Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 

cumminsca06.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 April 2, 2017
 
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 April 2, 2017, there were 167,975,197 shares of common stock outstanding with a par value of $2.50 per share.
 
Website Access to Company’s Reports
 
Cummins maintains an internet website at www.cummins.com.  Investors can obtain copies of our filings from this website free of charge as soon as reasonably practicable after they are electronically filed with, or furnished, to the Securities and Exchange Commission. Cummins is not including the information provided on the website as part of, or incorporating such information by reference into, this Quarterly Report on Form 10-Q.
 


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 months ended April 2, 2017 and April 3, 2016
 
Condensed Consolidated Statements of Comprehensive Income for the three months ended April 2, 2017 and April 3, 2016
 
Condensed Consolidated Balance Sheets at April 2, 2017 and December 31, 2016
 
Condensed Consolidated Statements of Cash Flows for the three months ended April 2, 2017 and April 3, 2016
 
Condensed Consolidated Statements of Changes in Equity for the three months ended April 2, 2017 and April 3, 2016
 
 
 
 
 

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PART I.  FINANCIAL INFORMATION 
ITEM 1.  Condensed Consolidated Financial Statements 
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
Three months ended
In millions, except per share amounts 
 
April 2,
2017
 
April 3,
2016
NET SALES (a)
 
$
4,589

 
$
4,291

Cost of sales
 
3,461

 
3,235

GROSS MARGIN
 
1,128

 
1,056

OPERATING EXPENSES AND INCOME
 
 

 
 

Selling, general and administrative expenses
 
537

 
490

Research, development and engineering expenses
 
158

 
166

Equity, royalty and interest income from investees (Note 4)
 
108

 
72

Other operating income (expense), net
 
5

 
(2
)
OPERATING INCOME
 
546

 
470

Interest income
 
2

 
6

Interest expense (Note 7)
 
18

 
19

Other income (expense), net
 
18

 
8

INCOME BEFORE INCOME TAXES
 
548

 
465

Income tax expense
 
143

 
132

CONSOLIDATED NET INCOME
 
405

 
333

Less: Net income attributable to noncontrolling interests
 
9

 
12

NET INCOME ATTRIBUTABLE TO CUMMINS INC.
 
$
396

 
$
321

 
 
 
 
 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
 
 

 
 

Basic
 
$
2.36

 
$
1.87

Diluted
 
$
2.36

 
$
1.87

 
 
 
 
 
WEIGHTED AVERAGE SHARES OUTSTANDING
 
 

 
 

Basic
 
167.5

 
171.8

Dilutive effect of stock compensation awards
 
0.5

 
0.2

Diluted
 
168.0

 
172.0

 
 
 
 
 
CASH DIVIDENDS DECLARED PER COMMON SHARE
 
$
1.025

 
$
0.975

____________________________________
(a) Includes sales to nonconsolidated equity investees of $267 million and $242 million for the three months ended April 2, 2017 and April 3, 2016, respectively.
 
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

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CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
 
Three months ended
In millions 
 
April 2,
2017
 
April 3,
2016
CONSOLIDATED NET INCOME
 
$
405

 
$
333

Other comprehensive income (loss), net of tax (Note 10)
 
 

 
 

Foreign currency translation adjustments
 
80

 
(57
)
Unrealized gain (loss) on derivatives
 
1

 
(21
)
Change in pension and other postretirement defined benefit plans
 
21

 
9

Total other comprehensive income (loss), net of tax
 
102

 
(69
)
COMPREHENSIVE INCOME
 
507

 
264

Less: Comprehensive income attributable to noncontrolling interests
 
22

 
12

COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC.
 
