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Cummins Announces Fourth Quarter and Full Year 2017 Results
  • Fourth quarter revenues of $5.5 billion, EBIT of 11.3 percent of sales
  • GAAP1 Net Loss of $274 million, Diluted EPS Loss of $1.65
  • Full year revenues of $20.4 billion, EBIT of 12.0 percent of sales
  • GAAP Net Income of $999 million, Diluted EPS of $5.97
  • Fourth quarter and full year Diluted EPS negatively impacted by $4.68 and $4.65 as a result of charges related to the recently enacted U.S. Tax Cuts and Jobs Act
  • The company expects full year 2018 revenues to be up 4 to 8 percent, EBITDA expected to be in the range of 15.8 to 16.2 percent

COLUMBUS, Ind.--(BUSINESS WIRE)--Feb. 6, 2018-- Cummins Inc. (NYSE: CMI) today reported results for the fourth quarter of 2017.

Fourth quarter revenues of $5.5 billion increased 22 percent from the same quarter in 2016. Strong demand for trucks, construction and mining equipment drove the majority of the revenue increase. Sales in North America and international markets both increased by 22 percent.

Earnings before interest and taxes (EBIT) in the fourth quarter were $620 million, or 11.3 percent of sales, up from $526 million or 11.7 percent of sales a year ago. EBIT was negatively impacted by $39 million as a result of charges incurred by unconsolidated joint ventures related to U.S. tax reform. Excluding the impact of tax reform, EBIT for the fourth quarter of 2017 was $659 million or 12.0 percent of sales.

Net income attributable to Cummins in the fourth quarter was a net loss of $274 million (a loss of $1.65 per diluted share), compared to net income of $378 million ($2.25 per diluted share). Fourth quarter net income included $777 million in one-time charges related to tax reform. Excluding the tax reform impact, net income attributable to Cummins in the fourth quarter was $503 million ($3.03 per diluted share), reflecting a 19.5 percent tax rate.

Revenues for the full year 2017 were $20.4 billion, 17 percent higher than 2016. Revenues in North America increased 15 percent and international sales increased 19 percent.

EBIT for the year was $2.4 billion or 12.0 percent of sales, or 12.2 percent of sales excluding charges related to tax reform. This compares to $2.0 billion or 11.4 percent of sales in 2016.

Net income attributable to Cummins for the full year was $999 million ($5.97 per diluted share), compared to $1.4 billion ($8.23 per diluted share) in 2016. Excluding charges totaling $777 million in connection with tax reform, full year net income attributable to Cummins was $1.8 billion ($10.62 per diluted share), with a full year tax rate of 24.5 percent.

“The Company delivered strong growth, solid profitability and record operating cash flow in 2017,” said Chairman and CEO Tom Linebarger. “We expect demand to remain strong in many of our core markets in 2018 and profitability to improve as a result of higher sales and continued execution of our cost reduction initiatives. The Company again plans to return at least 50 percent of Operating Cash Flow to shareholders in 2018.”

Based on the current forecast, Cummins expects full year 2018 revenues to be up 4 to 8 percent, and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) to be in the range of 15.8 to 16.2 percent of sales. EBITDA for the full year 2017 was 15.0 percent of sales, excluding the impact of US tax reform.

2017 Highlights:

  • The Company returned $1.2 billion or 51 percent of Operating Cash Flow to shareholders in the form of dividends and share repurchases
  • Cummins and Eaton (NYSE:ETN) partnered to form the Eaton Cummins Automated Transmission Technologies joint venture which will capitalize on the secular shift to more automated transmissions in commercial vehicle markets
  • The company announced a new electrified power partnership with GILLIG LLC to integrate and optimize new battery electric technology offered by Cummins that will soon power GILLIG zero-emissions transit buses
  • Cummins was named to Ethisphere’s 2017 list of World’s Most Ethical Companies for a 10th consecutive year by the Ethisphere Institute
  • DiversityInc named Cummins one of the Top 50 Companies for Diversity for the eleventh consecutive year. Cummins ranked No. 21 on the 2017 annual list, which included more than 1,000 participating companies
  • Cummins was one of a select number of companies named to the North American Index of the Dow Jones Sustainability Indices, a leading independent organization measuring corporate sustainability in the world

1 Generally Accepted Accounting Principles

Fourth quarter 2017 detail

Engine Segment

  • Sales - $2.3 billion, up 16 percent
  • Segment EBIT - $224 million, or 9.8 percent of sales, compared to $194 million or 9.9 percent of sales
  • Segment EBIT was negatively impacted by $23 million as a result of charges recorded by unconsolidated joint ventures related to recent U.S. tax reform
  • On-highway revenues increased 14 percent, and off-highway revenues increased 27 percent primarily due to increased global demand in truck and constructions markets

