our technology licenses that now qualify for point in time recognition rather than over time. The impact to any individual financial statement line item as a result of applying the new standard, as compared to the old standard, was not material for the six months ended July 1, 2018.
 
 

Revenue Recognition Policies

Revenue Recognition Sales of Products

We sell to customers either through long-term arrangements or standalone purchase orders. Our long-term arrangements generally do not include committed volumes until underlying purchase orders are issued. Our performance obligations vary by contract, but may include diesel and natural gas engines and engine-related component products, including filtration,

9

Table of Contents

aftertreatment, turbochargers, fuel systems, controls systems, air handling systems, transmissions, electric power generation systems, batteries, parts, maintenance services and extended coverage.

Typically, we recognize revenue on the products we sell at a point in time, generally in accordance with shipping terms, which reflects the transfer of control to the customer. Since control of construction projects transfer to the customer as the work is performed, revenue on these projects is recognized based on the percentage of inputs incurred to date compared to the total expected cost of inputs, which is reflective of the value transferred to the customer. Revenue is recognized under long-term maintenance and other service agreements over the term of the agreement as underlying services are performed based on the percentage of the cost of services provided to date compared to the total expected cost of services to be provided under the contract. Sales of extended coverage are recognized based on the pattern of expected costs over the extended coverage period or, if such a pattern is unknown, on a straight-line basis over the coverage period as the customer is considered to benefit from our stand ready obligation over the coverage period. In all cases, we believe cost incurred is the most representative depiction of the extent of service performed to date on a particular contract.

Our arrangements may include the act of shipping products to our customers after the performance obligation related to that product has been satisfied. We have elected to account for shipping and handling as activities to fulfill the promise to transfer goods and have not allocated revenue to the shipping activity. All related shipping and handling costs are accrued at the time of shipment.

Our sales arrangements may include the collection of sales and other similar taxes that are then remitted to the related taxing authority. We have elected to present the amounts collected for these taxes net of the related tax expense rather than presenting them as additional revenue.

We grant credit limits and terms to customers based upon traditional practices and competitive conditions. Typical terms vary by market, but payments are generally due in 90 days or less from invoicing for most of our product and service sales, while payments on construction and other similar arrangements may be due on an installment basis.

For contracts where the time between cash collection and performance is less than one year, we have elected to use the practical expedient that allows us to ignore the possible existence of a significant financing component within the contract. For contracts where this time period exceeds one year, generally the timing difference is the result of business concerns other than financing. We do have a limited amount of customer financing for which we charge or impute interest, but such amounts are immaterial to our Condensed Consolidated Statements of Income.

Sales Incentives

We provide various sales incentives to both our distribution network and OEM customers. These programs are designed to promote the sale of our products in the channel or encourage the usage of our products by OEM customers. When there is uncertainty surrounding these sales incentives, we may limit the amount of revenue we recognize under a contract until the uncertainty has been resolved. Sales incentives primarily fall into three categories:

Volume rebates;
Market share rebates; and
Aftermarket rebates.

For volume rebates, we provide certain customers with rebate opportunities for attaining specified volumes during a particular quarter or year. We consider the expected amount of these rebates at the time of the original sale as we determine the overall transaction price. We update our assessment of the amount of rebates that will be earned quarterly based on our best estimate of the volume levels the customer will reach during the measurement period. For market share rebates, we provide certain customers with rebate opportunities based on the percentage of their production that utilizes our product. These rebates are typically measured either quarterly or annually and we assess them at least quarterly to determine our current estimates of amounts expected to be earned. These estimates are considered in the determination of transaction price at the time of the original sale based on the current market shares, with adjustments made as the level changes. For aftermarket rebates, we provide incentives to promote sales to certain dealers and end-markets. These rebates are typically paid on a quarterly, or more frequent basis. At the time of the sales, we consider the expected amount of these rebates when determining the overall transaction price. Estimates are adjusted at the end of each quarter based on the amounts yet to be paid. These estimates are based on historical experience with the particular program.


10

Table of Contents

Sales Returns

The initial determination of the transaction price may also be impacted by expected product returns. Rights of return do not exist for the majority of our sales other than for quality issues. We do offer certain return rights in our aftermarket business, where some aftermarket customers are permitted to return small amounts of parts and filters each year, and in our power generation business, which sells portable generators to retail customers. An estimate of future returns is accounted for at the time of sale as a reduction in the overall contract transaction price based on historical return rates.

Multiple Performance Obligations

Our sales arrangements may include multiple performance obligations. We identify each of the material performance obligations in these arrangements and allocate the total transaction price to each performance obligation based on its relative selling price. In most cases, the individual performance obligations are also sold separately and we use that price as the basis for allocating revenue to the included performance obligations. When an arrangement includes multiple performance obligations and invoicing to the customer does not match the allocated portion of the transaction price, unbilled revenue or deferred revenue is recorded reflecting that difference. Unbilled and deferred revenue are discussed in more detail below.

Long-term Contracts

Our long-term maintenance agreements often include a variable component of the transaction price. We are generally compensated under such arrangements on a cost per hour of usage basis. We typically can estimate the expected usage over the life of the contract, but reassess the transaction price each quarter and adjust our recognized revenue accordingly. Certain maintenance agreements apply to generators used to provide standby power, which have limited expectations of usage. These agreements may include monthly minimum payments, providing some certainty to the total transaction price. For these particular contracts that relate to standby power, we limit revenue recognized to date to an amount representing the total minimums earned to date under the contract plus any cumulative billings earned in excess of the minimums. We reassess the estimates of progress and transaction price on a quarterly basis. For prime power arrangements, revenue is not subject to such a constraint and is generally equal to the current estimate on a percentage of completion basis times the total expected revenue under the contract.

Most of our contracts are for a period of less than one year. We have certain long-term maintenance agreements, construction contracts and extended warranty coverage arrangements that span a period in excess of one year. The aggregate amount of the transaction price for long-term maintenance agreements and construction contracts allocated to performance obligations that have not been satisfied as of July 1, 2018, was $676 million. We expect to recognize the related revenue of $247 million over the next 12 months and $429 million over periods up to 10 years. See NOTE 10 ,"PRODUCT WARRANTY LIABILITY," for additional disclosures on extended warranty coverage arrangements. Our other contracts generally are for a duration of less than one year or include payment terms that correspond to the value we are providing our customers.

Deferred and Unbilled Revenue

The timing of our billing does not always match the timing of our revenue recognition. We record deferred revenue when we are entitled to bill a customer in advance of when we are permitted to recognize revenue. Deferred revenue may arise in construction contracts, where billings may occur in advance of performance or in accordance with specific milestones. Deferred revenue may also occur in long-term maintenance contracts, where billings are often based on usage of the underlying equipment, which generally follows a predictable pattern that often will result in the accumulation of collections in advance of our performance of the related maintenance services. Finally, deferred revenue exists in our extended coverage contracts, where the cash is collected prior to the commencement of the coverage period. Deferred revenue is included in our Condensed Consolidated Balance Sheets as a component of current liabilities for those expected to be recognized in revenue in a period of less than one year and long-term liabilities for those expected to be recognized as revenue in a period beyond one year. Deferred revenue is recognized as revenue as (or when) control of the underlying product, project or service passes to the customer under the related contract.
 
We recognize unbilled revenue when the revenue has been earned, but not yet billed. Unbilled revenue is included in our Condensed Consolidated Balance Sheets as a component of current assets for those expected to be collected in a period of less than one year and long-term assets for those expected to be collected in a period beyond one year. Unbilled revenue relates to our right to consideration for our completed performance under a contract. Unbilled revenue generally arises from contractual provisions that delay a portion of the billings on genset deliveries until commissioning occurs. Unbilled revenue may also occur when billings trail the provision of service in construction and long-term maintenance contracts. We periodically assess our unbilled revenue for impairment.

11

Table of Contents

The following is a summary of our unbilled and deferred revenue and related activity:
In millions
 
July 1,
2018
 
January 1,
2018
Unbilled revenue
 
$
56

 
$
6

Deferred revenue, primarily extended warranty
 
1,101

 
1,052

Revenue recognized (1)
 
(206
)
 

____________________________________
(1) Relates to year-to-date revenues recognized from amounts included in contract liabilities at the beginning of the period.
Revenue recognized in the period from performance obligations satisfied in previous periods was immaterial.
We did not record any impairment losses on our unbilled revenues during the three and six months ended July 1, 2018.
Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable represent amounts billed to customers and not yet collected or amounts that have been earned, but may not be billed until the passage of time, and are recorded when the right to consideration becomes unconditional. Trade accounts receivable are recorded at the invoiced amount, which approximates net realizable value, and generally do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. We determine the allowance based on our historical collection experience and by performing an analysis of our accounts receivable in light of the current economic environment. We review our allowance for doubtful accounts on a regular basis. In addition, when necessary, we provide an allowance for the full amount of specific accounts deemed to be uncollectible. Account balances are charged off against the allowance in the period in which we determine that it is probable the receivable will not be recovered. The allowance for doubtful accounts balances for the periods ended July 1, 2018 and December 31, 2017, were $16 million and $16 million, respectively, and bad debt write-offs were not material.

Contract Costs

We are required to record an asset for the incremental costs of obtaining a contract with a customer and other costs to fulfill a contract not otherwise required to be immediately expensed when we expect to recover those costs. The only material incremental cost we incur is commission expense, which is generally incurred in the same period as the underlying revenue. Costs to fulfill a contract are generally limited to customer-specific engineering expenses that do not meet the definition of research and development expenses. As a practical expedient, we have elected to recognize these costs of obtaining a contract as an expense when the related contract period is less than one year. When the period exceeds one year, this asset is amortized over the life of the contract. We did not have any material capitalized balances at July 1, 2018.

Extended Warranty

In addition, we sell extended warranty coverage on most of our engines and on certain components. We consider a warranty to be extended coverage in any of the following situations:

When a warranty is sold separately or is optional (extended coverage contracts, for example) or
When a warranty provides additional services.

The consideration collected is initially deferred and is recognized as revenue in proportion to the costs expected to be incurred in performing services over the contract period. We compare the remaining deferred revenue balance quarterly to the estimated amount of future claims under extended warranty programs and provide an additional accrual when the deferred revenue balance is less than expected future costs.

Disaggregation of Revenue
Consolidated Revenue
The table below presents our consolidated sales by geographic area. Net sales attributed to geographic areas were based on the location of the customer.

12

Table of Contents

 
 
Three months ended
 
Six months ended
In millions
 
July 1,
2018
 
July 1,
2018
United States
 
$
3,384

 
$
6,422

China
 
644

 
1,194

India
 
247

 
482

Other International
 
1,857

 
3,604

Total net sales
 
$
6,132

 
$
11,702


Segment Revenue
Engine segment external sales by market were as follows:
 
 
Three months ended
 
Six months ended
In millions
 
July 1,
2018
 
July 1,
2018
Heavy-duty truck
 
$
730

 
$
1,344

Medium-duty truck and bus
 
714

 
1,341

Light-duty automotive
 
330

 
653

Total on-highway
 
1,774

 
3,338

Off-highway
 
276

 
525

Total sales
 
$
2,050

 
$
3,863


Distribution segment external sales by region were as follows:
 
 
Three months ended
 
Six months ended
In millions
 
July 1,
2018
 
July 1,
2018
North America
 
$
1,349

 
$
2,623

Asia Pacific
 
211

 
398

Europe
 
143

 
274

China
 
84

 
161

Africa and Middle East
 
62

 
123

India
 
49

 
93

Latin America
 
45

 
83

Russia
 
45

 
80

Total sales
 
$
1,988

 
$
3,835



13

Table of Contents

Distribution segment external sales by product line were as follows:
 
 
Three months ended
 
Six months ended
In millions
 
July 1,
2018
 
July 1,
2018
Parts
 
$
815

 
$
1,618

Engines
 
460

 
828

Service
 
368

 
719

Power generation
 
345

 
670

Total sales
 
$
1,988

 
$
3,835


Components segment external sales by business were as follows:
 
 
Three months ended
 
Six months ended
In millions
 
July 1,
2018
 
July 1,
2018
Emission solutions
 
$
735

 
$
1,419

Turbo technologies
 
201

 
398

Filtration
 
257

 
514

Automated transmissions
 
141

 
258

Electronics and fuel systems
 
68

 
126

Total sales
 
$
1,402

 
$
2,715


Power Systems segment external sales by product line were as follows:
 
 
Three months ended
 
Six months ended
In millions
 
July 1,
2018
 
July 1,
2018
Power generation
 
$
390

 
$
700

Industrial
 
208

 
409

Generator technologies
 
93

 
177

Total sales
 
$
691

 
$
1,286


 


14

Table of Contents

NOTE 4. PENSION AND OTHER POSTRETIREMENT BENEFITS
We sponsor funded and unfunded domestic and foreign defined benefit pension and other postretirement plans. Contributions to these plans were as follows:
 
 
 
Three months ended
 
Six months ended
In millions
 
July 1,
2018
 
July 2,
2017
 
July 1,
2018
 
July 2,
2017
Defined benefit pension plans
 
 

 
 

 
 

 
 

Voluntary contribution
 
$
4

 
$
41

 
$
7

 
$
84

Mandatory contribution
 
5

 

 
11

 

Defined benefit pension contributions
 
$
9

 
$
41

 
$
18

 
$
84

 
 
 
 
 
 
 
 
 
Other postretirement benefit plans
 
 
 
 
 
 
 
 
Benefit payments (rebates), net
 
$
(2
)
 
$
3

 
$
5

 
$
18

 
 
 
 
 
 
 
 
 
Defined contribution pension plans
 
$
21

 
$
19

 
$
61

 
$
48


We anticipate making additional defined benefit pension contributions during the remainder of 2018 of $20 million for our U.S. and U.K. pension plans. Approximately $14 million of the estimated $38 million of pension contributions for the full year are voluntary. These contributions may be made from trusts or company funds either to increase pension assets or to make direct benefit payments to plan participants. We expect our 2018 net periodic pension cost to approximate $86 million.
On January 1, 2018, we adopted the new accounting standard related to the presentation of pension and other postretirement benefit costs. See NOTE 15, "RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS," for detailed information about the adoption of this standard.
The components of net periodic pension and other postretirement benefit costs under our plans were as follows:
 
 
Pension
 
 
 
 
 
 
U.S. Plans
 
U.K. Plans
 
Other Postretirement Benefits
 
 
Three months ended
In millions
 
July 1,
2018
 
July 2,
2017
 
July 1,
2018
 
July 2,
2017
 
July 1,
2018
 
July 2,
2017
Service cost
 
$
30

 
$
26

 
$
7

 
$
7

 
$

 
$

Interest cost
 
24

 
27

 
10

 
10

 
3

 
4

Expected return on plan assets
 
(49
)
 
(52
)
 
(18
)
 
(17
)
 

 

Recognized net actuarial loss
 
9

 
9

 
8

 
10

 

 
1

Net periodic benefit cost
 
$
14

 
$
10

 
$
7

 
$
10

 
$
3

 
$
5

 
 
Pension
 
 
 
 
 
 
U.S. Plans
 
U.K. Plans
 
Other Postretirement Benefits
 
 
Six months ended
In millions
 
July 1,
2018
 
July 2,
2017
 
July 1,
2018
 
July 2,
2017
 
July 1,
2018
 
July 2,
2017
Service cost
 
$
60

 
$
53

 
$
15

 
$
13

 
$

 
$

Interest cost
 
49

 
53

 
21

 
20

 
5

 
7

Expected return on plan assets
 
(98
)
 
(103
)
 
(36
)
 
(34
)
 

 

Recognized net actuarial loss
 
17

 
18

 
15

 
20

 

 
3

Net periodic benefit cost
 
$
28

 
$
21

 
$
15

 
$
19

 
$
5

 
$
10




15

Table of Contents

NOTE 5. EQUITY, ROYALTY AND INTEREST INCOME FROM INVESTEES
Equity, royalty and interest income from investees included in our Condensed Consolidated Statements of Income for the reporting periods was as follows: 
 
 
Three months ended
 
Six months ended
In millions
 
July 1,
2018
 
July 2,
2017
 
July 1,
2018
 
July 2,
2017
Manufacturing entities
 
 
 
 
 
 
 
 
Beijing Foton Cummins Engine Co., Ltd.
 