$
485

 
$
252

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

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CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
In millions, except par value
 
April 2,
2017
 
December 31,
2016
ASSETS
 
 

 
 

Current assets
 
 

 
 

Cash and cash equivalents
 
$
1,322

 
$
1,120

Marketable securities (Note 5)
 
145

 
260

Total cash, cash equivalents and marketable securities
 
1,467

 
1,380

Accounts and notes receivable, net
 
 
 
 
Trade and other
 
2,980

 
2,803

Nonconsolidated equity investees
 
267

 
222

Inventories (Note 6)
 
2,894

 
2,675

Prepaid expenses and other current assets
 
551

 
627

Total current assets
 
8,159

 
7,707

Long-term assets
 
 

 
 

Property, plant and equipment
 
7,746

 
7,635

Accumulated depreciation
 
(3,944
)
 
(3,835
)
Property, plant and equipment, net
 
3,802

 
3,800

Investments and advances related to equity method investees
 
1,059

 
946

Goodwill
 
482

 
480

Other intangible assets, net
 
345

 
332

Pension assets
 
785

 
731

Other assets
 
1,002

 
1,015

Total assets
 
$
15,634

 
$
15,011

 
 
 
 
 
LIABILITIES
 
 

 
 

Current liabilities
 
 

 
 

Accounts payable (principally trade)
 
$
2,168

 
$
1,854

Loans payable (Note 7)
 
48

 
41

Commercial paper (Note 7)
 
274

 
212

Accrued compensation, benefits and retirement costs
 
334

 
412

Current portion of accrued product warranty (Note 8)
 
352

 
333

Current portion of deferred revenue
 
498

 
468

Other accrued expenses
 
941

 
970

Current maturities of long-term debt (Note 7)
 
47

 
35

Total current liabilities
 
4,662

 
4,325

Long-term liabilities
 
 

 
 

Long-term debt (Note 7)
 
1,576

 
1,568

Postretirement benefits other than pensions
 
317

 
329

Pensions
 
325

 
326

Other liabilities and deferred revenue
 
1,278

 
1,289

Total liabilities
 
$
8,158

 
$
7,837

 
 
 
 
 
Commitments and contingencies (Note 9)
 


 


 
 
 

 
 

EQUITY
 
 
 
 
Cummins Inc. shareholders’ equity
 
 

 
 

Common stock, $2.50 par value, 500 shares authorized, 222.3 and 222.4 shares issued
 
$
2,163

 
$
2,153

Retained earnings
 
11,265

 
11,040

Treasury stock, at cost, 54.4 and 54.2 shares
 
(4,524
)
 
(4,489
)
Common stock held by employee benefits trust, at cost, 0.6 and 0.7 shares
 
(7
)
 
(8
)
Accumulated other comprehensive loss (Note 10)
 
(1,732
)
 
(1,821
)
Total Cummins Inc. shareholders’ equity
 
7,165

 
6,875

Noncontrolling interests
 
311

 
299

Total equity
 
$
7,476

 
$
7,174

Total liabilities and equity
 
$
15,634

 
$
15,011


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

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CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Three months ended
In millions
 
April 2,
2017
 
April 3,
2016
CASH FLOWS FROM OPERATING ACTIVITIES
 
 

 
 

Consolidated net income
 
$
405

 
$
333

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

 
 

Depreciation and amortization
 
139

 
128

Deferred income taxes
 
10

 
(2
)
Equity in income of investees, net of dividends (Note 4)
 
(83
)
 
(48
)
Pension contributions in excess of expense (Note 3)
 
(23
)
 
(50
)
Other post-retirement benefits payments in excess of expense (Note 3)
 
(10
)
 
(8
)
Stock-based compensation expense
 
7

 
5

Restructuring charges and other actions, net of cash payments
 

 
(25
)
Translation and hedging activities
 
11

 
(14
)
Changes in current assets and liabilities, net of acquisitions
 
 
 
 

Accounts and notes receivable
 
(205
)
 
(98
)
Inventories
 
(202
)
 
(54
)
Other current assets
 
73

 
188

Accounts payable
 
296

 
107

Accrued expenses
 
(90
)
 
(283
)
Changes in other liabilities and deferred revenue
 
48

 
78

Other, net
 
3

 
10

Net cash provided by operating activities
 
379

 
267

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 

 
 

Capital expenditures
 
(81
)
 
(71
)
Investments in internal use software
 
(27
)
 
(13
)
Investments in and advances to equity investees
 
(20
)
 
(25
)
Investments in marketable securities—acquisitions (Note 5)
 
(26
)
 
(291
)
Investments in marketable securities—liquidations (Note 5)
 
147

 
35

Cash flows from derivatives not designated as hedges
 
(24
)
 
