Annual report pursuant to Section 13 and 15(d)


12 Months Ended
Dec. 31, 2017
Commitments and Contingencies Disclosure [Abstract]  
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.
Loss Contingencies
Third Party Aftertreatment
Engine systems sold in the U.S. must be certified to comply with the Environmental Protection Agency (EPA) and California Air Resources Board (CARB) emission standards. EPA and CARB regulations require that in-use testing be performed on vehicles by the emission certificate holder and reported to the EPA and CARB in order to ensure ongoing compliance with these emission standards. We are the holder of this emission certificate for our engines, including engines installed in certain vehicles with one customer for which we did not also manufacture or sell the emission aftertreatment system. During 2015, a quality issue in certain of these third party aftertreatment systems caused some of our inter-related engines to fail in-use emission testing. In the fourth quarter of 2015, the vehicle manufacturer made a request that we assist in the design and bear the financial cost of a field campaign (Campaign) to address the technical issue purportedly causing some vehicles to fail the in-use testing.
As the certificate holder, we recorded a charge of $60 million in 2015 for the expected cost of the proposed voluntary Campaign. The Campaign design was finalized with our original equipment manufacturer (OEM) customer, reviewed with the EPA and submitted for final approval in 2016. We concluded based upon additional in-use emission testing performed in 2016 that the Campaign should be expanded to include a larger population of vehicles manufactured by this one OEM. We recorded additional charges of $138 million in 2016 to reflect the estimated cost of our overall participation in the Campaign.
In late 2016, litigation arose with our OEM customer regarding cost allocation for this Campaign. In January 2018, a settlement was reached with our customer to fully resolve this matter, which resulted in an incremental charge of $5 million recorded in the fourth quarter of 2017.
These charges are reflected in a separate line item on our Consolidated Statements of Income.
Engine System
During 2017, the CARB and U.S. EPA selected certain of our pre-2013 model year engine systems for additional emissions testing. Some of these engine systems failed CARB and EPA's tests as a result of degradation of an aftertreatment component. We have not been issued an official notice from the CARB or EPA regarding these particular engine systems. We are working with the agencies and will meet with them beginning in the first quarter of 2018, to develop a resolution of these matters. We are developing and testing a variety of solutions to address the technical issues, which could include a combination of calibration changes, service practices and hardware changes. We recorded a charge of $29 million to "cost of sales" in our Consolidated Statements of Income in the third quarter of 2017 for the expected cost of field campaigns to repair some of these engine systems.
In addition, we continue to evaluate other engine systems for model years 2010 through 2015 that could potentially be subject to similar aftertreatment component degradation issues.  At the close of 2017, we had not yet determined the impact to other model years or engine systems or the percentage of the engine system populations that could be affected.
Since there are many unresolved variables with respect to these degradation issues, we are not yet able to estimate the financial impact of these matters. It is possible that they could have a material impact on our results of operations in the periods in which these degradation issues are resolved and a solution is determined.
We do not currently expect any fines or penalties from the EPA or CARB related to this matter.
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 December 31, 2017, the maximum potential loss related to these guarantees was $51 million.
We have arrangements with certain suppliers that require us to purchase minimum volumes or be subject to monetary penalties. At December 31, 2017, if we were to stop purchasing from each of these suppliers, the aggregate amount of the penalty would be approximately $84 million, of which $23 million relates to a contract with a components supplier that extends to 2018 and $19 million relates to a contract with a power systems supplier that extends to 2019. 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 December 31, 2017, the total commitments under these contracts were $17 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 $102 million at December 31, 2017.
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.
We lease certain manufacturing equipment, facilities, warehouses, office space and equipment, aircraft and automobiles for varying periods under lease agreements. Most of the leases are non-cancelable operating leases with fixed rental payments, expire over the next 10 years and contain renewal provisions. Rent expense under these leases was as follows:
Years ended December 31,
In millions
Rent expense



The following is a summary of the leased property under capital leases by major classes:
December 31,
In millions






Less: Accumulated depreciation


Following is a summary of the future minimum lease payments due under capital and operating leases with terms of more than one year at December 31, 2017, together with the net present value of the minimum payments due under capital leases:
In millions
Capital Leases
Operating Leases










After 2022


Total minimum lease payments



Present value of net minimum lease payments