$
24

 
$
22

 
$
45

 
$
55

Dongfeng Cummins Engine Company, Ltd.
 
17

 
19

 
34

 
41

Chongqing Cummins Engine Company, Ltd.
 
15

 
10

 
32

 
19

Cummins Westport, Inc.
 
6

 
4

 
12

 
5

Dongfeng Cummins Emission Solutions Co., Ltd.
 
4

 
4

 
9

 
7

All other manufacturers
 
24

 
19

 
49

 
39

Distribution entities
 
 
 
 
 
 

 
 
Komatsu Cummins Chile, Ltda.
 
6

 
8

 
13

 
15

Cummins share of net income
 
96

 
86

 
194

 
181

Royalty and interest income
 
14

 
12

 
31

 
25

Equity, royalty and interest income from investees
 
$
110

 
$
98

 
$
225

 
$
206


NOTE 6. INCOME TAXES
Our effective tax rate for the year is expected to approximate 23.0 percent, excluding any discrete tax items that may arise.
Our effective tax rates for the three and six months ended July 1, 2018, were 22.5 percent and 29.0 percent, respectively. The three months ended July 1, 2018, contained only immaterial discrete items. The six months ended July 1, 2018, contained $74 million, or $0.45 per share, of unfavorable net discrete tax items, primarily due to $80 million of discrete items related to the 2017 Tax Cuts and Jobs Act (Tax Legislation). This includes $45 million associated with changes related to the Tax Legislation measurement period adjustment, detailed below, and $35 million associated with the one-time recognition of deferred tax charges at historical tax rates on intercompany profit in inventory.
Our effective tax rates for the three and six months ended July 2, 2017, were 26.4 percent and 26.2 percent, respectively and contained only immaterial discrete tax items.
The SEC issued guidance which addressed the uncertainty in the application of GAAP to the Tax Legislation where certain income tax effects could not be finalized at December 31, 2017. This guidance allows entities to record provisional amounts based on current estimates that are updated on a quarterly basis. As a result, our accounting for the effects of the Tax Legislation is not considered complete at this time. The final transition impacts of the Tax Legislation may differ from our estimates, possibly materially, due to, among other things, changes in interpretations of the Tax Legislation, any legislative action to address questions that arise because of the Tax Legislation, any changes in accounting standards for income taxes or related interpretations in response to the Tax Legislation, or any updates or changes to estimates we have utilized to calculate the transition impacts. The SEC requires final calculations to be completed within the one-year measurement period ending December 22, 2018, and reflect any additional guidance issued throughout the year. Any adjustments of provisional amounts will be reported in the period in which the estimates change. We have made provisional estimates of the effects of the Tax Legislation in three primary areas: (1) the one-time transition tax; (2) the withholding tax accrued on those earnings no longer considered permanently reinvested at December 31, 2017 and (3) our existing deferred tax balances. The Internal Revenue Service (IRS) continues to issue guidance, which required adjustment of the one-time transition tax as shown in the table below.

16

Table of Contents

The changes during the one-year measurement period for the six months ended July 1, 2018, for each group consisted of the following:
In millions
Tax Valuation Adjustments
as of
July 1, 2018
One-time transition tax
$
40

Withholding tax accrued
5

Net impact of measurement period changes
$
45


NOTE 7. MARKETABLE SECURITIES
A summary of marketable securities, all of which are classified as current, was as follows:
 
 
 
July 1, 2018
 
December 31, 2017
In millions
 
Cost
 
Gross unrealized
gains/(losses)
(1)
 
Estimated
fair value
 
Cost
 
Gross unrealized
gains/(losses)
(1)
 
Estimated
fair value
Equity securities
 
 

 
 

 
 

 
 

 
 

 
 

Debt mutual funds
 
$
163

 
$

 
$
163

 
$
170

 
$

 
$
170

Certificates of deposit
 
34

 

 
34

 
12

 

 
12

Equity mutual funds
 
14

 
2

 
16

 
12

 
3

 
15

Available-for-sale debt securities
 
1

 

 
1

 
1

 

 
1

Total marketable securities
 
$
212

 
$
2

 
$
214

 
$
195

 
$
3

 
$
198

____________________________________
(1) Unrealized gains and losses for available-for-sale debt securities are recorded in other comprehensive income (See NOTE 13, "ACCUMULATED OTHER COMPREHENSIVE LOSS," to our Condensed Consolidated Financial Statements for more information). Effective January 1, 2018, with the adoption of the FASB standard, all unrealized gains and losses for equity securities are recorded in other income, net in the Condensed Consolidated Statements of Income. See NOTE 15, "RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS," for detailed information about the adoption of this standard.

All marketable securities are classified as Level 2 securities. The fair value of Level 2 securities is estimated using actively quoted prices for similar instruments from brokers and observable inputs where available, including market transactions and third-party pricing services, or net asset values provided to investors. We do not currently have any Level 3 securities and there were no transfers between Level 2 or 3 during the first half of 2018 and for the year ended December 31, 2017.

A description of the valuation techniques and inputs used for our Level 2 fair value measures is as follows:
Debt mutual funds— The fair value measure for the vast majority of these investments is the daily net asset value published on a regulated governmental website. Daily quoted prices are available from the issuing brokerage and are used on a test basis to corroborate this Level 2 input.
Certificates of deposit— These investments provide us with a contractual rate of return and generally range in maturity from three months to five years. The counterparties to these investments are reputable financial institutions with investment grade credit ratings. Since these instruments are not tradable and must be settled directly by us with the respective financial institution, our fair value measure is the financial institution's month-end statement.
Equity mutual funds— The fair value measure for these investments is the net asset value published by the issuing brokerage. Daily quoted prices are available from reputable third party pricing services and are used on a test basis to corroborate this Level 2 input measure.
Available-for-sale debt securities— The fair value measure for these securities is broker quotes received from reputable firms. These securities are infrequently traded on a national stock exchange and these values are used on a test basis to corroborate our Level 2 input measure.

17


The proceeds from sales and maturities of marketable securities were as follows:
 
 
Three months ended
 
Six months ended
In millions
 
July 1,
2018
 
July 2,
2017
 
July 1,
2018
 
July 2,
2017
Proceeds from sales of marketable securities
 
$
12

 
$
12

 
$
81

 
$
44

Proceeds from maturities of marketable securities
 
22

 
3

 
35

 
118

Investments in marketable securities - liquidations
 
$
34

 
$
15

 
$
116

 
$
162

 
 

NOTE 8. INVENTORIES
Inventories are stated at the lower of cost or market. Inventories included the following:
 
In millions
 
July 1,
2018
 
December 31,
2017
Finished products
 
$
2,329

 
$
2,078

Work-in-process and raw materials
 
1,355

 
1,216

Inventories at FIFO cost
 
3,684

 
3,294

Excess of FIFO over LIFO
 
(125
)
 
(128
)
Total inventories
 
$
3,559

 
$
3,166


NOTE 9. DEBT
Loans Payable and Commercial Paper
Loans payable, commercial paper and the related weighted-average interest rates were as follows:
In millions
 
July 1, 2018
 
December 31,
2017
Loans payable (1)
 
$
55

 
$
57

Commercial paper (2)
 
802

 
298

____________________________________
(1)  Loans payable consist primarily of notes payable to various domestic and international financial institutions. It is not practicable to aggregate these notes and calculate a quarterly weighted-average interest rate.
(2)  The weighted average interest rate, inclusive of all brokerage fees, was 2.08 percent and 1.56 percent at July 1, 2018 and December 31, 2017, respectively.
We can issue up to $2.75 billion of unsecured, short-term promissory notes ("commercial paper") pursuant to our board authorized commercial paper programs. The programs facilitate the private placement of unsecured short-term debt through third party brokers. We intend to use the net proceeds from the commercial paper borrowings for general corporate purposes.
Revolving Credit Facilities
We have access to committed credit facilities that total $2.75 billion, including a $1.0 billion, 364-day facility that expires September 14, 2018 and a $1.75 billion, 5-year facility that expires on November 13, 2020. We intend to maintain credit facilities of a similar aggregate amount by renewing or replacing these facilities before expiration. Revolving credit facilities are maintained primarily to provide backup liquidity for our commercial paper borrowings, letters of credit and general corporate purposes.

18

Table of Contents

Long-term Debt
A summary of long-term debt was as follows:
 
In millions
 
July 1,
2018
 
December 31,
2017
Long-term debt
 
 

 
 

Senior notes, 3.65%, due 2023
 
$
500

 
$
500

Debentures, 6.75%, due 2027
 
58

 
58

Debentures, 7.125%, due 2028
 
250

 
250

Senior notes, 4.875%, due 2043
 
500

 
500

Debentures, 5.65%, due 2098 (effective interest rate 7.48%)
 
165

 
165

Other debt
 
55

 
76

Unamortized discount
 
(53
)
 
(54
)
Fair value adjustments due to hedge on indebtedness
 
18

 
35

Capital leases
 
112

 
121

Total long-term debt
 
1,605

 
1,651

Less: Current maturities of long-term debt
 
49

 
63

Long-term debt
 
$
1,556

 
$
1,588


Principal payments required on long-term debt during the next five years are as follows:
In millions
 
2018
 
2019
 
2020
 
2021
 
2022
Principal payments
 
$
30

 
$
50

 
$
12

 
$
8

 
$
8


Fair Value of Debt
Based on borrowing rates currently available to us for bank loans with similar terms and average maturities, considering our risk premium, the fair values and carrying values of total debt, including current maturities, were as follows:
 
In millions
 
July 1,
2018
 
December 31,
2017
Fair value of total debt (1)
 
$
2,668

 
$
2,301

Carrying values of total debt
 
2,462

 
2,006

_________________________________________________
(1) The fair value of debt is derived from Level 2 inputs.

19

Table of Contents

NOTE 10. PRODUCT WARRANTY LIABILITY
A tabular reconciliation of the product warranty liability, including the deferred revenue related to our extended warranty coverage and accrued recall programs was as follows:
 
In millions 
 
July 1,
2018
 
July 2,
2017
Balance, beginning of year
 
$
1,687

 
$
1,414

Provision for warranties issued
 
222

 
182

Deferred revenue on extended warranty contracts sold
 
139

 
101

Campaigns (1)
 
403

 
57

Payments
 
(212
)
 
(199
)
Amortization of deferred revenue on extended warranty contracts
 
(118
)
 
(109
)
Changes in estimates for pre-existing warranties
 
10

 
74

Foreign currency translation
 
(6
)
 
1

     Other
 
5

 

Balance, end of period
 
$
2,130

 
$
1,521


____________________________________
(1) See NOTE 12, "COMMITMENTS AND CONTINGENCIES," for additional information on campaigns.
Warranty related deferred revenues and the long-term portion of the warranty liabilities on our Condensed Consolidated Balance Sheets were as follows:
In millions
 
July 1,
2018
 
December 31,
2017
 
Balance Sheet Location
Deferred revenue related to extended coverage programs
 
 

 
 
 
 
Current portion
 
$
228

 
$
231

 
Current portion of deferred revenue
Long-term portion
 
558

 
536

 
Other liabilities and deferred revenue
Total
 
$
786

 
$
767

 
 
 
 
 
 
 
 
 
Long-term portion of warranty liability
 
$
880

 
$
466

 
Other liabilities and deferred revenue


NOTE 11. OTHER ACCRUED EXPENSES AND OTHER LIABILITIES AND DEFERRED REVENUE

Other accrued expenses included the following:
In millions
July 1, 2018
 
December 31, 2017
Other taxes payable
$
178

 
$
197

Marketing accruals
169

 
146

Income taxes payable
102

 
77

Other
357

 
495

Other accrued expenses
$
806

 
$
915



20

Table of Contents

Other liabilities and deferred revenue included the following:
In millions
July 1,
2018
 
December 31,
2017
Accrued warranty
$
880

 
$
466

Deferred revenue
622

 
604

Deferred income taxes
400

 
391

Income taxes payable(1)
252

 
281

Accrued compensation
152

 
151

Other long-term liabilities
135

 
134

Other liabilities and deferred revenue
$
2,441

 
$
2,027

____________________________________________________
(1) Long-term income taxes payable are the result of the 2017 Tax Legislation and relate to the non-current portion of
the one-time transition tax on accumulated foreign earnings.

NOTE 12. COMMITMENTS AND CONTINGENCIES
We are subject to numerous lawsuits and claims arising out of the ordinary course of our business, including actions related to product liability; personal injury; the use and performance of our products; warranty matters; product recalls; patent, trademark or other intellectual property infringement; contractual liability; the conduct of our business; tax reporting in foreign jurisdictions; distributor termination; workplace safety; and environmental matters. We also have been identified as a potentially responsible party at multiple waste disposal sites under U.S. federal and related state environmental statutes and regulations and may have joint and several liability for any investigation and remediation costs incurred with respect to such sites. We have denied liability with respect to many of these lawsuits, claims and proceedings and are vigorously defending such lawsuits, claims and proceedings. We carry various forms of commercial, property and casualty, product liability and other forms of insurance; however, such insurance may not be applicable or adequate to cover the costs associated with a judgment against us with respect to these lawsuits, claims and proceedings. We do not believe that these lawsuits are material individually or in the aggregate. While we believe we have also established adequate accruals pursuant to GAAP for our expected future liability with respect to pending lawsuits, claims and proceedings, where the nature and extent of any such liability can be reasonably estimated based upon then presently available information, there can be no assurance that the final resolution of any existing or future lawsuits, claims or proceedings will not have a material adverse effect on our business, results of operations, financial condition or cash flows.
We conduct significant business operations in Brazil that are subject to the Brazilian federal, state and local labor, social security, tax and customs laws. While we believe we comply with such laws, they are complex, subject to varying interpretations and we are often engaged in litigation regarding the application of these laws to particular circumstances.
Engine System Campaign Accrual
During 2017, the California Air Resources Board (CARB) and the U.S. Environmental Protection Agency (EPA) selected certain of our pre-2013 model year engine systems for additional emissions testing. Some of these engine systems failed CARB and EPA tests as a result of degradation of an aftertreatment component. We recorded charges of $36 million to cost of sales in our Consolidated Statements of Income during 2017 for the then expected cost of field campaigns to repair some of these engine systems. We concluded based upon additional emission testing performed, and further discussions with the EPA and CARB in the first quarter of 2018, that the field campaigns should be expanded to include a larger population of our engine systems that are subject to the aftertreatment component degradation, including our model years 2010 through 2015. As a result, we recorded an additional charge of $187 million, or $0.87 per share, to cost of sales in our Condensed Consolidated Statements of Income ($94 million recorded in the Components segment and $93 million in the Engine segment) in the first quarter of 2018.
In the second quarter of 2018, we reached agreement with the CARB and EPA regarding our plans to address the affected populations. In finalizing our plans, we have increased the number of systems to be addressed through hardware replacement compared to our assumptions last quarter. As a result of this agreement and considering that the hardware replacement solution is a higher cost approach than that previously assumed on some of the engine systems, we recorded an additional charge of $181 million, or $0.85 per share, to cost of sales in our Condensed Consolidated Statements of Income ($91 million recorded in the Engine segment and $90 million in the Components segment) in the second quarter of 2018. With the additional charge in the second quarter of 2018, the total accrual related to this matter is $404 million, which represents our best estimate of the cost to execute the campaigns. The campaigns will launch in phases across the affected population and are expected to begin in the third quarter of 2018 with a projection to be substantially completed by December 31, 2020.