(26
)
Other, net
 
4

 
3

Net cash used in investing activities
 
(27
)
 
(388
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 

 
 

Proceeds from borrowings
 

 
105

Net borrowings of commercial paper (Note 7)
 
62

 
50

Payments on borrowings and capital lease obligations
 
(11
)
 
(15
)
Distributions to noncontrolling interests
 
(10
)
 
(10
)
Dividend payments on common stock
 
(171
)
 
(170
)
Repurchases of common stock (Note 2)
 
(51
)
 
(575
)
Other, net
 
17

 
(21
)
Net cash used in financing activities
 
(164
)
 
(636
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
 
14

 
(39
)
Net increase (decrease) in cash and cash equivalents
 
202

 
(796
)
Cash and cash equivalents at beginning of year
 
1,120

 
1,711

CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
1,322

 
$
915


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

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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, 2015
$
556

 
$
1,622

 
$
10,322

 
$
(3,735
)
 
$
(11
)
 
$
(1,348
)
 
$
7,406

 
$
344

 
$
7,750

Net income


 


 
321

 


 


 


 
321

 
12

 
333

Other comprehensive income (loss), net of tax (Note 10)


 


 


 


 


 
(69
)
 
(69
)
 

 
(69
)
Issuance of common stock


 
2

 


 


 


 


 
2

 

 
2

Employee benefits trust activity


 
9

 


 


 
2

 


 
11

 

 
11

Repurchases of common stock (Note 2)


 
(100
)
 


 
(475
)
 


 


 
(575
)
 

 
(575
)
Cash dividends on common stock


 


 
(170
)
 


 


 


 
(170
)
 

 
(170
)
Distributions to noncontrolling interests


 


 


 


 


 


 

 
(10
)
 
(10
)
Stock based awards


 
(6
)
 


 
7

 


 


 
1

 

 
1

Acquisition of noncontrolling interests
 
 
(7
)
 
 
 
 
 
 
 
 
 
(7
)
 
(6
)
 
(13
)
BALANCE AT APRIL 3, 2016
$
556

 
$
1,520

 
$
10,473

 
$
(4,203
)
 
$
(9
)
 
$
(1,417
)
 
$
6,920

 
$
340

 
$
7,260

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE AT DECEMBER 31, 2016
$
556

 
$
1,597

 
$
11,040

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

 
$
299

 
$
7,174

Net income


 


 
396

 


 


 


 
396

 
9

 
405

Other comprehensive income (loss), net of tax (Note 10)


 


 


 


 


 
89

 
89

 
13

 
102

Employee benefits trust activity


 
9

 


 


 
1

 


 
10

 

 
10

Repurchases of common stock


 


 


 
(51
)
 


 


 
(51
)
 

 
(51
)
Cash dividends on common stock


 


 
(171
)
 


 


 


 
(171
)
 

 
(171
)
Distributions to noncontrolling interests


 


 


 


 


 


 

 
(10
)
 
(10
)
Stock based awards


 
(1
)
 


 
16

 


 


 
15

 

 
15

Other shareholder transactions


 
2

 


 


 


 


 
2

 

 
2

BALANCE AT APRIL 2, 2017
$
556

 
$
1,607

 
$
11,265

 
$
(4,524
)
 
$
(7
)
 
$
(1,732
)
 
$
7,165

 
$
311

 
$
7,476

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

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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, as one of the first diesel engine manufacturers. We changed our name to Cummins Inc. in 2001. We are a global power leader that designs, manufactures, distributes and services diesel and natural gas engines and engine-related component products, including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems and electric power generation systems. We sell our products to original equipment manufacturers (OEMs), distributors and other customers worldwide. We serve our customers through a network of approximately 600 wholly-owned and independent distributor locations and over 7,400 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 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, 2016. Our interim period financial results for the three 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 first quarters of 2017 and 2016 ended on April 2 and April 3, respectively. Our fiscal year ends on December 31, regardless of the day of the week on which December 31 falls.
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:

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Table of Contents

 
 