Distribution Segment

  • Sales - $1.9 billion, up 16 percent
  • Segment EBIT - $97 million, or 5.0 percent of sales, compared to $122 million or 7.3 percent of sales
  • Segment EBIT was negatively impacted by $4 million as a result of charges recorded by unconsolidated joint ventures related to recent U.S. tax reform
  • Revenues in North America increased by 21 percent and in international markets by 7 percent

Components Segment

  • Sales - $1.6 billion, up 32 percent
  • Segment EBIT - $168 million, or 10.8 percent of sales, compared to $140 million or 11.9 percent of sales
  • Segment EBIT was negatively impacted by $12 million as result of charges recorded by unconsolidated joint ventures related to recent U.S. tax reform
  • The Eaton Cummins Automated Transmission joint venture recorded sales of $95 million and an EBIT loss of $14 million in the fourth quarter
  • Revenues in North America increased by 35 percent, and international sales grew by 30 percent due to higher commercial truck production in North America and China as well as additional content in India with the introduction of Bharat Stage IV in 2017

Power Systems Segment

  • Sales - $1.1 billion, up 18 percent
  • Segment EBIT - $95 million, or 8.6 percent of sales, compared to $68 million, or 7.3 percent of sales
  • Increased demand in mining, oil and gas and power generation markets drove the growth in sales

About Cummins

Cummins Inc., a global power leader, is a corporation of complementary business units that design, manufacture, distribute and service diesel and natural gas engines and related technologies, including fuel systems, controls, air handling, filtration, emission solutions and electrical power generation systems. Headquartered in Columbus, Indiana, (USA) Cummins currently employs approximately 58,600 people worldwide and serves customers in approximately 190 countries and territories through a network of approximately 500 company-owned and independent distributor locations and approximately 7,500 dealer locations. Press releases can be found on the Web at www.cummins.com. Follow Cummins on Twitter at www.twittter.com/cummins and on YouTube at www.youtube.com/cumminsinc.

Forward-looking disclosure statement

Information provided in this release that is not purely historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our forecasts, guidance, preliminary results, expectations, hopes, beliefs and intentions on strategies regarding the future. These forward looking statements include, without limitation, statements relating to our plans and expectations for our revenues for the full year of 2018. Our actual future results could differ materially from those projected in such forward-looking statements because of a number of factors, including, but not limited to: the adoption and implementation of global emission standards; the price and availability of energy; the pace of infrastructure development; increasing global competition among our customers; general economic, business and financing conditions; governmental action; changes in our customers’ business strategies; competitor pricing activity; expense volatility; labor relations; and other risks detailed from time to time in our Securities and Exchange Commission filings, including particularly in the Risk Factors section of our 2016 Annual Report on Form 10-K. 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 press release and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. More detailed information about factors that may affect our performance may be found in our filings with the Securities and Exchange Commission, which are available at http://www.sec.gov or at http://www.cummins.com in the Investor Relations section of our website.

Presentation of Non-GAAP Financial Information

EBIT and EBITDA are non-GAAP measures used in this release, and are defined and reconciled to what management believes to be the most comparable GAAP measures in a schedule attached to this release. Cummins presents this information as it believes it is useful to understanding the Company's operating performance, and because EBIT and EBITDA are measures used internally to assess the performance of the operating units.

Webcast information

Cummins management will host a teleconference to discuss these results today at 10 a.m. EST. This teleconference will be webcast and available on the Investor Relations section of the Cummins website at www.cummins.com. Participants wishing to view the visuals available with the audio are encouraged to sign-in a few minutes prior to the start of the teleconference.

 
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (a)
 
Three months ended
In millions, except per share amounts

December 31,
2017

 

December 31,
2016

NET SALES $ 5,476 $ 4,503
Cost of sales 4,102   3,383  
GROSS MARGIN 1,374 1,120
OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses 633 519
Research, development and engineering expenses 207 158
Equity, royalty and interest income from investees 56 67
Loss contingency 5
Other operating income (expense), net 10   (3 )
OPERATING INCOME 595 507
Interest income 7 5
Interest expense 24 18
Other income, net 18   14  
INCOME BEFORE INCOME TAXES 596 508
Income tax expense 905   112  
CONSOLIDATED NET (LOSS) INCOME (309 ) 396
Less: Net (loss) income attributable to noncontrolling interests (35 ) 18  
NET (LOSS) INCOME ATTRIBUTABLE TO CUMMINS INC. $ (274 ) $ 378  
 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
Basic $ (1.66 ) $ 2.26
Diluted $ (1.65 ) $ 2.25
 
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 165.4 167.6
Diluted 166.2 168.1
 
CASH DIVIDENDS DECLARED PER COMMON SHARE $ 1.08 $ 1.025
         

(a)

  Prepared on an unaudited basis in accordance with accounting principles generally accepted in the United States of America.
 