21

Table of Contents

Guarantees and Commitments
Periodically, we enter into guarantee arrangements, including guarantees of non-U.S. distributor financings, residual value guarantees on equipment under operating leases and other miscellaneous guarantees of joint ventures or third-party obligations. At July 1, 2018, the maximum potential loss related to these guarantees was $56 million.
We have arrangements with certain suppliers that require us to purchase minimum volumes or be subject to monetary penalties. At July 1, 2018, if we were to stop purchasing from each of these suppliers, the aggregate amount of the penalty would be approximately $82 million. Most of these arrangements enable us to secure critical components. We do not currently anticipate paying any penalties under these contracts.
We enter into physical forward contracts with suppliers of platinum, palladium and copper to purchase minimum volumes of the commodities at contractually stated prices for various periods, not to exceed two years. At July 1, 2018, the total commitments under these contracts were $62 million. These arrangements enable us to fix the prices of these commodities, which otherwise are subject to market volatility.
We have guarantees with certain customers that require us to satisfactorily honor contractual or regulatory obligations, or compensate for monetary losses related to nonperformance. These performance bonds and other performance-related guarantees were $110 million at July 1, 2018.
Indemnifications
Periodically, we enter into various contractual arrangements where we agree to indemnify a third-party against certain types of losses. Common types of indemnities include:
product liability and license, patent or trademark indemnifications;
asset sale agreements where we agree to indemnify the purchaser against future environmental exposures related to the asset sold; and
any contractual agreement where we agree to indemnify the counterparty for losses suffered as a result of a misrepresentation in the contract.
We regularly evaluate the probability of having to incur costs associated with these indemnities and accrue for expected losses that are probable. Because the indemnifications are not related to specified known liabilities and due to their uncertain nature, we are unable to estimate the maximum amount of the potential loss associated with these indemnifications.

22

Table of Contents

NOTE 13. ACCUMULATED OTHER COMPREHENSIVE LOSS
Following are the changes in accumulated other comprehensive income (loss) by component for the three months ended:
 
 
Three months ended
In millions
 
Change in
pensions and
other
postretirement
defined benefit
plans
 
Foreign
currency
translation
adjustment
 
Unrealized gain
(loss) on
marketable
securities
 
Unrealized gain
(loss) on
derivatives
 
Total
attributable to
Cummins Inc.
 
Noncontrolling
interests
 
Total
Balance at April 2, 2017
 
$
(664
)
 
$
(1,060
)
 
$
(1
)
 
$
(7
)
 
$
(1,732
)
 
 

 
 

Other comprehensive income before reclassifications
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Before tax amount
 

 
105

 
1

 
(2
)
 
104

 
$
1

 
$
105

Tax benefit (expense)
 

 
(4
)
 
(1
)
 
1

 
(4
)
 

 
(4
)
After tax amount
 

 
101

 

 
(1
)
 
100

 
1

 
101

Amounts reclassified from accumulated other comprehensive loss(1)
 
15

 

 
1

 
1

 
17

 

 
17

Net current period other comprehensive income (loss)
 
15

 
101

 
1

 

 
117

 
$
1

 
$
118

Balance at July 2, 2017
 
$
(649
)
 
$
(959
)
 
$

 
$
(7
)
 
$
(1,615
)
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at April 1, 2018
 
$
(681
)
 
$
(720
)
 
$

 
$
4

 
$
(1,397
)
 
 

 
 

Other comprehensive income before reclassifications
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Before tax amount
 

 
(328
)
 

 
4

 
(324
)
 
$
(17
)
 
$
(341
)
Tax benefit (expense)
 

 
45

 

 
(2
)
 
43

 

 
43

After tax amount
 

 
(283
)
 

 
2

 
(281
)
 
(17
)
 
(298
)
Amounts reclassified from accumulated other comprehensive loss(1)
 
13

 

 

 
(2
)
 
11

 
1

 
12

Net current period other comprehensive income (loss)
 
13

 
(283
)
 

 

 
(270
)
 
$
(16
)
 
$
(286
)
Balance at July 1, 2018
 
$
(668
)
 
$
(1,003
)
 
$

 
$
4

 
$
(1,667
)
 
 

 
 

____________________________________
(1) Amounts are net of tax. Reclassifications out of accumulated other comprehensive income (loss) and the related tax effects are immaterial for separate disclosure.







23

Table of Contents

Following are the changes in accumulated other comprehensive income (loss) by component for the six months ended:
 
 
Six months ended
In millions
 
Change in
pensions and
other
postretirement
defined benefit
plans
 
Foreign
currency
translation
adjustment
 
Unrealized gain
(loss) on
marketable
securities
(1)
 
Unrealized gain
(loss) on
derivatives
 
Total
attributable to
Cummins Inc.
 
Noncontrolling
interests
 
Total
Balance at December 31, 2016
 
$
(685
)
 
$
(1,127
)
 
$
(1
)
 
$
(8
)
 
$
(1,821
)
 
 

 
 

Other comprehensive income before reclassifications
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Before tax amount
 
8

 
180

 
2

 
(8
)
 
182

 
$
14

 
$
196

Tax benefit (expense)
 
(3
)
 
(12
)
 
(1
)
 
3

 
(13
)
 

 
(13
)
After tax amount
 
5

 
168

 
1

 
(5
)
 
169

 
14

 
183

Amounts reclassified from accumulated other comprehensive loss(2)
 
31

 

 

 
6

 
37

 

 
37

Net current period other comprehensive income (loss)
 
36

 
168

 
1

 
1

 
206

 
$
14

 
$
220

Balance at July 2, 2017
 
$
(649
)
 
$
(959
)
 
$

 
$
(7
)
 
$
(1,615
)
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
 
$
(689
)
 
$
(812
)
 
$
1

 
$
(3
)
 
$
(1,503
)
 
 

 
 

Other comprehensive income before reclassifications
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Before tax amount
 
(8
)
 
(203
)
 

 
15

 
(196
)
 
$
(24
)
 
$
(220
)
Tax benefit (expense)
 
2

 
12

 

 
(6
)
 
8

 

 
8

After tax amount
 
(6
)
 
(191
)
 

 
9

 
(188
)
 
(24
)
 
(212
)
Amounts reclassified from accumulated other comprehensive loss(2)
 
27

 

 
(1
)
 
(2
)
 
24

 
1

 
25

Net current period other comprehensive income (loss)
 
21

 
(191
)
 
(1
)
 
7

 
(164
)
 
$
(23
)
 
$
(187
)
Balance at July 1, 2018
 
$
(668
)
 
$
(1,003
)
 
$

 
$
4

 
$
(1,667
)
 
 

 
 


____________________________________
(1) We adopted the new accounting pronouncement "Accounting for Certain Financial Instruments" on January 1, 2018, which moved the treatment of unrealized gains and losses for non-debt securities directly to the
Condensed Consolidated Statements of Income on a prospective basis. The impact of adopting this standard includes a one-time cumulative effect adjustment to opening retained earnings of $2 million. See NOTE 15, "RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS," to our Condensed Consolidated Financial Statements for more information.
(2) Amounts are net of tax. Reclassifications out of accumulated other comprehensive income (loss) and the related tax effects are immaterial for separate disclosure.


24

Table of Contents

NOTE 14. OPERATING SEGMENTS
Operating segments under GAAP are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (CODM), or decision-making group, in deciding how to allocate resources and in assessing performance. Our CODM is the President and Chief Operating Officer.
Our reportable operating segments consist of Engine, Distribution, Components, Power Systems and Electrified Power. This reporting structure is organized according to the products and markets each segment serves. The Engine segment produces engines (15 liters and less in size) and associated parts for sale to customers in on-highway and various off-highway markets. Our engines are used in trucks of all sizes, buses and recreational vehicles, as well as in various industrial applications, including construction, agriculture, power generation systems and other off-highway applications. 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. The Components segment sells filtration products, aftertreatment systems, turbochargers, fuel systems and transmissions. The Power Systems segment is an integrated power provider, which designs, manufactures and sells engines (16 liters and larger) for industrial applications (including mining, oil and gas, marine and rail), standby and prime power generator sets, alternators and other power components. We formed the Electrified Power segment, effective January 1, 2018, which will provide fully electric and hybrid powertrain solutions along with innovative components and subsystems to serve all our markets as they adopt electrification, meeting the needs of our OEM partners and end customers.
Our Electrified Power segment will design, manufacture, sell and support electrified power systems ranging from fully electric to hybrid. We are currently developing the Cummins Electric Power Battery and the Cummins Hybrid Plug-In systems for urban bus, which are expected to launch in 2019 and 2020, respectively. We also design and manufacture battery modules, packs and systems for commercial, industrial and material handling applications. We use a range of cell chemistries which are suitable for pure electric, hybrid and plug-in hybrid applications. In addition to electrified powertrains for urban bus, we intend to deliver product offerings to future markets, including pick-up and delivery applications and other markets as they adopt electric solutions. We invest in and utilize our internal research and development capabilities, along with strategic acquisitions and partnerships to meet our objectives.
Effective January 1, 2018, we changed our measure to EBITDA (defined as earnings before interest expense, income taxes, noncontrolling interests, depreciation and amortization) as the primary basis for the CODM to evaluate the performance of each of our reportable operating segments. EBITDA assists investors and debt holders in comparing our performance on a consistent basis without regard for depreciation and amortization, which can vary significantly depending upon many factors. Prior periods have been revised to reflect the current presentation. Segment amounts exclude certain expenses not specifically identifiable to segments.
The accounting policies of our operating segments are the same as those applied in our Condensed Consolidated Financial Statements. We prepared the financial results of our operating segments on a basis that is consistent with the manner in which we internally disaggregate financial information to assist in making internal operating decisions. We allocate certain common costs and expenses, primarily corporate functions, among segments differently than we would for stand-alone financial information prepared in accordance with GAAP. These include certain costs and expenses of shared services, such as information technology, human resources, legal, finance and supply chain management. We do not allocate changes in cash surrender value of corporate owned life insurance to individual segments. EBITDA may not be consistent with measures used by other companies.

25

Table of Contents

Summarized financial information regarding our reportable operating segments for the three months ended is shown in the table below:
In millions
 
Engine
 
Distribution
 
Components
 
Power Systems
 
Electrified Power
 
Total Segment
 
Intersegment Eliminations (1)
 
Total
Three months ended July 1, 2018
 
 

 
 
 
 

 
 

 
 
 
 
 
 

 
 

External sales
 
$
2,050

 
$
1,988

 
$
1,402

 
$
691

 
$
1

 
$
6,132

 
$

 
$
6,132

Intersegment sales
 
646

 
6

 
485

 
555

 

 
1,692

 
(1,692
)
 

Total sales
 
2,696

 
1,994

 
1,887

 
1,246

 
1

 
7,824

 
(1,692
)
 
6,132

Research, development and engineering expenses
 
76

 
5

 
62

 
60

 
16

 
219

 

 
219

Equity, royalty and interest income from investees
 
67

 
11

 
14

 
18

 

 
110

 

 
110

Interest income
 
3

 
3

 
2

 
2

 

 
10

 

 
10

Segment EBITDA
 
362

 
145

 
237

 
186

 
(21
)
 
909

 
(12
)
 
897

Depreciation and amortization (2)
 
47

 
27

 
47

 
32

 
1

 
154

 

 
154

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended July 2, 2017
 
 

 
 

 
 

 
 

 
 
 
 
 
 

 
 

External sales
 
$
1,711

 
$
1,716

 
$
1,064

 
$
587

 
$

 
$
5,078

 
$

 
$
5,078

Intersegment sales
 
596

 
6

 
390

 
430

 

 
1,422

 
(1,422
)
 

Total sales
 
2,307

 
1,722

 
1,454

 
1,017

 

 
6,500

 
(1,422
)
 
5,078

Research, development and engineering expenses
 
63

 
4

 
58

 
50

 

 
175

 

 
175

Equity, royalty and interest income from investees
 
56

 
13

 
15

 
14

 

 
98

 

 
98

Interest income
 
2

 
1

 
1

 
1

 

 
5

 

 
5

Segment EBITDA
 
323

 
127

 
228

 
90

 

 
768

 
(4
)
 
764

Depreciation and amortization (2)
 
46

 
31

 
38

 
29

 

 
144

 

 
144

____________________________________
(1) Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three months ended July 1, 2018 and July 2, 2017.
(2) Depreciation and amortization, as shown on a segment basis, excludes the amortization of debt discount and deferred costs included in the Condensed Consolidated Statements of Income as interest expense. A portion of depreciation expense is included in "Research, development and engineering expenses" above.

26

Table of Contents

Summarized financial information regarding our reportable operating segments for the six months ended is shown in the table below:
In millions
 
Engine
 
Distribution
 
Components
 
Power Systems
 
Electrified Power
 
Total Segment
 
Intersegment Eliminations (1)
 
Total
Six months ended July 1, 2018
 
 

 
 

 
 

 
 

 
 
 
 
 
 

 
 

External sales
 
$
3,863

 
$
3,835

 
$
2,715

 
$
1,286

 
$
3

 
$
11,702

 
$

 
$
11,702

Intersegment sales
 
1,279

 
12

 
925

 
1,034

 

 
3,250

 
(3,250
)
 

Total sales
 
5,142

 
3,847

 
3,640

 
2,320

 
3

 
14,952

 
(3,250
)
 
11,702

Research, development and engineering expenses
 
155

 
10

 
124

 
117

 
23

 
429

 

 
429

Equity, royalty and interest income from investees
 
134

 
24

 
30

 
37

 

 
225

 

 
225

Interest income
 
5

 
5

 
3

 
4

 

 
17

 

 
17

Segment EBITDA
 
648

 
268

 
464

 
328

 
(31
)
 
1,677

 
(80
)
 
1,597

Depreciation and amortization(2)
 
96

 
54

 
93

 
62

 
2

 
307

 

 
307

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended July 2, 2017
 
 

 
 

 
 

 
 

 
 
 
 
 
 

 
 

External sales
 
$
3,168

 
$
3,353

 
$
2,044

 
$
1,102

 
$

 
$
9,667

 
$

 
$
9,667

Intersegment sales
 
1,162

 
14

 
754

 
797

 

 
2,727

 
(2,727
)
 

Total sales
 
4,330

 
3,367

 
2,798

 
1,899

 

 
12,394

 
(2,727
)
 
9,667

Research, development and engineering expenses
 
117

 
8

 
108

 
100

 

 
333

 

 
333

Equity, royalty and interest income from investees
 
128

 
24

 
28

 
26

 

 
206

 

 
206

Interest income
 
3

 
2

 
1

 
1

 

 
7

 

 
7

Segment EBITDA
 
596

 
257

 
444

 
175

 

 
1,472

 
(3
)
 
1,469

Depreciation and amortization(2)
 
90

 
61

 
75

 
57

 

 
283

 

 
283

____________________________________
(1) Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the six months ended July 1, 2018 and July 2, 2017.
(2) Depreciation and amortization, as shown on a segment basis, excludes the amortization of debt discount and deferred costs included in the Condensed Consolidated Statements of Income as interest expense. The amortization of debt discount and deferred costs was $1 million and $1 million for the six month periods ended July 1, 2018 and July 2, 2017, respectively. A portion of depreciation expense is included in "Research, development and engineering expenses" above.