Three months ended
 
April 2,
2017
 
April 3,
2016
Options excluded
116,535

 
1,687,666

Accelerated Share Repurchase
On February 9, 2016, we entered into an accelerated share repurchase (ASR) agreement with a third party financial institution to repurchase $500 million of our common stock under our previously announced share repurchase plans. Pursuant to the terms of the agreement, we paid the full $500 million purchase price and received approximately 4.1 million shares at a price of $98.43 per share, representing approximately 80 percent of the shares expected to be repurchased. The unsettled portion of the ASR met the criteria to be accounted for as a forward contract indexed to our stock and qualified as an equity transaction. This resulted in a $100 million reduction to additional paid-in capital during the first quarter of 2016. The initial delivery of shares resulted in a reduction to our common stock outstanding used to calculate earnings per share in the first quarter of 2016.
NOTE 3. 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
In millions
 
April 2,
2017
 
April 3,
2016
Defined benefit pension plans
 
 

 
 

Voluntary contribution
 
$
43

 
$
48

Mandatory contribution
 

 
12

Defined benefit pension contributions
 
$
43

 
$
60

 
 
 
 
 
Other postretirement plans
 
$
15

 
$
13

 
 
 
 
 
Defined contribution pension plans
 
$
29

 
$
21

We anticipate making additional defined benefit pension contributions during the remainder of 2017 of $91 million for our U.S. and U.K pension plans. Approximately $133 million of the estimated $134 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 2017 net periodic pension cost to approximate $83 million.
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
 
April 2,
2017
 
April 3,
2016
 
April 2,
2017
 
April 3,
2016
 
April 2,
2017
 
April 3,
2016
Service cost
 
$
27

 
$
23

 
$
6

 
$
5

 
$

 
$

Interest cost
 
26

 
28

 
10

 
13

 
3

 
4

Expected return on plan assets
 
(51
)
 
(51
)
 
(17
)
 
(19
)
 

 

Recognized net actuarial loss
 
9

 
7

 
10

 
4

 
2

 
1

Net periodic benefit cost
 
$
11

 
$
7

 
$
9

 
$
3

 
$
5

 
$
5

 
 
 
 
 
 
 
 
 
 
 
 
 

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NOTE 4. 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
In millions
 
April 2,
2017
 
April 3,
2016
Distribution entities
 
 
 
 
Komatsu Cummins Chile, Ltda.
 
$
7

 
$
10

North American distributors
 

 
5

Manufacturing entities
 
 
 
 
Beijing Foton Cummins Engine Co., Ltd.
 
33

 
18

Dongfeng Cummins Engine Company, Ltd.
 
22

 
7

Chongqing Cummins Engine Company, Ltd.
 
9

 
8

All other manufacturers
 
24

 
16

Cummins share of net income
 
95

 
64

Royalty and interest income
 
13

 
8

Equity, royalty and interest income from investees
 
$
108

 
$
72

NOTE 5. MARKETABLE SECURITIES
A summary of marketable securities, all of which are classified as current, was as follows:
 
 
 
April 2, 2017
 
December 31, 2016
In millions
 
Cost
 
Gross unrealized
gains/(losses)
 
Estimated
fair value
 
Cost
 
Gross unrealized
gains/(losses)
 
Estimated
fair value
Available-for-sale (1)
 
 

 
 

 
 

 
 

 
 

 
 

Debt mutual funds
 
$
130

 
$

 
$
130

 
$
132

 
$

 
$
132

Bank debentures
 

 

 

 
114

 

 
114

Equity mutual funds
 
12

 
1

 
13

 
12

 

 
12

Government debt securities
 
2

 

 
2

 
2

 

 
2

Total marketable securities
 
$
144

 
$
1

 
$
145

 
$
260

 
$

 
$
260

____________________________________
(1) 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 three months of 2017 and for the year ended 2016.
A description of the valuation techniques and inputs used for our Level 2 fair value measures was 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.
Bank debentures— 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 institutions’ 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.
Government 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.