 
  Years ended December 31,
In millions, except per share amounts 2017   2016
NET SALES $ 20,428 $ 17,509
Cost of sales 15,338   13,057  
GROSS MARGIN 5,090 4,452
OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses 2,390 2,046
Research, development and engineering expenses 752 636
Equity, royalty and interest income from investees 357 301
Loss contingency 5 138
Other operating income (expense), net 65   (5 )
OPERATING INCOME 2,365 1,928
Interest income 18 23
Interest expense 81 69
Other income, net 63   48  
INCOME BEFORE INCOME TAXES 2,365 1,930
Income tax expense 1,371   474  
CONSOLIDATED NET INCOME 994 1,456
Less: Net (loss) income attributable to noncontrolling interests (5 ) 62  
NET INCOME ATTRIBUTABLE TO CUMMINS INC. $ 999   $ 1,394  
 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
Basic $ 5.99 $ 8.25
Diluted $ 5.97 $ 8.23
 
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 166.6 169.0
Diluted 167.3 169.3
 
CASH DIVIDENDS DECLARED PER COMMON SHARE $ 4.21 $ 4.00
         
(a)   Prepared on an unaudited basis in accordance with accounting principles generally accepted in the United States of America.
 
   
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (a)
 
In millions, except par value December 31,
2017
December 31,
2016
ASSETS
Current assets
Cash and cash equivalents $ 1,369 $ 1,120
Marketable securities 198   260  
Total cash, cash equivalents and marketable securities 1,567 1,380
Accounts and notes receivable, net 3,618 3,025
Inventories 3,166 2,675
Prepaid expenses and other current assets 577   627  
Total current assets 8,928   7,707  
Long-term assets
Property, plant and equipment, net 3,927 3,800
Investments and advances related to equity method investees 1,156 946
Goodwill 1,082 480
Other intangible assets, net 973 332
Pension assets 1,043 731
Other assets 966   1,015  
Total assets $ 18,075   $ 15,011  
 
LIABILITIES
Current liabilities
Accounts payable (principally trade) $ 2,579 $ 1,854
Loans payable 57 41
Commercial paper 298 212
Accrued compensation, benefits and retirement costs 811 412
Current portion of accrued product warranty 454 333
Current portion of deferred revenue 500 468
Other accrued expenses 915 970
Current maturities of long-term debt 63   35  
Total current liabilities 5,677   4,325  
Long-term liabilities
Long-term debt 1,588 1,568
Postretirement benefits other than pensions 289 329
Pensions 330 326
Other liabilities and deferred revenue 2,027   1,289  
Total liabilities $ 9,911   $ 7,837  
 
EQUITY
Cummins Inc. shareholders’ equity
Common stock, $2.50 par value, 500 shares authorized, 222.4 and 222.4 shares issued $ 2,210 $ 2,153
Retained earnings 11,464 11,040
Treasury stock, at cost, 56.7 and 54.2 shares (4,905 ) (4,489 )
Common stock held by employee benefits trust, at cost, 0.5 and 0.7 shares (7 ) (8 )
Accumulated other comprehensive loss (1,503 ) (1,821 )
Total Cummins Inc. shareholders’ equity 7,259 6,875
Noncontrolling interests 905   299  
Total equity $ 8,164   $ 7,174  
Total liabilities and equity $ 18,075   $ 15,011  
         
(a)   Prepared on an unaudited basis in accordance with accounting principles generally accepted in the United States of America.
 
 
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (a)
 
Years ended December 31,
In millions 2017   2016
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,277   $ 1,939  
 
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (506 ) (531 )
Investments in internal use software (81 ) (63 )
Proceeds from disposals of property, plant and equipment 110 14
Investments in and advances to equity investees (66 ) (41 )
Acquisitions of businesses, net of cash acquired (662 ) (94 )
Investments in marketable securities—acquisitions (194 ) (478 )
Investments in marketable securities—liquidations 266 306
Proceeds from sale of equity investees 60
Cash flows from derivatives not designated as hedges 76 (102 )
Other, net 5   12  
Net cash used in investing activities (1,052 ) (917 )
 
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 6 111
Net borrowings of commercial paper 86 212
Payments on borrowings and capital lease obligations (60 ) (163 )
Net borrowings under short-term credit agreements 12 19
Distributions to noncontrolling interests (29 ) (65 )
Dividend payments on common stock (701 ) (676 )
Repurchases of common stock (451 ) (778 )
Acquisitions of noncontrolling interests (98 )
Other, net 63   25  
Net cash used in financing activities (1,074 ) (1,413 )
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 98   (200 )
Net increase (decrease) in cash and cash equivalents 249 (591 )
Cash and cash equivalents at beginning of year 1,120   1,711  
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,369   $ 1,120  
         
(a)   Prepared on an unaudited basis in accordance with accounting principles generally accepted in the United States of America.
 