27

Table of Contents

A reconciliation of our segment information to the corresponding amounts in the Condensed Consolidated Statements of Income is shown in the table below:
 
 
Three months ended
 
Six months ended
In millions
 
July 1,
2018
 
July 2,
2017
 
July 1,
2018
 
July 2,
2017
Total EBITDA
 
$
897

 
$
764

 
$
1,597

 
$
1,469

Less:
 
 
 
 
 
 
 
 
Depreciation and amortization
 
154

 
144

 
307

 
283

Interest expense
 
28

 
21

 
52

 
39

Income before income taxes
 
$
715

 
$
599

 
$
1,238

 
$
1,147



NOTE 15. RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Accounting Pronouncements Recently Adopted
On January 1, 2018, we adopted the new revenue recognition standard in accordance with GAAP. See NOTE 3, "REVENUE RECOGNITION," for detailed information about the adoption of this standard.
In March 2017, the FASB amended its standards related to the presentation of pension and other postretirement benefit costs in the financial statements beginning January 1, 2018. Under the new standard, we are required to separate service costs from all other elements of pension costs and reflect the other elements of pension costs outside of operating income in our Condensed Consolidated Statements of Income. In addition, the standard limits the amount eligible for capitalization (into inventory or self-constructed assets) to the amount of service cost. This portion of the standard was applied on a prospective basis. The remainder of the new standard was applied on a retrospective basis using a practical expedient as the estimation basis for the reclassification of prior period non-service cost components of net periodic benefit cost from operating income to non-operating income. As a result, we revised our Condensed Consolidated Statements of Income by the following amounts:
 
 
Favorable / (Unfavorable)
 
 
2017
 
In millions
Q1
 
Q2
 
Cost of sales
$
4

 
$
2

 
Selling, general and administrative expenses
(10
)
 
(10
)
 
Research, development and engineering expenses

 
(1
)
 
Total change in operating income
(6
)
 
(9
)
 
Other non operating income, net
6

 
9

 
Total change in income before income taxes
$

 
$


In August 2016, the FASB amended its standards related to the classification of certain cash receipts and cash payments which became effective for us beginning January 1, 2018. The new standard made eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. Adoption of this standard did not have a material impact on our Condensed Consolidated Financial Statements.
In January 2016, the FASB amended its standards related to the accounting for certain financial instruments which became effective for us beginning January 1, 2018. This amendment addresses certain aspects of recognition, measurement, presentation and disclosure. The standard resulted in a cumulative effect increase to opening retained earnings of $2 million in our Condensed Consolidated Financial Statements.
Accounting Pronouncements Issued But Not Yet Effective
In August 2017, the FASB amended its standards related to accounting for derivatives and hedging. These amendments allow the initial hedge effectiveness assessment to be performed by the end of the first quarter in which the hedge is designated rather than concurrently with entering into the hedge transaction. The changes also expand the use of a periodic qualitative hedge effectiveness assessment in lieu of an ongoing quantitative assessment performed throughout the life of the hedge. The revision removes the requirement to record ineffectiveness on cash flow hedges through the income statement when a hedge i

28

Table of Contents

s considered highly effective, instead deferring all related hedge gains and losses in other comprehensive income until the hedged item impacts earnings. The modifications permit hedging the contractually-specified price of a component of a commodity purchase and revises certain disclosure requirements. The amendments are effective January 1, 2019 and early adoption is permitted in any interim period or fiscal year prior to the effective date. The revised standard is required to be adopted on a modified retrospective basis for any cash flow or net investment hedge relationships that exist on the date of adoption and prospectively for disclosures. We do not expect the amendments to have a material effect on our Consolidated Financial Statements and are still evaluating early adoption.
In June 2016, the FASB amended its standards related to accounting for credit losses on financial instruments. This amendment introduces new guidance for accounting for credit losses on instruments including trade receivables and held-to-maturity debt securities. The new rules are effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We do not expect adoption of this standard to have a material impact on our Consolidated Financial Statements.
In February 2016, the FASB amended its standards related to the accounting for leases. Under the new standard, lessees will now be required to recognize substantially all leases on the balance sheet as both a right-of-use asset and a liability. The standard will continue to have two types of leases for income statement recognition purposes: operating leases and finance leases. Operating leases will result in the recognition of a single lease expense on a straight-line basis over the lease term similar to the treatment for operating leases under today's standards. Finance leases will result in an accelerated expense similar to the accounting for capital leases under today's standards. The determination of a lease classification as operating or finance will occur in a manner similar to today's standard. The new standard also contains amended guidance regarding the identification of embedded leases in service contracts and the identification of lease and non-lease components of an arrangement. The new standard is effective on January 1, 2019, with early adoption permitted. The standard currently requires adoption on a full retrospective basis; however, the FASB has recently approved an amendment to allow adoption on a modified retrospective basis.  While the amendment is not yet published, we would expect to adopt on a modified retrospective basis assuming the amendment is published as approved. We are still evaluating the impact the standard could have on our Consolidated Financial Statements, including our internal controls over financial reporting. While we have not yet quantified the amount, we do expect the standard will have a material impact on our Consolidated Balance Sheets due to the recognition of additional assets and liabilities for operating leases.

29

Table of Contents

ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
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;
changes in the engine outsourcing practices of significant customers;
the development of new technologies that reduce demand for our current products and services;
any significant additional problems in our engine platforms or aftertreatment systems;
product recalls;
lower than expected acceptance of new or existing products or services;
a slowdown in infrastructure development and/or depressed commodity prices;
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 taxation;
exposure to potential security breaches or other disruptions to our information technology systems and data security;
a major customer experiencing financial distress;
our plan to reposition our portfolio of product offerings through exploring strategic acquisitions and divestitures and related uncertainties of entering such transactions;
supply shortages and supplier financial risk, particularly from any of our single-sourced suppliers;
competitor activity;
increasing competition, including increased global competition among our customers in emerging markets; 
policy changes in international trade;
foreign currency exchange rate changes;
variability in material and commodity costs;
failure to realize expected results from our investment in Eaton Cummins Automated Transmission Technologies joint venture;
political, economic and other risks from operations in numerous countries;
global legal and ethical compliance costs and risks;
aligning our capacity and production with our demand;
product liability claims;
increasingly stringent environmental laws and regulations;
future bans or limitations on the use of diesel-powered vehicles;

30

Table of Contents

the price and availability of energy;
the performance of our pension plan assets and volatility of discount rates;
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 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; and
other risk factors described in our 2017 Form 10-K, Part I, 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.


31

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 Management's Discussion and Analysis of Financial Condition and Results of Operations section of our 2017 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 Adopted and Recently Issued Accounting Pronouncements

32

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, transmissions, electric power generation systems, batteries and electrified power 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, Navistar International Corporation and Fiat Chrysler Automobiles (Chrysler). We serve our customers through a network of approximately 500 wholly-owned and independent distributor locations and over 7,500 dealer locations in more than 190 countries and territories.
Our reportable operating segments consist of Engine, Distribution, Components, Power Systems and Electrified Power. This reporting structure is organized according to the products and markets each segment serves. The Engine segment produces engines (15 liters and less in size) and associated parts for sale to customers in on-highway and various off-highway markets. Our engines are used in trucks of all sizes, buses and recreational vehicles, as well as in various industrial applications, including construction, agriculture, power generation systems and other off-highway applications. 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. The Components segment sells filtration products, aftertreatment systems, turbochargers, fuel systems and transmissions. The Power Systems segment is an integrated power provider, which designs, manufactures and sells engines (16 liters and larger) for industrial applications (including mining, oil and gas, marine and rail), standby and prime power generator sets, alternators and other power components. We formed the Electrified Power segment, effective January 1, 2018, which will provide fully electric and hybrid powertrain solutions along with innovative components and subsystems to serve all our markets as they adopt electrification, meeting the needs of our OEM partners and end customers.
Our Electrified Power segment will design, manufacture, sell and support electrified power systems ranging from fully electric to hybrid. We are currently developing the Cummins Electric Power Battery and the Cummins Hybrid Plug-In systems for urban bus, which are expected to launch in 2019 and 2020, respectively. We also design and manufacture battery modules, packs and systems for commercial, industrial and material handling applications. We use a range of cell chemistries which are suitable for pure electric, hybrid and plug-in hybrid applications. In addition to electrified powertrains for urban bus, we intend to deliver product offerings to future markets, including pick-up and delivery applications and other markets as they adopt electric solutions. We invest in and utilize our internal research and development capabilities, along with strategic acquisitions and partnerships to meet our objectives.
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, 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 net sales increased 21 percent in the three months ended July 1, 2018, as compared to the same period in 2017, with all operating segments reporting higher sales. Net sales in the U.S. and Canada improved by 22 percent primarily due to increased demand in the North American on-highway markets (primarily in the heavy- and medium-duty truck and light commercial vehicle markets), increased demand in all of our distribution product lines, sales from the automated transmission business acquired during the third quarter of 2017 and increased industrial demand in the oil and gas markets. International demand growth (excludes the U.S. and Canada) improved net sales by 18 percent, with sales up in most of our markets, especially in China, Europe, Latin America, Asia Pacific and India. The increase in international sales was primarily due to increased on-highway truck demand (especially in Latin America and China), favorable foreign currency impacts of 3 percent of international sales (primarily the Chinese renminbi, Euro and British pound), increased demand in industrial markets (especially construction and mining markets in China and Europe) and increased demand for power generation equipment primarily in China and the Middle East.
Worldwide net sales increased 21 percent in the six months ended July 1, 2018, as compared to the same period in 2017, with all operating segments reporting higher sales. Net sales in the U.S. and Canada improved by 22 percent primarily due to increased demand in the North American on-highway markets (primarily in the heavy- and medium-duty truck and light commercial vehicle markets), increased demand in all of our distribution product lines, sales from the automated transmission

33

Table of Contents

business acquired during the third quarter of 2017 and increased industrial demand (especially in the oil and gas and construction markets). International demand growth (excludes the U.S. and Canada) improved net sales by 19 percent, with sales up in most of our markets, especially in China, Europe, Latin America, Asia Pacific and India. The increase in international sales was primarily due to increased on-highway truck demand (especially in Latin America and China), favorable foreign currency impacts of 4 percent of international sales (primarily the the Chinese renminbi, Euro and British pound), increased demand in industrial markets (especially construction and mining markets in China and Europe) and increased demand for power generation equipment primarily in China, the Middle East and Australia.
Effective January 1, 2018, we changed our measure to EBITDA (defined as earnings before interest expense, income taxes, noncontrolling interests, depreciation and amortization) as a primary basis for the Chief Operating Decision Maker to evaluate the performance of each of our operating segments. EBITDA assists investors and debt holders in comparing our performance on a consistent basis without regard for depreciation and amortization, which can vary significantly depending upon many factors. Prior periods have been revised to reflect the current presentation. The following tables contain sales and EBITDA by operating segment for the three and six months ended July 1, 2018 and July 2, 2017Refer to the section titled “OPERATING SEGMENT RESULTS” for a more detailed discussion of sales and EBITDA by operating segment, including the reconciliation of segment EBITDA to net income attributable to Cummins Inc.
 
 
Three months ended
Operating Segments
 
July 1, 2018
 
July 2, 2017
 
Percent change
 
 
 
 
Percent
 
 
 
 
 
Percent
 
 
 
2018 vs. 2017
In millions
 
Sales
 
of Total
 
EBITDA
 
Sales
 
of Total
 
EBITDA
 
Sales
 
EBITDA
Engine
 
$
2,696

 
44
 %
 
$
362

 
$
2,307

 
45
 %
 
$
323

 
17
%
 
12
%
Distribution
 
1,994

 
33
 %
 
145

 
1,722

 
34
 %
 
127

 
16
%
 
14
%
Components
 
1,887

 
31
 %
 
237

 
1,454

 
29
 %
 
228

 
30
%
 
4
%
Power Systems
 
1,246

 
20
 %
 
186

 
1,017

 
20
 %
 
90

 
23
%
 
NM

Electrified Power
 
1

 
 %
 
(21
)
 

 
 %
 

 
NM

 
NM

Intersegment eliminations
 
(1,692
)
 
(28
)%
 
(12
)
 
(1,422
)
 
(28
)%
 
(4
)
 
19
%
 
NM

Total
 
$
6,132

 
100
 %
 
$
897

 
$
5,078

 
100
 %
 
$
764

 
21
%
 
17
%
 
______________________________________
"NM" - not meaningful information

Net income attributable to Cummins was $545 million, or $3.32 per diluted share, on sales of $6.1 billion for the three months ended July 1, 2018, versus the comparable prior year period net income attributable to Cummins of $424 million, or $2.53 per diluted share, on sales of $5.1 billion. The increase in net income and earnings per diluted share was driven by significantly higher net sales, increased gross margin and a lower effective tax rate as the result of the U.S. enacted Tax Cuts and Jobs Act (Tax Legislation), partially offset by higher research, development and engineering expenses. The increase in gross margin was primarily due to higher volumes, improved pricing and lower material costs, partially offset by $181 million for an Engine System Campaign (a campaign in the Components and Engine segments for engine model years 2010 to 2015 related to degradation of an aftertreatment component) and increased compensation costs. See Note 12, "COMMITMENTS AND CONTINGENCIES," to the Condensed Consolidated Financial Statements for additional information on the Engine System Campaign. Diluted earnings per share for the three months ended July 1, 2018, benefited $0.01 from fewer weighted average shares outstanding due to the stock repurchase program.
 
 
Six months ended
Operating Segments
 
July 1, 2018
 
July 2, 2017
 
Percent change
 
 
 
 
Percent
 
 
 
 
 
Percent
 
 
 
2018 vs. 2017
In millions
 
Sales
 
of Total
 
EBITDA
 
Sales
 
of Total
 
EBITDA
 
Sales
 
EBITDA
Engine
 
$
5,142

 
44
 %
 
$
648

 
$
4,330

 
45
 %
 
$
596

 
19
%
 
9
%
Distribution
 
3,847

 
33
 %
 
268

 
3,367

 
35
 %
 
257

 
14
%
 
4
%
Components
 
3,640

 
31
 %
 
464

 
2,798

 
29
 %
 
444

 
30
%
 
5
%
Power Systems
 
2,320

 
20
 %
 
328

 
1,899

 
19
 %
 
175

 
22
%
 
87
%
Electrified Power
 
3

 
 %
 
(31
)
 

 
 %
 

 
NM

 
NM

Intersegment eliminations
 
(3,250
)
 
(28
)%
 
(80
)
 
(2,727
)
 
(28
)%
 
(3
)
 
19
%
 
NM

Total
 
$
11,702

 
100
 %
 
$
1,597

 
$
9,667

 
100
 %
 
$
1,469

 
21
%
 
9
%
______________________________________
"NM" - not meaningful information


34

Table of Contents


Net income attributable to Cummins was $870 million, or $5.27 per diluted share, on sales of $11.7 billion for the six months ended July 1, 2018, versus the comparable prior year period net income attributable to Cummins of $820 million, or $4.88 per diluted share, on sales of $9.7 billion. The increase in net income and earnings per diluted share was driven by significantly higher net sales and increased gross margin, partially offset by higher research, development and engineering expenses, a higher effective tax rate ($74 million of unfavorable net discrete tax items primarily due to $80 million of discrete items for Tax Legislation passed in December 2017) and increased selling, general and administrative expenses. See Note 6, "INCOME TAXES," to the Condensed Consolidated Financial Statements for additional information on the tax valuation adjustments. The increase in gross margin was primarily due to higher volumes, improved pricing, lower material costs and favorable mix, partially offset by $368 million for an Engine System Campaign and increased compensation costs. Diluted earnings per share for the six months ended July 1, 2018, benefited $0.03 from fewer weighted average shares outstanding, primarily due to the stock repurchase programs.