10


The proceeds from sales and maturities of marketable securities and gross realized gains and losses from the sale of available-for-sale securities were as follows:
 
 
Three months ended
In millions
 
April 2,
2017
 
April 3,
2016
Proceeds from sales and maturities of marketable securities (1)
 
$
147

 
$
35

____________________________________
(1) Gross realized gains and losses from the sale of available-for-sale securities were immaterial.
The fair value of available-for-sale investments in debt securities that utilize a Level 2 fair value measure is shown by contractual maturity below:
 
Contractual Maturity (In millions)
 
April 2,
2017
1 year or less
 
$
131

5 - 10 years
 
1

Total
 
$
132

NOTE 6. INVENTORIES
Inventories are stated at the lower of cost or market. Inventories included the following:
 
In millions
 
April 2,
2017
 
December 31,
2016
Finished products
 
$
1,867

 
$
1,779

Work-in-process and raw materials
 
1,145

 
1,005

Inventories at FIFO cost
 
3,012

 
2,784

Excess of FIFO over LIFO
 
(118
)
 
(109
)
Total inventories
 
$
2,894

 
$
2,675

NOTE 7. DEBT
Loans Payable and Commercial Paper
Loans payable, commercial paper and the related weighted-average interest rates were as follows:
In millions
 
April 2, 2017
 
December 31, 2016
Loans payable (1)
 
$
48

 
$
41

Commercial paper (2)
 
274

 
212

____________________________________
(1) Loans payable consist primarily of notes payable to various domestic and international financial institutions. It is not practical to aggregate these notes and calculate a quarterly weighted-average interest rate.
(2) The weighted average interest rate, inclusive of all brokerage fees, was 0.94 percent and 0.79 percent at April 2, 2017 and December 31, 2016, respectively.

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Long-term Debt
A summary of long-term debt was as follows:
 
In millions
 
April 2,
2017
 
December 31,
2016
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
 
69

 
51

Unamortized discount
 
(55
)
 
(56
)
Fair value adjustments due to hedge on indebtedness
 
43

 
47

Capital leases
 
93

 
88

Total long-term debt
 
1,623

 
1,603

Less: Current maturities of long-term debt
 
47

 
35

Long-term debt
 
$
1,576

 
$
1,568

Principal payments required on long-term debt during the next five years are as follows:
In millions
 
2017
 
2018
 
2019
 
2020
 
2021
Principal payments
 
$
34

 
$
45

 
$
35

 
$
10

 
$
4

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 value and carrying value of total debt, including current maturities, were as follows:
 
In millions
 
April 2,
2017
 
December 31,
2016
Fair value of total debt (1)
 
$
2,150

 
$
2,077

Carrying value of total debt
 
1,945

 
1,856

_________________________________________________
(1) The fair value of debt is derived from Level 2 inputs.
NOTE 8. 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 
 
April 2,
2017
 
April 3,
2016
Balance, beginning of year
 
$
1,414

 
$
1,404

Provision for warranties issued
 
92

 
93

Deferred revenue on extended warranty contracts sold
 
48

 
55

Payments
 
(95
)
 
(102
)
Amortization of deferred revenue on extended warranty contracts
 
(54
)
 
(47
)
Changes in estimates for pre-existing warranties
 
34

 

Foreign currency translation
 
(2
)
 

Balance, end of period
 
$
1,437

 
$
1,403


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Warranty related deferred revenue and the long-term portion of the warranty liability on our April 2, 2017, balance sheet were as follows:
In millions
 
April 2,
2017
 
Balance Sheet Location
Deferred revenue related to extended coverage programs
 
 

 
 
Current portion
 
$
224

 
Current portion of deferred revenue
Long-term portion
 
515

 
Other liabilities and deferred revenue
Total
 
$
739

 
 
 
 
 
 
 
Long-term portion of warranty liability
 
$
346

 
Other liabilities and deferred revenue
NOTE 9. 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.
Loss Contingency Charges
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 on 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.
While we are not responsible for the warranty issues related to a component that we did not manufacture or sell, as the emission compliance certificate holder, we are responsible for proposing a remedy to the EPA and CARB. As a result, we have proposed actions to the agencies that we believe will address the emission failures. As the certificate holder, we expect to participate in the cost of the proposed voluntary Campaign and recorded a charge of $60 million in 2015. The Campaign design was finalized with our 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 participation in the Campaign. We continue to work with our OEM customer to resolve the allocation of costs for the Campaign, including pending litigation between the parties. The Campaign is not expected to be completed for some time and our final cost could differ from the amount we have recorded.
We do not currently expect any fines or penalties from the EPA or CARB related to this matter.