         

CUMMINS INC. AND SUBSIDIARIES

SEGMENT INFORMATION

(Unaudited)

 
In millions Engine Distribution Components (1)

Power
Systems

Total
Segment

Intersegment
Eliminations (2)

Total
Three months ended December 31, 2017
External sales $ 1,710 $ 1,928 $ 1,180 $ 658 $ 5,476 $ $ 5,476
Intersegment sales 577   10  

378

  445   1,410   (1,410 )  
Total sales 2,287 1,938 1,558 1,103 6,886 (1,410 ) 5,476
Depreciation and amortization (3) 47 26 46 30 149 149
Research, development and engineering expenses 79 5 70 53 207 207
Equity, royalty and interest income from investees (4) 33 9 14 56 56
Interest income 2 2 2 1 7 7
EBIT 224 97 168 95 584 36 620
 
EBIT as a percentage of total sales 9.8 % 5.0 % 10.8 % 8.6 % 8.5 % 11.3 %
 
Three months ended December 31, 2016
External sales $ 1,424 $ 1,664 $ 860 $ 555 $ 4,503 $ $ 4,503
Intersegment sales 543   6   317   377   1,243   (1,243 )  
Total sales 1,967 1,670 1,177 932 5,746 (1,243 ) 4,503
Depreciation and amortization (3) 41 31 38 28 138 138
Research, development and engineering expenses 60 3 47 48 158 158
Equity, royalty and interest income from investees 28 14 12 13 67 67
Interest income 2 1 1 1 5 5
EBIT 194 122 (5) 140 68 (6) 524 2 526
 
EBIT as a percentage of total sales 9.9 % 7.3 % 11.9 % 7.3 % 9.1 % 11.7 %
                                         
(1)   The 2017 disclosures include Eaton Cummins Automated Transmission Technologies joint venture results consolidated during the third quarter of 2017.
(2) Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three months ended December 31, 2017 and 2016.
(3) 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."
(4) U.S. tax legislation passed in December 2017 decreased our equity earnings at certain equity investees, negatively impacting our equity, royalty and interest income from investees by $23 million, $4 million and $12 million for the Engine, Distribution and Components segments, respectively.
(5) Distribution segment EBIT included a gain of $15 million on the fair value adjustment resulting from the acquisition of the controlling interest in a North American distributor in the fourth quarter of 2016.
(6) In the fourth quarter of 2016, we sold our remaining 49 percent interest in Cummins Olayan Energy for $61 million and recognized a gain of $17 million.
 
         
In millions Engine Distribution Components (1)

Power
Systems

Total
Segment

Intersegment
Eliminations (2)

Total
Year ended December 31, 2017
External sales $ 6,661 $ 7,029 $ 4,363 $ 2,375 $ 20,428 $ $ 20,428
Intersegment sales 2,292   29   1,526   1,683   5,530   (5,530 )
Total sales 8,953 7,058 5,889 4,058 25,958 (5,530 ) 20,428
Depreciation and amortization (3) 184 116 163 117 580 580
Research, development and engineering expenses 279 19 240 214 752 752
Equity, royalty and interest income from investees (4) 219 44 40 54 357 357
Interest income 6 6 3 3 18 18
EBIT 959 384 754 294 2,391 55 2,446
 
EBIT as a percentage of total sales 10.7 % 5.4 % 12.8 % 7.2 % 9.2 % 12.0
 
Year ended December 31, 2016
External sales $ 5,774 $ 6,157 $ 3,514 $ 2,064 $ 17,509 $ $ 17,509
Intersegment sales 2,030   24   1,322   1,453   4,829   (4,829 )
Total sales 7,804 6,181 4,836 3,517 22,338 (4,829 ) 17,509
Depreciation and amortization (3) 163 116 133 115 527 527
Research, development and engineering expenses 226 13 208 189 636 636
Equity, royalty and interest income from investees 148 70 41 42 301 301
Loss contingency 138 138 138
Interest income 10 4 4 5 23 23
EBIT 686 392 (5) 641 263 (6) 1,982 17 1,999
 