We generated $473 million of cash from operations for the six months ended July 1, 2018, compared to $826 million for the comparable period in 2017. Refer to the section titled "Cash Flows" in the "LIQUIDITY AND CAPITAL RESOURCES" section for a discussion of items impacting cash flows.

During the first half of 2018, we repurchased $379 million, or 2.5 million shares of common stock.

Our debt to capital ratio (total capital defined as debt plus equity) at July 1, 2018, was 23.1 percent, compared to 19.7 percent at December 31, 2017. The increase was primarily due to the issuance of commercial paper. At July 1, 2018, we had $1.5 billion in cash and marketable securities on hand and access to our $2.75 billion credit facilities, if necessary, to meet currently anticipated investment and funding needs.

In July 2018, our Board of Directors authorized an increase to our quarterly dividend of 5.6 percent from $1.08 per share to $1.14 per share.

We expect our effective tax rate for the full year of 2018 to approximate 23.0 percent, excluding any discrete tax items.
Our global pension plans, including our unfunded and non-qualified plans, were 116 percent funded at December 31, 2017. Our U.S. qualified plans, which represent approximately 55 percent of the worldwide pension obligation, were 131 percent funded and our U.K. plans were 118 percent funded. We anticipate making additional defined benefit pension contributions during the remainder of 2018 of $20 million for our U.S. and U.K. pension plans. Approximately $14 million of the estimated $38 million of U.K. pension contributions for the full year are voluntary. We expect our 2018 net periodic pension cost to approximate $86 million.
 

35

Table of Contents

OUTLOOK
Our outlook reflects the following positive trends and challenges to our business that we expect could impact our revenue and earnings potential for the remainder of 2018.
Positive Trends
We expect North American medium-duty truck and heavy-duty truck demand will remain strong.
We anticipate demand for pick-up trucks in North America will remain strong.
We believe demand in global mining markets will remain strong.
Global construction markets could remain strong.
We expect power generation markets to remain strong.
Challenges
We are experiencing cost increases as a result of trade tariffs recently imposed by the U.S. and some of its trading partners.  In the event of prolonged trade disputes, demand for our products could be negatively impacted and we could experience additional cost increases.
Market demand in truck markets in China is expected to decline.
Marine markets are expected to remain weak.
In summary, we expect demand to improve or remain strong in many of our most important markets.


36

Table of Contents

RESULTS OF OPERATIONS
 
 
Three months ended
 
Favorable/
 
Six months ended
 
Favorable/
 
 
July 1,
2018
 
July 2,
2017
 
(Unfavorable)
 
July 1,
2018
 
July 2,
2017
 
(Unfavorable)
In millions, except per share amounts
 
 
Amount
 
Percent
 
 
 
Amount
 
Percent
NET SALES
$
6,132

 
$
5,078

 
$
1,054

 
21
 %
 
$
11,702

 
$
9,667

 
$
2,035

 
21
 %
Cost of sales
4,692

 
3,827

 
(865
)
 
(23
)%
 
9,062

 
7,284

 
(1,778
)
 
(24
)%
GROSS MARGIN
1,440

 
1,251

 
189

 
15
 %
 
2,640

 
2,383

 
257

 
11
 %
OPERATING EXPENSES AND INCOME
 

 
 

 
 

 


 
 

 
 

 
 

 


Selling, general and administrative expenses
613

 
606

 
(7
)
 
(1
)%
 
1,190

 
1,153

 
(37
)
 
(3
)%
Research, development and engineering expenses
219

 
175

 
(44
)
 
(25
)%
 
429

 
333

 
(96
)
 
(29
)%
Equity, royalty and interest income from investees
110

 
98

 
12

 
12
 %
 
225

 
206

 
19

 
9
 %
Other operating income (expense), net
4

 
18

 
(14
)
 
(78
)%
 
6

 
23

 
(17
)
 
(74
)%
OPERATING INCOME
722

 
586

 
136

 
23
 %
 
1,252

 
1,126

 
126

 
11
 %
Interest income
10

 
5

 
5

 
100
 %
 
17

 
7

 
10

 
NM

Interest expense
28

 
21

 
(7
)
 
(33
)%
 
52

 
39

 
(13
)
 
(33
)%
Other income, net
11

 
29

 
(18
)
 
(62
)%
 
21

 
53

 
(32
)
 
(60
)%
INCOME BEFORE INCOME TAXES
715

 
599

 
116

 
19
 %
 
1,238

 
1,147

 
91

 
8
 %
Income tax expense
161

 
158

 
(3
)
 
(2
)%
 
359

 
301

 
(58
)
 
(19
)%
CONSOLIDATED NET INCOME
554

 
441

 
113

 
26
 %
 
879

 
846

 
33

 
4
 %
Less: Net income attributable to noncontrolling interests
9

 
17

 
8

 
47
 %
 
9

 
26

 
17

 
65
 %
NET INCOME ATTRIBUTABLE TO CUMMINS INC.
$
545

 
$
424

 
$
121

 
29
 %
 
$
870

 
$
820

 
$
50

 
6
 %
Diluted Earnings Per Common Share Attributable to Cummins Inc.
$
3.32

 
$
2.53

 
$
0.79

 
31
 %
 
$
5.27

 
$
4.88

 
$
0.39

 
8
 %

 
 
Three months ended
 
Favorable/
(Unfavorable)
 
Six months ended
 
Favorable/
(Unfavorable)
 
 
July 1,
2018
 
July 2,
2017
 
 
July 1,
2018
 
July 2,
2017
 
Percent of sales
 
 
 
Percentage Points
 
 
 
Percentage Points
Gross margin
 
23.5
%
 
24.6
%
 
(1.1
)
 
22.6
%
 
24.7
%
 
(2.1
)
Selling, general and administrative expenses
 
10.0
%
 
11.9
%
 
1.9

 
10.2
%
 
11.9
%
 
1.7

Research, development and engineering expenses
 
3.6
%
 
3.4
%
 
(0.2
)
 
3.7
%
 
3.4
%
 
(0.3
)
Net Sales
Net sales for the three months ended July 1, 2018, increased by $1.1 billion versus the comparable period in 2017. The primary drivers were as follows:
Components segment sales increased 30 percent primarily due to higher demand across all businesses, especially the emission solutions business, due to stronger market demand for trucks in North America and Europe, and sales from the automated transmission business acquired in the third quarter of 2017.
Engine segment sales increased 17 percent primarily due to higher demand across all markets, especially in North American heavy-duty truck and global construction markets.
Distribution segment sales increased 16 percent primarily due to higher demand in most geographic regions, especially North America, due to increased demand in the engines, parts and service lines of business.
Power Systems segment sales increased 23 percent primarily due to higher demand for all product lines, especially in industrial markets due to higher demand in North American oil and gas markets and international mining markets and increased power generation demand.
Foreign currency fluctuations favorably impacted sales by 1 percent of total sales primarily in the Chinese renminbi, Euro and British pound.
Net sales for the six months ended July 1, 2018, increased by $2.0 billion versus the comparable period in 2017. The primary drivers were as follows:

37

Table of Contents

Components segment sales increased 30 percent primarily due to higher demand across all businesses, especially the emission solutions business, due to stronger market demand for trucks in North America, Europe and India, and sales from the automated transmission business acquired in the third quarter of 2017.
Engine segment sales increased 19 percent primarily due to higher demand across most markets, especially in North American heavy-duty truck, medium duty truck and bus markets and increased demand in global construction markets.
Distribution segment sales increased 14 percent primarily due to higher demand in most geographic regions, especially in North America, due to increased demand in the engines, parts and service lines of business.
Power Systems segment sales increased 22 percent primarily due to higher demand for all product lines, especially in industrial markets due to higher demand in global mining markets, North America oil and gas markets and increased power generation demand.
Foreign currency fluctuations favorably impacted sales by 2 percent of total sales primarily in the Chinese renminbi, Euro and British pound.
Sales to international markets (excluding the U.S. and Canada), based on location of customers, for the three and six months ended July 1, 2018, were 41 percent and 41 percent of total net sales, respectively, compared with 42 percent and 42 percent of total net sales for the comparable periods in 2017. A more detailed discussion of sales by segment is presented in the “OPERATING SEGMENT RESULTS” section.
Cost of Sales    
The types of expenses included in the cost of sales line item include the following: raw materials consumption, including direct and indirect materials; salaries, wages and benefits; depreciation and amortization; estimated costs of warranty programs and campaigns; production utilities; production-related purchasing; warehousing, including receiving and inspection; engineering support costs; repairs and maintenance; production and warehousing facility property insurance; rent for production facilities and other production overhead.
Gross Margin    
Gross margin increased $189 million for the three months ended July 1, 2018, versus the comparable period in 2017 and decreased 1.1 points as a percentage of sales. The increase in gross margin was primarily due to higher volumes, improved pricing and lower material costs, partially offset by $181 million for an Engine System Campaign (a campaign in the Components and Engine segments for engine model years 2010 to 2015 related to degradation of an aftertreatment component) and increased compensation costs driven by headcount growth to support increased sales. The decrease in gross margin percentage was primarily due to the Engine System Campaign.
Gross margin increased $257 million for the six months ended July 1, 2018, versus the comparable period in 2017, and decreased 2.1 points as a percentage of sales. The increase in gross margin was primarily due to higher volumes, improved pricing, lower material costs and favorable mix, partially offset by $368 million for an Engine System Campaign and increased compensation costs driven by headcount growth to support increased sales. The decrease in gross margin percentage was primarily due to the Engine System Campaign.
The provision for base warranties issued, excluding campaigns, as a percent of sales for the three and six months ended July 1, 2018, was 1.9 percent and 1.9 percent, respectively, compared to 1.8 percent and 1.9 percent for the comparable periods in 2017. A detailed discussion of margin by segment is presented in the “OPERATING SEGMENT RESULTS” section.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $7 million for the three months ended July 1, 2018, versus the comparable period in 2017, primarily due to higher compensation expenses driven by headcount growth and higher consulting expenses. Compensation and related expenses include salaries, fringe benefits and variable compensation. Overall, selling, general and administrative expenses, as a percentage of sales, decreased to 10.0 percent in the three months ended July 1, 2018, from 11.9 percent in the comparable period in 2017.
Selling, general and administrative expenses increased $37 million for the six months ended July 1, 2018, versus the comparable period in 2017, primarily due to higher compensation expenses driven by headcount growth and higher consulting expenses. Overall, selling, general and administrative expenses, as a percentage of sales, decreased to 10.2 percent in the six months ended July 1, 2018, from 11.9 percent in the comparable period in 2017.

38

Table of Contents

Research, Development and Engineering Expenses
Research, development and engineering expenses increased $44 million for the three months ended July 1, 2018, versus the comparable period in 2017, primarily due to investments in the Electrified Power segment, increased compensation expenses driven by headcount growth due to investments in the Electrified Power segment and the automated transmission business acquired in the third quarter of 2017 and higher consulting expenses. Overall, research, development and engineering expenses as a percentage of sales increased to 3.6 percent in the three months ended July 1, 2018, from 3.4 percent in the comparable period in 2017.
Research, development and engineering expenses increased $96 million for the six months ended July 1, 2018, versus the comparable period in 2017, primarily due to investments in the Electrified Power segment, increased compensation expenses driven by headcount growth due to investments in the Electrified Power segment and the automated transmission business acquired in the third quarter of 2017 higher consulting expenses and lower expense recovery. Overall, research, development and engineering expenses as a percentage of sales increased to 3.7 percent in the six months ended July 1, 2018, from 3.4 percent in the comparable period in 2017. Research activities continue to focus on development of new products to meet future emission standards around the world and improvements in fuel economy performance of diesel and natural gas powered engines.
Equity, Royalty and Interest Income from Investees
Equity, royalty and interest income from investees increased $12 million for the three months ended July 1, 2018, versus the comparable period in 2017, primarily due to higher earnings at Chongqing Cummins Engine Company, Ltd., Tata Cummins Ltd. and Beijing Foton Cummins Engine Company, Ltd.
Equity, royalty and interest income from investees increased $19 million for the six months ended July 1, 2018, versus the comparable period in 2017, primarily due to higher earnings at Chongqing Cummins Engine Company, Ltd., Tata Cummins Ltd. and Cummins Westport, partially offset by lower earnings at Beijing Foton Cummins Engine Company, Ltd. and Dongfeng Cummins Engine Company, Ltd.
 
 
 
 
 
 
Other Operating Income (Expense), Net
Other operating income (expense), net was as follows:
 
 
Three months ended
 
Six months ended
In millions
 
July 1,
2018
 
July 2,
2017
 
July 1,
2018
 
July 2,
2017
Royalty income, net
 
$
11

 
$
11

 
$
18

 
$
20

Gain on sale of assets, net
 
3

 
8

 
3

 
5

Loss on write off of assets
 
(4
)
 
(1
)
 
(4
)
 
(2
)
Amortization of intangible assets
 
(5
)
 
(1
)
 
(10
)
 
(3
)
Other, net
 
(1
)
 
1

 
(1
)
 
3

Total other operating income (expense), net
 
$
4

 
$
18

 
$
6

 
$
23

Interest Income
Interest income for the three and six months ended July 1, 2018, increased $5 million and $10 million, respectively, versus the comparable periods in 2017, primarily due to higher interest rates.
Interest Expense
Interest expense for the three and six months ended July 1, 2018, increased $7 million and $13 million, respectively, versus the comparable periods in 2017, primarily due to higher weighted-average debt outstanding.