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The Campaign began in the fourth quarter of 2016. The remaining accrual of $181 million is included in ''Other accrued expenses'' in our Condensed Consolidated Balance Sheets.
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 April 2, 2017, the maximum potential loss related to these guarantees was $43 million.
We have arrangements with certain suppliers that require us to purchase minimum volumes or be subject to monetary penalties. At April 2, 2017, if we were to stop purchasing from each of these suppliers, the aggregate amount of the penalty would be approximately $119 million, of which $41 million relates to a contract with a components supplier that extends to 2018 and $35 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 April 2, 2017, the total commitments under these contracts were $24 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 $83 million at April 2, 2017.
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.

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NOTE 10. ACCUMULATED OTHER COMPREHENSIVE LOSS
Following are the changes in accumulated other comprehensive income (loss) by component:
 
 
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 other comprehensive income (loss)
Balance at December 31, 2015
 
$
(654
)
 
$
(696
)
 
$
(2
)
 
$
4

 
$
(1,348
)
 
 

 
 

Other comprehensive income before reclassifications
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Before tax amount
 

 
(58
)
 

 
(26
)
 
(84
)
 
$

 
$
(84
)
Tax benefit (expense)
 

 
1

 

 
4

 
5

 

 
5

After tax amount
 

 
(57
)
 

 
(22
)
 
(79
)
 

 
(79
)
Amounts reclassified from accumulated other comprehensive loss(1)(2)
 
9

 

 

 
1

 
10

 

 
10

Net current period other comprehensive income (loss)
 
9

 
(57
)
 

 
(21
)
 
(69
)
 
$

 
$
(69
)
Balance at April 3, 2016
 
$
(645
)
 
$
(753
)
 
$
(2
)
 
$
(17
)
 
$
(1,417
)
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
 
$
(685
)
 
$
(1,127
)
 
$
(1
)
 
$
(8
)
 
$
(1,821
)
 
 

 
 

Other comprehensive income before reclassifications
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Before tax amount
 
8

 
75

 
1

 
(6
)
 
78

 
$
13

 
$
91

Tax benefit (expense)
 
(3
)
 
(8
)
 

 
2

 
(9
)
 

 
(9
)
After tax amount
 
5

 
67

 
1

 
(4
)
 
69

 
13

 
82

Amounts reclassified from accumulated other comprehensive loss(1)(2)
 
16

 

 
(1
)
 
5

 
20

 

 
20

Net current period other comprehensive income (loss)
 
21

 
67

 

 
1

 
89

 
$
13

 
$
102

Balance at April 2, 2017
 
$
(664
)
 
$
(1,060
)
 
$
(1
)
 
$
(7
)
 
$
(1,732
)
 
 

 
 

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


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NOTE 11. 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 Chief Operating Officer.
Our reportable operating segments consist of Engine, Distribution, Components and Power Systems. 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 and fuel systems. 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 use segment EBIT (defined as earnings before interest expense, income taxes and noncontrolling interests) as a primary basis for the CODM to evaluate the performance of each of our operating segments. 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 debt-related items, actuarial gains or losses, prior service costs or credits, changes in cash surrender value of corporate owned life insurance or income taxes to individual segments. Segment EBIT may not be consistent with measures used by other companies.
Summarized financial information regarding our reportable operating segments is shown in the table below:
In millions
 
Engine
 
Distribution
 
Components
 
Power Systems
 
Non-segment
Items (1)
 
Total
Three months ended April 2, 2017
 
 

 
 
 
 

 
 

 
 

 
 

External sales
 
$
1,457

 
$
1,637

 
$
980

 
$
515

 
$

 
$
4,589

Intersegment sales
 
566

 
8

 
364

 
367

 
(1,305
)
 

Total sales
 
2,023

 
1,645

 
1,344

 
882

 
(1,305
)
 
4,589

Depreciation and amortization (2)
 
44

 
30

 
37

 
28

 

 
139

Research, development and engineering expenses
 
54

 
4

 
50

 
50

 