EBIT as a percentage of total sales 8.8 % 6.3 % 13.3 % 7.5 % 8.9 % 11.4
                                       
(1)   The 2017 disclosures include Eaton Cummins Automated Transmission Technologies joint venture results consolidated during the third quarter of 2017.
(2) Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the years ended December 31, 2017 and 2016.
(3) 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 $3 million for both years ended December 31, 2017 and December 31, 2016.
(4) U.S. tax legislation passed in December 2017 decreased our equity earnings at certain equity investees, negatively impacting our equity, royalty and interest income from investees by $23 million, $4 million and $12 million for the Engine, Distribution and Component segments, respectively.
(5) Distribution segment EBIT included a gain of $15 million on the fair value adjustment resulting from the acquisition of the controlling interests in a North American distributor in the fourth quarter of 2016.
(6) In the fourth quarter of 2016, we sold our remaining 49 percent interest in Cummins Olayan Energy for $61 million and recognized a gain of $17 million.
 

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 Years ended
In millions December 31,
2017
  December 31,
2016
December 31,
2017
  December 31,
2016
Total EBIT $ 620 $ 526 $ 2,446 $ 1,999
Less: Interest expense 24   18   81   69
Income before income taxes $ 596   $ 508   $ 2,365   $ 1,930
 

CUMMINS INC. AND SUBSIDIARIES
SELECT FOOTNOTE DATA
(Unaudited)

BASIS OF PRESENTATION

Our consolidated financial statements were prepared based on proposed guidance provided by the Financial Accounting Standards Board in their Exposure Draft (ED) released on January 18, 2018, regarding the reclassification of certain stranded effects of income taxes in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017. The ED was not final on our earnings release date of February 6, 2018, but is expected to be final when we file our 2017 Form 10-K the week of February 12, 2018.

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 Years ended
In millions December 31,
2017
December 31,
2016
December 31,
2017
December 31,
2016
Distribution entities
Komatsu Cummins Chile, Ltda. $ 7 $ 8 $ 30 $ 34
North American distributors 3 21
All other distributors (2 ) (1 )
Manufacturing entities
Dongfeng Cummins Engine Company, Ltd. 17 14 73 46
Beijing Foton Cummins Engine Co., Ltd. 15 (7 ) 94 52
Chongqing Cummins Engine Company, Ltd. 11 10 41 38
Dongfeng Cummins Emission Solutions Co., Ltd. 3 4 13 9
Shanghai Fleetguard Filter Co., Ltd. 2 3 12 10
Cummins Westport, Inc. (1) 6 9 (1) 11
All other manufacturers (12 ) (1) 16   37   (1) 39
Cummins share of net income 43 55 308 260
Royalty and interest income 13   12   49   41
Equity, royalty and interest income from investees $ 56   $ 67   $ 357   $ 301
 

____________________________________

(1)   U.S. tax legislation passed in December 2017 decreased our equity earnings at certain equity investees, including a $7 million unfavorable impact to Cummins Westport, Inc. due to the remeasurement of deferred taxes and a $32 million unfavorable impact to "All other manufacturers" due to withholding tax adjustments on foreign earnings.

INCOME TAXES

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (Tax Legislation). Among other things, the Tax Legislation changed the U.S. statutory rate to 21 percent effective January 1, 2018. The impact of the Tax Legislation resulted in a net incremental charge to our Condensed Consolidated Statements of Income of $777 million. The components of the 2017 charge were as follows:

 
In millions

Impact of Tax
Legislation

Increase in income tax expense $ 781
Decrease in equity, royalty and other income from investees 39

Increase in income attributable to noncontrolling interests

(43 )
Net impact of Tax Legislation $ 777  
 

The $781 million increase in tax expense is composed of three elements - the remeasurement of deferred taxes, a one-time transitional tax on unrepatriated earnings and withholding taxes on foreign earnings.

We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21 percent. We are still analyzing certain aspects of the Tax Legislation and refining our calculations, which could potentially affect the measurement of these balances. The provisional amount related to the remeasurement of our deferred tax balance is an incremental tax expense of $152 million.

The one-time transition tax is based on our total post-1986 unrepatriated earnings and profits not previously subject to U.S. income tax. The recorded provisional amount for our one-time transition tax is a tax expense of $298 million.