39

Table of Contents

Other Income, Net
Other income, net was as follows:
 
 
Three months ended
 
Six months ended
In millions
 
July 1,
2018
 
July 2,
2017
 
July 1,
2018
 
July 2,
2017
Non-service cost, pension and other postretirement benefits
 
$
15

 
$
9

 
$
30

 
$
15

Change in cash surrender value of corporate owned life insurance
 
1

 
16

 
(3
)
 
29

Dividend income
 

 
2

 
2

 
3

Bank charges
 
(2
)
 
(2
)
 
(5
)
 
(5
)
Foreign currency (loss) gain, net
 
(13
)
 
1

 
(24
)
 
3

Other, net
 
10

 
3

 
21

 
8

Total other income, net
 
$
11

 
$
29

 
$
21

 
$
53

Income Tax Expense
Our effective tax rate for the year is expected to approximate 23.0 percent, excluding any discrete tax items that may arise.
Our effective tax rates for the three and six months ended July 1, 2018, were 22.5 percent and 29.0 percent, respectively. The three months ended July 1, 2018, contained only immaterial discrete items. The six months ended July 1, 2018, contained $74 million, or $0.45 per share, of unfavorable net discrete tax items, primarily due to $80 million of discrete items related to the 2017 Tax Cuts and Jobs Act (Tax Legislation). This includes $45 million associated with changes related to the Tax Legislation measurement period adjustment and $35 million associated with the one-time recognition of deferred tax charges at historical tax rates on intercompany profit in inventory. See Note 6, "INCOME TAXES," for additional information.
Our effective tax rates for the three and six months ended July 2, 2017, were 26.4 percent and 26.2 percent, respectively, and contained only immaterial discrete tax items.
The change in the effective tax rate for the three months ended July 1, 2018, versus the comparable period in 2017, was primarily due to lower U.S. tax rates in the second quarter of 2018 as a result of Tax Legislation. The change in the effective tax rate for the six months ended July 1, 2018, versus the comparable period in 2017, was primarily due to unfavorable discrete changes associated with the Tax Legislation.
Noncontrolling Interests
Noncontrolling interests eliminate the income or loss attributable to non-Cummins ownership interests in our consolidated entities. Noncontrolling interests in income of consolidated subsidiaries for the three and six months ended July 1, 2018, decreased $8 million and $17 million, respectively, versus the comparable periods in 2017, primarily due to losses at the automated transmission business acquired in the third quarter of 2017.
Net Income Attributable to Cummins Inc. and Diluted Earnings Per Share Attributable to Cummins Inc.
Net income and diluted earnings per share attributable to Cummins Inc. for the three months ended July 1, 2018, increased $121 million and $0.79 per share, respectively, versus the comparable period in 2017, primarily due to significantly higher net sales, increased gross margin and a lower effective tax rate as the result of Tax Legislation passed in December 2017, partially offset by higher research, development and engineering expenses. Diluted earnings per share for the three months ended July 1, 2018, benefited $0.01 from fewer weighted average shares outstanding due to the stock repurchase program.
Net income and diluted earnings per share attributable to Cummins Inc. for the six months ended July 1, 2018, increased $50 million and $0.39 per share, respectively, versus the comparable period in 2017, primarily due to significantly higher net sales and increased gross margin, partially offset by higher research, development and engineering expenses, a higher effective tax rate ($74 million of unfavorable net discrete tax items primarily due to $80 million of discrete items for Tax Legislation passed in December 2017) and increased selling, general and administrative expenses. Diluted earnings per share for the six months ended July 1, 2018, benefited $0.03 from fewer weighted average shares outstanding, primarily due to the stock repurchase programs.


40

Table of Contents

Comprehensive Income - Foreign Currency Translation Adjustment
The foreign currency translation adjustment was a net loss of $299 million and $215 million, respectively, for the three months and six months ended July 1, 2018, compared to a net gain of $102 million and $182 million, respectively, for the three and six months ended July 2, 2017, and was driven by the following:
 
 
Three months ended
 
 
July 1, 2018
 
July 2, 2017
In millions
 
Translation adjustment
 
Primary currency driver vs. U.S. dollar
 
Translation adjustment
 
Primary currency driver vs. U.S. dollar
Wholly-owned subsidiaries
 
$
(232
)
 
British pound, Chinese renminbi, Indian rupee, Brazilian real

 
$
90

 
British pound, Chinese renminbi
Equity method investments
 
(51
)
 
Chinese renminbi, Indian rupee, British pound
 
11

 
Chinese renminbi
Consolidated subsidiaries with a noncontrolling interest
 
(16
)
 
Indian rupee
 
1

 
Indian rupee
Total
 
$
(299
)
 
 
 
$
102

 
 

 
 
 
 
 
 
 
 
 
 
 
Six months ended
 
 
July 1, 2018
 
July 2, 2017
In millions
 
Translation adjustment
 
Primary currency driver vs. U.S. dollar
 
Translation adjustment
 
Primary currency driver vs. U.S. dollar
Wholly-owned subsidiaries
 
$
(162
)
 
British pound, Indian rupee, Brazilian real, Chinese renminbi



 
$
147

 
British pound, Indian rupee, Chinese renminbi
Equity method investments
 
(29
)
 
Chinese renminbi, Indian rupee, British pound

 
21

 
Chinese renminbi, Indian rupee
Consolidated subsidiaries with a noncontrolling interest
 
(24
)
 
Indian rupee
 
14

 
Indian rupee
Total
 
$
(215
)
 
 
 
$
182

 
 




41

Table of Contents

OPERATING SEGMENT RESULTS
Our reportable operating segments consist of the Engine, Distribution, Components, Power Systems and Electrified Power segments. This reporting structure is organized according to the products and markets each segment serves. Effective January 1, 2018, we changed our measure to EBITDA as a primary basis for the Chief Operating Decision Maker to evaluate the performance of each of our reportable operating segments. Segment amounts exclude certain expenses not specifically identifiable to segments. See Note 14, "OPERATING SEGMENTS," to the Condensed Consolidated Financial Statements for additional information.
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/
 
 
July 1,
 
July 2,
 
(Unfavorable)
 
July 1,
 
July 2,
 
(Unfavorable)
In millions
 
2018
 
2017
 
Amount
 
Percent
 
2018
 
2017
 
Amount
 
Percent
External sales
 
$
2,050

 
$
1,711

 
$
339

 
20
 %
 
$
3,863

 
$
3,168

 
$
695

 
22
 %
Intersegment sales
 
646

 
596

 
50

 
8
 %
 
1,279

 
1,162

 
117

 
10
 %
Total sales
 
2,696

 
2,307

 
389

 
17
 %
 
5,142

 
4,330

 
812

 
19
 %
Research, development and engineering expenses
 
76

 
63

 
(13
)
 
(21
)%
 
155

 
117

 
(38
)
 
(32
)%
Equity, royalty and interest income from investees
 
67

 
56

 
11

 
20
 %
 
134

 
128

 
6

 
5
 %
Interest income
 
3

 
2

 
1

 
50
 %
 
5

 
3

 
2

 
67
 %
Segment EBITDA
 
362

 
323

 
39

 
12
 %
 
648

 
596

 
52

 
9
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 

 
Percentage Points
 
 

 
 

 
Percentage Points
Segment EBITDA as a percentage of total sales
 
13.4
%
 
14.0
%
 
 

 
(0.6
)
 
12.6
%
 
13.8
%
 
 

 
(1.2
)

Sales for our Engine segment by market were as follows:
 
 
Three months ended
 
Favorable/
 
Six months ended
 
Favorable/
 
 
July 1,
 
July 2,
 
(Unfavorable)
 
July 1,
 
July 2,
 
(Unfavorable)
In millions
 
2018
 
2017
 
Amount
 
Percent
 
2018
 
2017
 
Amount
 
Percent
Heavy-duty truck
 
$
920

 
$
714

 
$
206

 
29
%
 
$
1,735

 
$
1,334

 
$
401

 
30
 %
Medium-duty truck and bus
 
777

 
701

 
76

 
11
%
 
1,469

 
1,245

 
224

 
18
 %
Light-duty automotive
 
444

 
429

 
15

 
3
%
 
846

 
852

 
(6
)
 
(1
)%
Total on-highway
 
2,141

 
1,844

 
297

 
16
%
 
4,050

 
3,431

 
619

 
18
 %
Off-highway
 
555

 
463

 
92

 
20
%
 
1,092

 
899

 
193

 
21
 %
Total sales
 
$
2,696

 
$
2,307

 
$
389

 
17
%
 
$
5,142

 
$
4,330

 
$
812

 
19
 %
Unit shipments by engine classification (including unit shipments to Power Systems and off-highway engine units included in their respective classification) were as follows:
 
 
Three months ended
 
Favorable/
 
Six months ended
 
Favorable/
 
 
July 1,
 
July 2,
 
(Unfavorable)
 
July 1,
 
July 2,
 
(Unfavorable)
 
 
2018
 
2017
 
Amount
 
Percent
 
2018
 
2017
 
Amount
 
Percent
Heavy-duty
 
32,000

 
24,100

 
7,900

 
33
%
 
58,600

 
43,300

 
15,300

 
35
%
Medium-duty
 
83,500

 
71,600

 
11,900

 
17
%
 
157,500

 
131,900

 
25,600

 
19
%
Light-duty
 
68,500

 
65,600

 
2,900

 
4
%
 
130,400

 
128,700

 
1,700

 
1
%
Total unit shipments
 
184,000

 
161,300

 
22,700

 
14
%
 
346,500

 
303,900

 
42,600

 
14
%

42

Table of Contents

Sales
Engine segment sales for the three months ended July 1, 2018, increased $389 million versus the comparable period in 2017. The following were the primary drivers by market:
Heavy-duty truck sales increased $206 million primarily due to higher demand in North American heavy-duty truck markets with increased shipments of 38 percent.
Off-highway sales increased $92 million primarily due to improved demand in global construction markets, with increased international unit shipments of 39 percent primarily in China and Europe, and increased unit shipments of 10 percent in North America.
Medium-duty truck and bus sales increased $76 million primarily due to higher demand in North American medium-duty truck markets with increased engine shipments of 15 percent.
Total on-highway-related sales for the three months ended July 1, 2018, were 79 percent of total Engine segment sales, versus 80 percent for the comparable period in 2017.
Engine segment sales for the six months ended July 1, 2018, increased $812 million versus the comparable period in 2017. The following were the primary drivers by market:
Heavy-duty truck sales increased $401 million primarily due to higher demand in North American heavy-duty truck markets with increased shipments of 42 percent.
Medium-duty truck and bus sales increased $224 million primarily due to higher demand in North American medium-duty truck markets with increased engine shipments of 19 percent.
Off-highway sales increased $193 million due to improved demand in global construction markets with increased international unit shipments of 42 percent, primarily in China and Europe, and increased unit shipments of 27 percent in North America.
Total on-highway-related sales for the six months ended July 1, 2018, were 79 percent of total Engine segment sales, versus 79 percent for the comparable period in 2017.
Segment EBITDA
Engine segment EBITDA for the three months ended July 1, 2018, increased $39 million versus the comparable period in 2017, primarily due to higher gross margin, higher equity, royalty and interest income from investees and lower selling, general and administrative expenses, partially offset by increased research, development and engineering expenses. The increase in gross margin was primarily due to higher volumes and favorable pricing, partially offset by increased Engine System Campaign costs of $91 million. The increase in research, development and engineering expenses was primarily due to higher compensation expense and lower expense recovery. The increase in equity, royalty and interest income from investees was primarily due to higher earnings at Tata Cummins Ltd., Beijing Foton Cummins Engine Co., Ltd. and Cummins Westport, Inc.
 
Engine segment EBITDA for the six months ended July 1, 2018, increased $52 million versus the comparable period in 2017, primarily due to higher gross margin, lower selling, general and administrative expenses and higher equity, royalty and interest income from investees, partially offset by increased research, development and engineering expenses. The increase in gross margin was primarily due to higher volumes and favorable pricing, partially offset by increased Engine System Campaign costs of $184 million. The increase in research, development and engineering expenses was primarily due to higher compensation expense, lower expense recovery and higher consulting expenses. The increase in equity, royalty and interest income from investees was primarily due to higher earnings at Tata Cummins Ltd. and Cummins Westport, Inc., partially offset by lower earnings at Beijing Foton Cummins Engine Co.

43

Table of Contents

Distribution Segment Results 
Financial data for the Distribution segment was as follows:
 
 
Three months ended
 
Favorable/
 
Six months ended
 
Favorable/
 
 
July 1,
 
July 2,
 
(Unfavorable)
 
July 1,
 
July 2,
 
(Unfavorable)
In millions
 
2018
 
2017
 
Amount
 
Percent
 
2018
 
2017
 
Amount
 
Percent
External sales
 
$
1,988

 
$
1,716

 
$
272

 
16
 %
 
$
3,835

 
$
3,353

 
$
482

 
14
 %
Intersegment sales
 
6

 
6

 

 
 %
 
12

 
14

 
(2
)
 
(14
)%
Total sales
 
1,994

 
1,722

 
272

 
16
 %
 
3,847

 
3,367

 
480

 
14
 %
Research, development and engineering expenses
 
5

 
4

 
(1
)
 
(25
)%
 
10

 
8

 
(2
)
 
(25
)%
Equity, royalty and interest income from investees
 
11

 
13

 
(2
)
 
(15
)%
 
24

 
24

 

 
 %
Interest income
 
3

 
1

 
2

 
NM

 
5

 
2

 
3

 
NM

Segment EBITDA
 
145

 
127

 
18

 
14
 %
 
268

 
257

 
11

 
4
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Percentage Points
 
 
 
 
 
Percentage Points
Segment EBITDA as a percentage of total sales
 
7.3
%
 
7.4
%
 
 

 
(0.1
)
 
7.0
%
 
7.6
%
 
 

 
(0.6
)
____________________________________
"NM" - not meaningful information
Sales for our Distribution segment by region were as follows:
 
 
Three months ended
 
Favorable/
 
Six months ended
 
Favorable/
 
 
July 1,
 
July 2,
 
(Unfavorable)
 
July 1,
 
July 2,
 
(Unfavorable)
In millions
 
2018
 
2017
 
Amount
 
Percent
 
2018
 
2017
 
Amount
 
Percent
North America
 
$
1,353

 
$
1,131

 
$
222

 
20
 %
 
$
2,629

 
$
2,244

 
$
385

 
17
 %
Asia Pacific
 
212

 
187

 
25

 
13
 %
 
401

 
357

 
44

 
12
 %
Europe
 
143

 
107

 
36

 
34
 %
 
275

 
204

 
71

 
35
 %
China
 
84

 
75

 
9

 
12
 %
 
162

 
133

 
29

 
22
 %
Africa and Middle East
 
62

 
86

 
(24
)
 
(28
)%
 
122

 
181

 
(59
)
 
(33
)%
India
 
50

 
52

 
(2
)
 
(4
)%
 
95

 
95

 

 
 %
Russia
 
45

 
41

 
4

 
10
 %
 
80

 
75

 
5

 
7
 %
Latin America
 
45

 
43

 
2

 
5
 %
 
83

 
78

 
5

 
6
 %
Total sales
 
$
1,994

 
$
1,722

 
$
272

 
16
 %
 
$
3,847

 
$
3,367

 
$
480

 
14
 %
Sales for our Distribution segment by product line were as follows:
 
 
Three months ended
 
Favorable/
 
Six months ended
 
Favorable/
 
 
July 1,
 
July 2,
 
(Unfavorable)
 
July 1,
 
July 2,
 
(Unfavorable)
In millions
 
2018
 
2017
 
Amount
 
Percent
 
2018
 
2017
 
Amount
 
Percent
Parts
 
$
817

 
$
759

 
$
58

 
8
%
 
$
1,625

 
$
1,504

 
$
121

 
8
%
Engines
 
461

 
314

 
147

 
47
%
 
828

 
589

 
239

 
41
%
Service
 
370

 
320

 
50

 
16
%
 
722

 
639

 
83

 
13
%
Power generation
 
346

 
329

 
17

 
5
%
 
672

 
635

 
37

 
6
%
Total sales
 
$
1,994

 
$
1,722

 
$
272

 
16
%
 
$
3,847

 
$
3,367

 
$
480

 
14
%
Sales
Distribution segment sales for the three months ended July 1, 2018, increased $272 million versus the comparable period in 2017. The following were the primary drivers by region:
North American sales increased $222 million, representing 82 percent of the total change in Distribution segment sales, primarily due to increased demand in the engines, parts and service lines of business.
European sales increased $36 million primarily due to an increase in demand for whole goods.

44

Table of Contents

Foreign currency fluctuations favorably impacted sales primarily in the Euro, Chinese renminbi and Canadian dollar.
Distribution segment sales for the six months ended July 1, 2018, increased $480 million versus the comparable period in 2017. The following were the primary drivers by region:
North American sales increased $385 million, representing 80 percent of the total change in Distribution segment sales, primarily due to increased demand in the engines, parts and service lines of business.
European sales increased $71 million primarily due to an increase in demand for whole goods.
Foreign currency fluctuations favorably impacted sales primarily in the Euro, Chinese renminbi, Canadian dollar and Australian dollar.
Segment EBITDA
Distribution segment EBITDA for the three months ended July 1, 2018, increased $18 million versus the comparable period in 2017, primarily due to higher gross margin. The increase in gross margin was primarily due to higher volumes, partially offset by increased compensation expenses.
 
Distribution segment EBITDA for the six months ended July 1, 2018, increased $11 million versus the comparable period in 2017, primarily due to higher gross margin, partially offset by increased selling, general and administrative expenses and higher research, development and engineering expenses. The increase in gross margin was primarily due to higher volumes and improved pricing, partially offset by increased compensation expenses. The increase in selling, general and administrative expenses was primarily due to higher compensation expenses and increased consulting expenses.
Components Segment Results
Financial data for the Components segment was as follows:
 
 
Three months ended
 
Favorable/
 
Six months ended
 
Favorable/
 
 
July 1,
 
July 2,
 
(Unfavorable)
 
July 1,
 
July 2,
 
(Unfavorable)
In millions
 
2018
 
2017
 
Amount
 
Percent
 
2018
 
2017
 
Amount
 
Percent
External sales
 
$
1,402

 
$
1,064

 
$
338

 
32
 %
 
$
2,715

 
$
2,044

 
$
671

 
33
 %
Intersegment sales
 
485

 
390

 
95

 
24
 %
 
925

 
754

 
171

 
23
 %
Total sales
 
1,887

 
1,454

 
433

 
30
 %
 
3,640

 
2,798

 
842

 
30
 %
Research, development and engineering expenses
 
62

 
58

 
(4
)
 
(7
)%
 
124

 
108

 
(16
)
 
(15
)%
Equity, royalty and interest income from investees
 
14

 
15

 
(1
)
 
(7
)%
 
30

 
28

 
2

 
7
 %
Interest income
 
2

 
1

 
1

 
100
 %
 
3

 
1

 
2

 
NM

Segment EBITDA
 
237

 
228

 
9

 
4
 %
 
464

 
444

 
20

 
5
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Percentage Points
 
 
 
 
 
Percentage Points
Segment EBITDA as a percentage of total sales
 
12.6
%
 
15.7
%
 
 

 
(3.1
)
 
12.7
%
 
15.9
%
 
 

 
(3.2
)
____________________________________
"NM" - not meaningful information

Sales for our Components segment by business were as follows:
 
 
Three months ended
 
Favorable/
 
Six months ended
 
Favorable/
 
 
July 1,
 
July 2,
 
(Unfavorable)
 
July 1,
 
July 2,
 
(Unfavorable)
In millions
 
2018
 
2017
 
Amount
 
Percent
 
2018
 
2017
 
Amount
 
Percent
Emission solutions
 
$
841

 
$
674

 
$
167

 
25
%
 
$
1,616

 
$
1,290

 
$
326

 
25
%
Turbo technologies
 
355

 
307

 
48

 
16
%
 
695

 
594

 
101

 
17
%
Filtration
 
324

 
291

 
33

 
11
%
 
644

 
568

 
76

 
13
%
Electronics and fuel systems
 
226

 
182

 
44

 
24
%
 
427

 
346

 
81

 
23
%
Automated transmissions
 
141

 

 
141

 
NM

 
258

 

 
258

 
NM

Total sales
 
$
1,887

 
$
1,454

 
$
433

 
30
%
 
$
3,640

 
$
2,798

 
$
842

 
30
%
____________________________________
"NM" - not meaningful information

45

Table of Contents

Sales
Components segment sales for the three months ended July 1, 2018, increased $433 million, across all lines of business, versus the comparable period in 2017. The following were the primary drivers by business:
Emission solutions sales increased $167 million primarily due to stronger market demand for trucks in North America and Europe.
Automated transmissions, consolidated during the third quarter of 2017, delivered sales of $141 million in North America.
Turbo technologies sales increased $48 million primarily due to higher demand in North America and Western Europe.
Electronics and fuel systems sales increased $44 million primarily due to higher demand in North America.
Filtration sales increased $33 million primarily due to higher demand in North America and Western Europe.
Foreign currency fluctuations favorably impacted sales primarily in the Chinese renminbi and Euro.
Components segment sales for the six months ended July 1, 2018, increased $842 million, across all lines of business, versus the comparable period in 2017. The following were the primary drivers by business:
Emission solutions sales increased $326 million primarily due to stronger market demand for trucks in North America, Europe and India, and increased sales of products to meet new emission standards in India.
Automated transmissions, consolidated during the third quarter of 2017, delivered sales of $258 million in North America.
Turbo technologies sales increased $101 million primarily due to higher demand in North America and Western Europe.
Electronics and fuel systems sales increased $81 million primarily due to higher demand in North America.
Filtration sales increased $76 million primarily due to higher demand in North America and Western Europe.
Foreign currency fluctuations favorably impacted sales primarily in the Chinese renminbi, Euro and British pound.
Segment EBITDA 
Components segment EBITDA for the three months ended July 1, 2018, increased $9 million versus the comparable period in 2017, as higher gross margin and favorable foreign currency fluctuations (primarily in the Chinese renminbi) were partially offset by higher selling, general and administrative expenses, increased research, development and engineering expenses and lower equity, royalty and interest income from investees. The increase in gross margin was primarily due to higher volumes, lower material costs and favorable mix, partially offset by increased Engine System Campaign costs of $90 million and increased compensation expenses driven by the acquisition of the automated transmission business in the third quarter of 2017. The increases in selling, general and administrative expenses and research, development and engineering expenses were primarily due to higher compensation expense due to the addition of the automated transmission business.
 
Components segment EBITDA for the six months ended July 1, 2018, increased $20 million versus the comparable period in 2017, as higher gross margin and equity, royalty and interest income from investees was partially offset by increased selling, general and administrative expenses and higher research, development and engineering expenses. The increase in gross margin was primarily due to higher volumes, lower material costs, improved mix and favorable foreign currency fluctuations (primarily the Chinese renminbi), partially offset by increased Engine System Campaign costs of $184 million. The increase in selling, general and administrative expenses was primarily due to higher consulting expense and increased compensation expense due to the addition of the automated transmission business. The increase in research, development and engineering expenses was primarily due to higher compensation expense due to the addition of the automated transmission business and increased consulting expenses, partially offset by higher expense recovery. The increase in equity, royalty and interest income from investees was primarily due to higher earnings at Dongfeng Cummins Emission Solutions Co., Ltd.


46

Table of Contents

Power Systems Segment Results
Financial data for the Power Systems segment was as follows:
 
 
Three months ended
 
Favorable/
 
Six months ended
 
Favorable/
 
 
July 1,
 
July 2,
 
(Unfavorable)
 
July 1,
 
July 2,
 
(Unfavorable)
In millions
 
2018
 
2017
 
Amount
 
Percent
 
2018
 
2017
 
Amount
 
Percent
External sales
 
$
691

 
$
587

 
$
104

 
18
 %
 
$
1,286

 
$
1,102

 
$
184

 
17
 %
Intersegment sales
 
555

 
430

 
125

 
29
 %
 
1,034

 
797

 
237

 
30
 %
Total sales
 
1,246

 
1,017

 
229

 
23
 %
 
2,320

 
1,899

 
421

 
22
 %
Research, development and engineering expenses
 
60

 
50

 
(10
)
 
(20
)%
 
117

 
100

 
(17
)
 
(17
)%
Equity, royalty and interest income from investees
 
18

 
14

 
4

 
29
 %
 
37

 
26

 
11

 
42
 %
Interest income
 
2

 
1

 
1

 
100
 %
 
4

 
1

 
3

 
NM

Segment EBITDA
 
186

 
90

 
96

 
NM

 
328

 
175

 
153

 
87
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Percentage Points
 
 
 
 
 
Percentage Points
Segment EBITDA as a percentage of total sales
 
14.9
%
 
8.8
%
 
 

 
6.1

 
14.1
%
 
9.2
%
 
 

 
4.9

____________________________________
"NM" - not meaningful information

Sales for our Power Systems segment by product line were as follows:
 
 
Three months ended
 
Favorable/
 
Six months ended
 
Favorable/
 
 
July 1,
 
July 2,
 
(Unfavorable)
 
July 1,
 
July 2,
 
(Unfavorable)
In millions
 
2018
 
2017
 
Amount
 
Percent
 
2018
 
2017
 
Amount
 
Percent
Power generation
 
$
666

 
$
570

 
$
96

 
17
%
 
$
1,237

 
$
1,096

 
$
141

 
13
%
Industrial
 
483

 
353

 
130

 
37
%
 
897

 
628

 
269

 
43
%
Generator technologies
 
97

 
94

 
3

 
3
%
 
186

 
175

 
11

 
6
%
Total sales
 
$
1,246

 
$
1,017

 
$
229

 
23
%
 
$
2,320

 
$
1,899

 
$
421

 
22
%
 
Sales
Power Systems segment sales for the three months ended July 1, 2018, increased $229 million versus the comparable period in 2017. The following were the primary drivers by product line:
Industrial sales increased $130 million primarily due to higher demand in oil and gas markets in North America and global mining markets, especially in China and Eastern Europe.
Power generation sales increased $96 million primarily due to higher demand in North America, China and the Middle East.
Power Systems segment sales for the six months ended July 1, 2018, increased $421 million versus the comparable period in 2017. The following were the primary drivers by product line:
Industrial sales increased $269 million primarily due to higher demand in global mining markets, especially in China, Eastern Europe and North America, and in oil and gas markets in North America.
Power generation sales increased $141 million primarily due to higher demand in China, North America and Australia.
Foreign currency fluctuations favorably impacted sales primarily in the British pound, Chinese renminbi and Euro.

47

Table of Contents

Segment EBITDA
Power Systems segment EBITDA for the three months ended July 1, 2018, increased $96 million versus the comparable period in 2017 primarily due to higher gross margin and equity, royalty and interest income from investees, partially offset by increased research, development and engineering expenses and higher selling, general and administrative expenses. The increase in gross margin was primarily due to increased volumes, lower warranty and lower material costs, partially offset by higher compensation expenses driven by volume growth. The increase for both selling, general and administrative expenses and research, development and engineering expenses was primarily due to higher compensation expenses, new product launches and higher consulting expenses. The increase in equity, royalty and interest income from investees was primarily due to higher earnings at Chongqing Cummins Engine Company, Ltd.
 
Power Systems segment EBITDA for the six months ended July 1, 2018, increased $153 million versus the comparable period in 2017 primarily due to higher gross margin and equity, royalty and interest income from investees, partially offset by increased research, development and engineering expenses and higher selling, general and administrative expenses. The increase in gross margin was primarily due to increased volumes, lower warranty and lower material costs, partially offset by higher compensation expenses driven by volume growth. The increase for both selling, general and administrative expenses and research, development and engineering expenses was primarily due to higher compensation expenses, new product launches and higher consulting expenses. The increase in equity, royalty and interest income from investees was primarily due to higher earnings at Chongqing Cummins Engine Company, Ltd.
Electrified Power Segment Results
We formed the Electrified Power segment during the first quarter of 2018. The primary focus of the segment is on research and development activities around fully electric and hybrid powertrain solutions. Our intellectual property is developed both in house as well as through acquisitions. As of July 1, 2018, we had completed two acquisitions, which provided us with battery systems intellectual property as well as start-up sales of $1 million and $3 million for the three and six months ended July 1, 2018, respectively. In June 2018, we entered into an agreement to purchase Efficient Drivetrains, Inc., which designs and produces hybrid and fully-electric power solutions for commercial markets, and expect the transaction to close in the third quarter of 2018. We invested $16 million and $23 million for the three and six months ended July 1, 2018, respectively, in research and development activities, which along with the gross margins generated by our acquisitions and selling, general and administrative expenses resulted in a segment EBITDA loss of $21 million and $31 million for three and six months ended July 1, 2018, respectively.
 
 
 
 
Reconciliation of Segment EBITDA to Net Income Attributable to Cummins Inc.
The table below reconciles the segment information to the corresponding amounts in the Condensed Consolidated Statements of Income:
 
 
Three months ended
 
Six months ended
In millions
 
July 1,
2018
 
July 2,
2017
 
July 1,
2018
 
July 2,
2017
TOTAL SEGMENT EBITDA
 
$
909

 
$
768

 
$
1,677

 
$
1,472

Intersegment elimination (1)
 
(12
)
 
(4
)
 
(80
)
 
(3
)
TOTAL EBITDA
 
897

 
764

 
1,597

 
1,469

Less:
 
 
 
 
 
 
 
 
Interest expense
 
28

 
21

 
52

 
39

Depreciation and amortization (2)
 
154

 
144

 
307

 
283

INCOME BEFORE INCOME TAXES
 
715

 
599

 
1,238

 
1,147

Less: Income tax expense
 
161

 
158

 
359

 
301

CONSOLIDATED NET INCOME
 
554

 
441

 
879

 
846

Less: Net income attributable to noncontrolling interest
 
9

 
17

 
9

 
26

NET INCOME ATTRIBUTABLE TO CUMMINS INC.
 
$
545

 
$
424

 
$
870

 
$
820

____________________________________
(1) Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three and six months ended July 1, 2018 and July 2, 2017.
(2) Depreciation and amortization, as shown on a segment basis, excludes the amortization of debt discount and deferred costs included in the Condensed Consolidated Statements of Income as interest expense. The amortization of debt discount and deferred costs was $1 million and $1 million for the six month periods ended July 1, 2018 and July 2, 2017, respectively.

48

Table of Contents

LIQUIDITY AND CAPITAL RESOURCES
Key Working Capital and Balance Sheet Data
We fund our working capital with cash from operations and short-term borrowings, including commercial paper, when necessary. Various assets and liabilities, including short-term debt, can fluctuate significantly from month to month depending on short-term liquidity needs. As a result, working capital is a prime focus of management attention. Working capital and balance sheet measures are provided in the following table:
Dollars in millions
 
July 1,
2018
 
December 31,
2017
Working capital (1)
 
$
3,731

 
$
3,251

Current ratio
 
1.61

 
1.57

Accounts and notes receivable, net
 
$
4,095

 
$
3,618

Days’ sales in receivables
 
60

 
59

Inventories
 
$
3,559

 
$
3,166

Inventory turnover
 
5.0

 
5.0

Accounts payable (principally trade)
 
$
2,981

 
$
2,579

Days' payable outstanding
 
58

 
53

Total debt
 
$
2,462

 
$
2,006

Total debt as a percent of total capital
 
23.1
%
 
19.7
%
____________________________________
(1) Working capital includes cash and cash equivalents.
Cash Flows
Cash and cash equivalents were impacted as follows:
 
 
Six months ended
 
 
In millions
 
July 1,
2018
 
July 2,
2017
 
Change
Net cash provided by operating activities
 
$
473

 
$
826

 
$
(353
)
Net cash used in investing activities
 
(236
)
 
(160
)
 
(76
)
Net cash used in financing activities
 
(253
)
 
(544
)
 
291

Effect of exchange rate changes on cash and cash equivalents
 
(35
)
 
51

 
(86
)
Net (decrease) increase in cash and cash equivalents
 
$
(51
)
 
$
173

 
$
(224
)
 
Net cash provided by operating activities decreased $353 million for the six months ended July 1, 2018, versus the comparable period in 2017, primarily due to higher working capital levels, partially offset by lower net pension contributions of $69 million and higher earnings of $33 million. During the first six months of 2018, the higher working capital requirements resulted in a cash outflow of $536 million compared to a cash outflow of $196 million in the comparable period in 2017, primarily due to the payment of higher accrued variable compensation expense in the first quarter of 2018 and business growth.
Net cash used in investing activities increased $76 million for the six months ended July 1, 2018, versus the comparable period in 2017, primarily due to higher net investments in marketable securities of $120 million, partially offset by lower investments in and advances to equity investees of $49 million.
Net cash used in financing activities decreased $291 million for the six months ended July 1, 2018, versus the comparable period in 2017, primarily due to higher borrowings of commercial paper of $582 million, partially offset by higher repurchases of common stock of $259 million.
The effect of exchange rate changes on cash and cash equivalents for the six months ended July 1, 2018, versus the comparable period in 2017, decreased $86 million primarily due to unfavorable fluctuations in the British pound of $68 million.
Sources of Liquidity 
We generate significant ongoing cash flow and cash provided by operations is our principal source of liquidity with $473 million provided in the six months ended July 1, 2018.