Withholding tax is an additional cost associated with the distribution of earnings from some jurisdictions. As a result of the Tax Legislation, we reconsidered previous assertions regarding earnings that were considered permanently reinvested, which requires us to record withholding taxes on earnings likely to be distributed in the foreseeable future. The assertion as to which earnings are permanently reinvested for purposes of calculating withholding tax is provisional as we refine the underlying calculations of the amount of earnings subject to the tax and the rate at which it will be taxed. The recorded provisional amount for the withholding tax resulted in an incremental tax expense of $331 million.

Our unconsolidated equity investees were also unfavorably impacted by the new tax legislation by $39 million, due to $32 million of withholding taxes on foreign earnings and $7 million due to the remeasurement of deferred taxes. In addition, our noncontrolling interests included a $43 million credit related to the withholding taxes on foreign earnings.

Our income tax rates are generally less than the 35 percent U.S. statutory income tax rate, primarily because of lower taxes on foreign earnings and research tax credits. Our effective tax rate for 2017 was 151.8 percent and 58.0 percent for the fourth quarter and full year, respectively, compared to 22.0 percent and 24.6 percent for the fourth quarter and full year in 2016. Our 2017 effective tax rate excluding the Tax Legislation was 19.5 percent and 24.5 percent for the fourth quarter and full year, respectively.

We expect our 2018 effective tax rate to be 23 percent, excluding any discrete items (including adjustments to provisional estimates) that may arise.

CUMMINS INC. AND SUBSIDIARIES
FINANCIAL MEASURES THAT SUPPLEMENT GAAP
(Unaudited)

Condensed Consolidated Statements of Income excluding impacts of Tax Legislation

 
Cummins Inc. and Subsidiaries
Condensed Consolidated Statements of Income
 
Three months ended
December 31, 2017
In millions, except per share amounts

As
Reported
Under
GAAP

 

Excluding
Tax
Legislation
Impact

 

Adjusted
Excluding
Tax Impact

NET SALES $ 5,476 $ $ 5,476
Cost of sales 4,102     4,102
GROSS MARGIN 1,374 1,374
OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses 633 633
Research, development and engineering expenses 207 207
Equity, royalty and interest income from investees 56 39 95
Loss contingency 5 5
Other operating income (expense), net 10     10
OPERATING INCOME 595 39 634
Interest income 7 7
Interest expense 24 24
Other income, net 18     18
INCOME BEFORE INCOME TAXES 596 39 635
Income tax expense 905   (781 ) 124
CONSOLIDATED NET (LOSS) INCOME (309 ) 820 511
Less: Net (loss) income attributable to noncontrolling interests (35 ) 43   8
NET (LOSS) INCOME ATTRIBUTABLE TO CUMMINS INC. $ (274 ) $ 777   $ 503
 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
Basic $ (1.66 ) $ 4.70 $ 3.04
Diluted $ (1.65 ) $ 4.68 $ 3.03
 
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 165.4 165.4
Diluted 166.2 166.2
 
CASH DIVIDENDS DECLARED PER COMMON SHARE $ 1.08 $ $ 1.08
                       
 
Cummins Inc. and Subsidiaries
Condensed Consolidated Statements of Income
     
Year ended December 31,
2017
In millions, except per share amounts

As
Reported
Under
GAAP

Excluding
Tax
Legislation
Impact

Adjusted
Excluding
Tax Impact

NET SALES $ 20,428 $ $ 20,428
Cost of sales 15,338     15,338
GROSS MARGIN 5,090 5,090
OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses 2,390 2,390
Research, development and engineering expenses 752 752
Equity, royalty and interest income from investees 357 39 396
Loss contingency 5 5
Other operating income (expense), net 65     65
OPERATING INCOME 2,365 39 2,404
Interest income 18 18
Interest expense 81 81
Other income, net 63     63
INCOME BEFORE INCOME TAXES 2,365 39 2,404
Income tax expense 1,371   (781 ) 590
CONSOLIDATED NET INCOME 994 820 1,814
Less: Net (loss) income attributable to noncontrolling interests (5 ) 43   38
NET INCOME ATTRIBUTABLE TO CUMMINS INC. $ 999   $ 777   $ 1,776
 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
Basic $ 5.99 $ 4.66 $ 10.65
Diluted $ 5.97 $ 4.65 $ 10.62
 
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 166.6 166.6
Diluted 167.3 167.3
 
CASH DIVIDENDS DECLARED PER COMMON SHARE $ 4.21 $ $ 4.21
                       

Reconciliation of Non GAAP measures - Earnings before interest, income taxes and noncontrolling interests

We define EBIT as earnings before interest expense, income tax expense and noncontrolling interests in income of consolidated subsidiaries. We use EBIT to assess and measure the performance of our operating segments and also as a component in measuring our variable compensation programs. This measure is not in accordance with, or an alternative for, accounting principles generally accepted in the United States and may not be consistent with measures used by other companies. It should be considered supplemental data. Below is a reconciliation of “Net income attributable to Cummins Inc.” to EBIT for each of the applicable periods:

   
Three months ended Years ended
In millions

December 31,
2017

 

December 31,
2016

December 31,
2017

 

December 31,
2016

Net (loss) income attributable to Cummins Inc. $ (274 ) $ 378 $ 999 $ 1,394
 
Net (loss) income attributable to Cummins Inc. as a percentage of net sales (5.0 )% 8.4 % 4.9 % 8.0 %
 
Add
Net (loss) income attributable to noncontrolling interests (35 ) 18   (5 ) 62  
Consolidated net (loss) income (309 ) 396   994   1,456  
 
Add
Interest expense 24 18 81 69
Income tax expense 905   112   1,371   474  
EBIT 620   526   2,446   1,999  
 
EBIT as a percentage of net sales 11.3 % 11.7 % 12.0 % 11.4 %
 
Impact of tax legislation on equity investees 39     39    
 
EBIT, excluding impact of tax legislation on equity investees $ 659   $

526

  $ 2,485   $ 1,999  
 
EBIT, excluding impact of tax legislation on equity investees, as a percentage of net sales 12.0 % 11.7 % 12.2 % 11.4 %
 

Reconciliation of Non GAAP measures - Earnings before interest, income taxes, noncontrolling interests, depreciation and amortization

We define EBITDA as earnings before interest expense, income tax expense, noncontrolling interests, depreciation and amortization in income of consolidated subsidiaries. We will use EBITDA to assess and measure the performance of our operating segments and also as a component in measuring our variable compensation programs beginning January 1, 2018. This measure is not in accordance with, or an alternative for, accounting principles generally accepted in the United States and may not be consistent with measures used by other companies. It should be considered supplemental data. Below is a reconciliation of “Net income attributable to Cummins Inc.” to EBITDA for each of the applicable periods:

   
Three months ended Years ended
In millions

December 31,
2017

 

December 31,
2016

December 31,
2017

 

December 31,
2016

Net (loss) income attributable to Cummins Inc. $ (274 ) $ 378 $ 999 $ 1,394
 
Net (loss) income attributable to Cummins Inc. as a percentage of net sales (5.0 )% 8.4 % 4.9 % 8.0 %
 
Add
Net (loss) income attributable to noncontrolling interests (35 ) 18   (5 ) 62  
Consolidated net (loss) income (309 ) 396   994   1,456  
 
Add
Interest expense 24 18 81 69
Income tax expense 905   112   1,371   474  
EBIT 620   526   2,446   1,999  
 
Add
Depreciation and amortization 149   138   580   527  
EBITDA 769   664   3,026   2,526  
 
EBITDA as a percentage of net sales 14.0 % 14.7 % 14.8 % 14.4 %
 
Impact of tax legislation on equity investees 39     39    
 
EBITDA, excluding impact of tax legislation on equity investees $ 730   $ 664   $ 3,065   $ 2,526  
 
EBITDA, excluding tax legislation impact on equity investees, as a percentage of net sales 13.3 % 14.7 % 15.0 % 14.4 %
 

CUMMINS INC. AND SUBSIDIARIES
BUSINESS UNIT SALES DATA
(Unaudited)

Engine Segment Sales by Market and Unit Shipments by Engine Classification

Sales for our Engine segment by market were as follows:

         
2017
In millions Q1 Q2 Q3 Q4 YTD
Heavy-duty truck $ 620 $ 714 $ 776 $ 730 $ 2,840
Medium-duty truck and bus 544 701 625 643 2,513
Light-duty automotive 423 429 452 423 1,727
Off-highway 436   463   483   491   1,873
Total sales $ 2,023   $ 2,307   $ 2,336   $ 2,287   $ 8,953
 
2016
In millions Q1 Q2 Q3 Q4 YTD
Heavy-duty truck $ 631 $ 622 $ 625 $ 565 $ 2,443
Medium-duty truck and bus 549 600 517 606 2,272
Light-duty automotive 433 394 345 409 1,581
Off-highway 363   386   372   387   1,508
Total sales $ 1,976   $ 2,002   $ 1,859   $ 1,967   $ 7,804
 

Unit shipments by engine classification (including unit shipments to Power Systems and off-highway engine units included in their respective classification) were as follows:

         
2017
Units Q1 Q2 Q3 Q4 YTD
Heavy-duty 19,200 24,100 28,100 24,500 95,900
Medium-duty 60,300 71,600 68,500 67,700 268,100
Light-duty 63,100   65,600   66,300   62,500   257,500
Total units 142,600   161,300   162,900   154,700   621,500
 