49

Table of Contents

At July 1, 2018, our sources of liquidity included:
 
 
July 1, 2018
In millions
 
Total
 
U.S.
 
International
 
Primary location of international balances
Cash and cash equivalents
 
$
1,318

 
$
306

 
$
1,012

 
U.K., China, Singapore, Mexico, Belgium, Australia, Canada
Marketable securities (1)
 
214

 
54

 
160

 
India
Total
 
$
1,532

 
$
360

 
$
1,172

 
 
Available credit capacity
 

 
 
 
 
 
 
Revolving credit facilities (2)
 
$
1,948

 
 
 
 
 
 
International and other uncommitted domestic credit facilities
 
$
194

 
 
 
 
 
 
____________________________________
(1) The majority of marketable securities could be liquidated into cash within a few days.
(2) The five-year credit facility for $1.75 billion and the 364-day credit facility for $1.0 billion, maturing November 2020 and September 2018, respectively, are maintained primarily to provide backup liquidity for our commercial paper borrowings and general corporate purposes. At July 1, 2018, we had $802 million of commercial paper outstanding, which effectively reduced the available capacity under our revolving credit facilities to $1.95 billion.
Cash, Cash Equivalents and Marketable Securities
A significant portion of our cash flow is generated outside the U.S. We manage our worldwide cash requirements considering available funds among the many subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. As a result, we do not anticipate any local liquidity restrictions to preclude us from funding our operating needs with local resources.
Debt Facilities and Other Sources of Liquidity
We have access to committed credit facilities that total $2.75 billion, including a $1.0 billion, 364-day facility that expires September 14, 2018 and a $1.75 billion, 5-year facility that expires on November 13, 2020. We intend to maintain credit facilities of a similar aggregate amount by renewing or replacing these facilities before expiration. Revolving credit facilities are maintained primarily to provide backup liquidity for our commercial paper borrowings, letters of credit and general corporate purposes.
We can issue up to $2.75 billion of unsecured, short-term promissory notes ("commercial paper") pursuant to our board authorized commercial paper programs. The programs facilitate the private placement of unsecured short-term debt through third party brokers. We intend to use the net proceeds from the commercial paper borrowings for general corporate purposes.
As a well-known seasoned issuer, we filed an automatic shelf registration for an undetermined amount of debt and equity securities with the Securities and Exchange Commission on February 16, 2016. Under this shelf registration we may offer, from time to time, debt securities, common stock, preferred and preference stock, depositary shares, warrants, stock purchase contracts and stock purchase units.
Uses of Cash
Stock Repurchases
In December 2016, our Board of Directors authorized the acquisition of up to $1 billion of additional common stock upon completion of the 2015 repurchase plan. In the first six months of 2018, we made the following purchases under the 2015 and 2016 stock repurchase programs:

50

Table of Contents

In millions, except per share amounts
 
Shares
Purchased
 
Average Cost
Per Share
 
Total Cost of
Repurchases
 
Remaining
Authorized
Capacity
(1)
November 2015, $1 billion repurchase program
 
 

 
 

 
 

 
 

April 1
 
0.3

 
$
166.79

 
$
46

 
$

 
 
 
 
 
 
 
 
 
December 2016, $1 billion repurchase program
 
 
 
 
 
 
 
 
April 1
 
0.7

 
164.48

 
$
117

 
$
883

July 1
 
1.5

 
143.69

 
216

 
667

Subtotal
 
2.2

 
150.38

 
333

 
 
 
 
 
 
 
 
 
 
 
Total
 
2.5

 
$
152.20

 
$
379

 
 
____________________________________
(1) The remaining authorized capacity under the 2016 plan was calculated based on the cost to purchase the shares but excludes commission expenses in accordance with the authorized plan.
We intend to repurchase outstanding shares from time to time to enhance shareholder value and to offset the dilutive impact of employee stock based compensation plans. These repurchases may be done in the open market or through accelerated share repurchase programs as appropriate based on market conditions.
Dividends
In July 2018, our Board of Directors authorized an increase to our quarterly dividend of 5.6 percent from $1.08 per share to $1.14 per share. We paid dividends of $355 million during the six months ended July 1, 2018.
Capital Expenditures
Capital expenditures, including spending on internal use software, for the six months ended July 1, 2018, were $221 million compared to $222 million in the comparable period in 2017We continue to invest in new product lines and targeted capacity expansions. We plan to spend between $730 million and $760 million in 2018 on capital expenditures as we continue with product launches and facility improvements. Approximately 50 percent of our capital expenditures are expected to be invested outside of the U.S. in 2018.
Pensions
Our global pension plans, including our unfunded and non-qualified plans, were 116 percent funded at December 31, 2017. Our U.S. qualified plans, which represent approximately 55 percent of the worldwide pension obligation, were 131 percent funded and our U.K. plans were 118 percent funded. The funded status of our pension plans is dependent upon a variety of variables and assumptions including return on invested assets, market interest rates and levels of voluntary contributions to the plans. In the first six months of 2018, the investment loss on our U.S. pension trust was 1.2 percent while our U.K. pension trust loss was 0.7 percent. Approximately 76 percent of our pension plan assets are held in highly liquid investments such as fixed income and equity securities. The remaining 24 percent of our plan assets are held in less liquid, but market valued investments, including real estate, private equity, venture capital, opportunistic credit and insurance contracts. We anticipate making additional defined benefit pension contributions during the remainder of 2018 of $20 million for our U.S. and U.K. pension plans. Approximately $14 million of the estimated $38 million of U.S. and U.K. pension contributions for the full year are voluntary. These contributions may be made from trusts or company funds either to increase pension assets or to make direct benefit payments to plan participants. We expect our 2018 net periodic pension cost to approximate $86 million.
Current Maturities of Short and Long-Term Debt
We had $802 million of commercial paper outstanding at July 1, 2018, that matures in less than one year. The maturity schedule of our existing long-term debt does not require significant cash outflows in the intermediate term. Required annual principal payments range from $8 million to $50 million over the next five years (including the remainder of 2018). See Note 9, "DEBT," to the Condensed Consolidated Financial Statements for additional information.

51

Table of Contents

Credit Ratings
Our ratings and outlook from each of the credit rating agencies as of the date of filing are shown in the table below.
 
 
Long-Term
 
Short-Term
 
 
Credit Rating Agency (1)
 
Senior Debt Rating
 
Debt Rating
 
Outlook
Standard & Poor’s Rating Services
 
A+
 
A1
 
Stable
Moody’s Investors Service, Inc.
 
A2
 
P1
 
Stable
____________________________________
(1) Credit ratings are not recommendations to buy, are subject to change and each rating should be evaluated independently of any other rating. In addition, we undertake no obligation to update disclosures concerning our credit ratings, whether as a result of new information, future events or otherwise.
Management's Assessment of Liquidity

Our financial condition and liquidity remain strong. Our solid balance sheet and credit ratings enable us to have ready access to credit and the capital markets. We assess our liquidity in terms of our ability to generate adequate cash to fund our operating, investing and financing activities. We believe our operating cash flow and liquidity provide us with the financial flexibility needed to fund working capital, common stock repurchases, acquisitions, capital expenditures, dividend payments, projected pension obligations and debt service obligations. While we expect more efficient access to overseas earnings as a result of Tax Legislation, we will continue to generate cash from operations in the U.S. and maintain access to our revolving credit facility as noted above.


52

Table of Contents

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
A summary of our significant accounting policies is included in Note 1, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,” of the Notes to the Consolidated Financial Statements of our 2017 Form 10-K, which discusses accounting policies that we have selected from acceptable alternatives.
Our Condensed Consolidated Financial Statements are prepared in accordance with generally accepted accounting principles that often require management to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts presented and disclosed in the financial statements. Management reviews these estimates and assumptions based on historical experience, changes in business conditions and other relevant factors they believe to be reasonable under the circumstances. In any given reporting period, our actual results may differ from the estimates and assumptions used in preparing our Condensed Consolidated Financial Statements.
Critical accounting estimates are defined as follows: the estimate requires management to make assumptions about matters that were highly uncertain at the time the estimate was made; different estimates reasonably could have been used; or if changes in the estimate are reasonably likely to occur from period to period and the change would have a material impact on our financial condition or results of operations. Our senior management has discussed the development and selection of our accounting policies, related accounting estimates and the disclosures set forth below with the Audit Committee of our Board of Directors. Our critical accounting estimates disclosed in the Form 10-K address the estimation of liabilities for warranty programs, accounting for income taxes and pension benefits.
A discussion of our critical accounting estimates may be found in the “Management’s Discussion and Analysis” section of our 2017 Form 10-K under the caption “APPLICATION OF CRITICAL ACCOUNTING ESTIMATES.” Within the context of these critical accounting estimates, we are not currently aware of any reasonably likely events or circumstances that would result in different policies or estimates being reported in the first six months of 2018.
RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 15, "RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS," in the Notes to Condensed Consolidated Financial Statements for additional information.
ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk
A discussion of quantitative and qualitative disclosures about market risk may be found in Item 7A of our 2017 Form 10-K. There have been no material changes in this information since the filing of our 2017 Form 10-K. 
ITEM 4.  Controls and Procedures
Evaluation of Disclosure Controls and Procedures 
As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, our CEO and our CFO concluded that our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to management, including our CEO and CFO, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter ended July 1, 2018, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 

53

Table of Contents

PART II.  OTHER INFORMATION
ITEM 1.  Legal Proceedings
We are subject to numerous lawsuits and claims arising out of the ordinary course of our business, including actions related to product liability; personal injury; the use and performance of our products; warranty matters; product recalls; patent, trademark or other intellectual property infringement; contractual liability; the conduct of our business; tax reporting in foreign jurisdictions; distributor termination; workplace safety; and environmental matters. We also have been identified as a potentially responsible party at multiple waste disposal sites under U.S. federal and related state environmental statutes and regulations and may have joint and several liability for any investigation and remediation costs incurred with respect to such sites. We have denied liability with respect to many of these lawsuits, claims and proceedings and are vigorously defending such lawsuits, claims and proceedings. We carry various forms of commercial, property and casualty, product liability and other forms of insurance; however, such insurance may not be applicable or adequate to cover the costs associated with a judgment against us with respect to these lawsuits, claims and proceedings. We do not believe that these lawsuits are material individually or in the aggregate. While we believe we have also established adequate accruals pursuant to U.S. generally accepted accounting principles for our expected future liability with respect to pending lawsuits, claims and proceedings, where the nature and extent of any such liability can be reasonably estimated based upon then presently available information, there can be no assurance that the final resolution of any existing or future lawsuits, claims or proceedings will not have a material adverse effect on our business, results of operations, financial condition or cash flows.
We conduct significant business operations in Brazil that are subject to the Brazilian federal, state and local labor, social security, tax and customs laws. While we believe we comply with such laws, they are complex, subject to varying interpretations and we are often engaged in litigation regarding the application of these laws to particular circumstances.
ITEM 1A.  Risk Factors
In addition to other information set forth in this report, you should consider other risk factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2017, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K or the "CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION" in this Quarterly report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently judge to be immaterial also may materially adversely affect our business, financial condition or operating results.
ITEM 2.  Unregistered Sales of Equity Securities and Use of Proceeds
The following information is provided pursuant to Item 703 of Regulation S-K:
 
 
 
Issuer Purchases of Equity Securities
Period
 
Total
Number of
Shares
Purchased(1)
 
Average
Price Paid
per Share
 
Total Number of
Shares Purchased
as Part of Publicly
Announced
Plans or Programs
 
Maximum
Number of Shares
that May Yet Be
Purchased Under the
Plans or Programs(2)
April 2 - May 6
 

 
$

 

 
59,353

May 7 - June 3
 
1,021,676

 
146.01

 
1,021,100

 
64,828

June 4 - July 1
 
483,114

 
138.85

 
482,530

 
70,427

Total
 
1,504,790

 
143.71

 
1,503,630

 
 

____________________________________
(1)  Shares purchased represent shares under our Key Employee Stock Investment Plan established in 1969 (there is no maximum repurchase limitation in this plan) and our Board of Directors authorized share repurchase program.
(2)  These values reflect the sum of shares held in loan status under our Key Employee Stock Investment Plan. The repurchase program authorized by the Board of Directors does not limit the number of shares that may be purchased and were excluded from this column. The dollar value remaining available for future purchases under this program as of July 1, 2018, was $667 million.
In December 2016, our Board of Directors authorized the acquisition of up to $1 billion of additional common stock upon completion of the 2015 repurchase plan. During the three months ended July 1, 2018, we repurchased $216 million of common stock under this authorization.
During the three months ended July 1, 2018, we repurchased 1,160 shares from employees in connection with the Key Employee Stock Investment Plan which allows certain employees, other than officers, to purchase shares of common stock on an installment basis up to an established credit limit. Loans are issued for five-year terms at a fixed interest rate established at

54

Table of Contents

the date of purchase and may be refinanced after their initial five-year period for an additional five-year period. Participants must hold shares for a minimum of six months from date of purchase. If the shares are sold before the loan is paid off, the employee must wait six months before another share purchase may be made. We hold participants’ shares as security for the loans and would, in effect repurchase shares if the participant defaulted in repayment of the loan. There is no maximum amount of shares that we may purchase under this plan.  
ITEM 3.  Defaults Upon Senior Securities
Not applicable. 
ITEM 4.  Mine Safety Disclosures
Not applicable. 
ITEM 5.  Other Information
Not applicable. 
ITEM 6. Exhibits
The exhibits listed in the following Exhibit Index are filed as part of this Quarterly Report on Form 10-Q.
CUMMINS INC.
EXHIBIT INDEX
Exhibit No.
 
Description of Exhibit
 
 
 
 
 
 
 
101.INS
 
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. 
101.SCH
 
XBRL Taxonomy Extension Schema Document.
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.


55

Table of Contents

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Cummins Inc.
 
 
 
Date:
July 31, 2018
 
 
 
 
 
 
 
 
 
 
By:
/s/ PATRICK J. WARD
 
By:
/s/ CHRISTOPHER C. CLULOW
 
 
Patrick J. Ward
 
 
Christopher C. Clulow
 
 
Vice President and Chief Financial Officer
 
 
Vice President-Corporate Controller
 
 
(Principal Financial Officer)
 
 
(Principal Accounting Officer)

56