2016
Units Q1 Q2 Q3 Q4 YTD
Heavy-duty 19,700 20,700 20,100 18,500 79,000
Medium-duty 55,400 62,300 53,400 58,000 229,100
Light-duty 61,700   57,100   49,800   60,000   228,600
Total units 136,800   140,100   123,300   136,500   536,700
 

Distribution Segment Sales by Product Line

Sales for our Distribution segment by product line were as follows:

         
2017
In millions Q1 Q2 Q3 Q4 YTD
Parts $ 745 $ 759 $ 768 $ 768 $ 3,040
Service 319 320 326 347 1,312
Power generation 306 329 317 385 1,337
Engines 275   314   342   438   1,369
Total sales $ 1,645   $ 1,722   $ 1,753   $ 1,938   $ 7,058
 
2016
In millions Q1 Q2 Q3 Q4 YTD
Parts $ 648 $ 642 $ 643 $ 694 $ 2,627
Service 299 297 299 320 1,215
Power generation 275 326 291 347 1,239
Engines 241   279   271   309   1,100
Total sales $ 1,463   $ 1,544   $ 1,504   $ 1,670   $ 6,181
 

Component Segment Sales by Business

In the first quarter of 2017, our Components segment reorganized its reporting structure to move our electronics business out of the emission solutions business and into the fuel systems business to enhance operational, administrative and product development efficiencies. Prior year sales were reclassified to conform with this change. We renamed our fuel systems business to electronics and fuel systems.

In the third quarter of 2017, we formed the Eaton Cummins Automated Transmission Technologies joint venture (ECJV), which was consolidated and included in our Components segment as the automated transmissions business.

Sales for our Components segment by product line were as follows:

         
2017
In millions Q1 Q2 Q3 Q4 YTD
Emission solutions $ 616 $ 674 $ 696 $ 689 $ 2,675
Turbo technologies 287 307 297 288 1,179
Filtration 277 291 287 298 1,153
Electronics and fuel systems 164 182 184 188 718
Automated transmissions     69   95   164
Total sales $ 1,344   $ 1,454   $ 1,533   $ 1,558   $ 5,889
 
2016
In millions Q1 Q2 Q3 Q4 YTD
Emission solutions $ 589 $ 603 $ 522 $ 524 $ 2,238
Turbo technologies 265 276 241 254 1,036
Filtration 252 262 244 252 1,010
Electronics and fuel systems 131   138   136   147   552
Total sales $ 1,237   $ 1,279   $ 1,143   $ 1,177   $ 4,836
 
2015
In millions YTD
Emission solutions $ 2,449
Turbo technologies 1,141
Filtration 1,010
Electronics and fuel systems 572  
Total sales $ 5,172  
 

Power Systems Segment Sales by Product Line and Unit Shipments by Engine Classification

In the first quarter of 2017, our Power Systems segment reorganized its product lines to better reflect how the segment is managed. Prior year sales were reclassified to reflect these changes.

Sales for our Power Systems segment by product line were as follows:

         
2017
In millions Q1 Q2 Q3 Q4 YTD
Power generation $ 526 $ 570 $ 580 $ 629 $ 2,305
Industrial 275 353 385 386 1,399
Generator technologies 81   94   91   88   354
Total sales $ 882   $ 1,017   $ 1,056   $ 1,103   $ 4,058
 
2016
In millions Q1 Q2 Q3 Q4 YTD
Power generation $ 518 $ 602 $ 543 $ 593 $ 2,256
Industrial 215 236 235 255 941
Generator technologies 75   83   78   84   320
Total sales $ 808   $ 921   $ 856   $ 932   $ 3,517
 
2015
In millions YTD
Power generation $ 2,588
Industrial 1,121
Generator technologies 358  
Total sales $ 4,067  
 

High-horsepower unit shipments by engine classification were as follows:

         
2017
Units Q1 Q2 Q3 Q4 YTD
Power generation 1,900 2,100 2,200 2,000 8,200
Industrial 1,300   1,700   1,600   1,800   6,400
Total units 3,200   3,800   3,800   3,800   14,600
 
2016
Units Q1 Q2 Q3 Q4 YTD
Power generation 1,800 2,200 2,000 1,900 7,900
Industrial 1,000   1,100   1,000   1,300   4,400
Total units 2,800   3,300   3,000   3,200   12,300
 

Source: Cummins Inc.

Cummins Inc.
Carole Casto, 317-610-2480
Vice President - Marketing and Communications
carole.casto@cummins.com

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