 
158

Equity, royalty and interest income from investees
 
72

 
11

 
13

 
12

 

 
108

Interest income
 
1

 
1

 

 

 

 
2

Segment EBIT
 
229

 
100

 
179

 
57

 
1

 
566

 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended April 3, 2016 (3)
 
 
 
 
 
 
 
 
 
 
 
 
External sales
 
$
1,489

 
$
1,458

 
$
897

 
$
447

 
$

 
$
4,291

Intersegment sales
 
487

 
5

 
340

 
361

 
(1,193
)
 

Total sales
 
1,976

 
1,463

 
1,237

 
808

 
(1,193
)
 
4,291

Depreciation and amortization (2)
 
39

 
28

 
31

 
29

 

 
127

Research, development and engineering expenses
 
57

 
4

 
56

 
49

 

 
166

Equity, royalty and interest income from investees
 
36

 
18

 
8

 
10

 

 
72

Interest income
 
2

 
1

 
1

 
2

 

 
6

Segment EBIT
 
197

 
87

 
163

 
46

 
(9
)
 
484

____________________________________
(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 April 2, 2017 and April 3, 2016.

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(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 were less than $1 million and $1 million for the three months ended April 2, 2017 and April 3, 2016, respectively.
(3) In the second quarter of 2016, we realigned our reportable operating segments. The three months ended April 3, 2016, were revised retrospectively to conform with these changes.
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
In millions
 
April 2,
2017
 
April 3,
2016
Total segment EBIT
 
$
566

 
$
484

Less: Interest expense
 
18

 
19

Income before income taxes
 
$
548

 
$
465

NOTE 12. RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Accounting Pronouncements Recently Adopted
In March 2016, the Financial Accounting Standards Board (FASB) amended its standards related to the accounting for stock compensation which became effective for us beginning January 1, 2017. We adopted certain provisions prospectively in accordance with the standard, while others were required to be adopted retrospectively. The amendment replaced the requirement to record excess tax benefits and certain tax deficiencies in additional paid-in capital (APIC) with prospectively recording all excess tax benefits and tax deficiencies as income tax expense / benefit in the income statement. Excess tax benefits and deficiencies are required to be recorded as discrete items in the period in which they occur and were not material for three months ended April 2, 2017. In addition, the standard impacted our Condensed Consolidated Statements of Cash Flows, as excess tax benefits are now required to be presented as an operating activity (we elected a retrospective presentation) and the cash paid to tax authorities when shares are withheld to satisfy the employer's statutory income tax withholding obligation are required to be presented as a financing activity (requiring retrospective presentation). This resulted in a net reclassification of $4 million from operating to financing activities for the three months ended April 3, 2016. Finally, in accordance with the standard, we elected to continue our historical approach of estimating forfeitures during the award's vesting period and adjusting our estimate when it is no longer probable that the employee will fulfill the service condition. The adoption of the standard was not material to our diluted earnings per common share.
Accounting Pronouncements Issued But Not Yet Effective
In March 2017, the FASB amended its standards related to the presentation of pension and other postretirement benefit costs in the financial statements. Under the new standard, we will be 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 Consolidated Statements of Income. In addition, the standard will limit the amount eligible for capitalization (into inventory or self-constructed assets) to the amount of service cost. This portion of the standard will be applied on a prospective basis. The new standard is effective for us on a retrospective basis beginning January 1, 2018. While we are still evaluating the impact of this standard, the change in presentation will likely result in a decrease in operating income primarily due to the requirement to present the effects of expected return on plan assets outside of operating income.
In August 2016, the FASB amended its standards related to the classification of certain cash receipts and cash payments. The new standard will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case it would be required to apply the amendments prospectively as of the earliest date practicable. We are in the process of evaluating the impact this standard will have on our Consolidated Statements of Cash Flows.
In June 2016, the FASB amended its standards related to the 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

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adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are in the process of evaluating the impact the amendment will have 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. We are still evaluating the impact the standard could have on our Consolidated Financial Statements; however, 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.
In January 2016, the FASB amended its standards related to the accounting for certain financial instruments. This amendment addresses certain aspects of recognition, measurement, presentation and disclosure. The new rules will become effective for annual and interim periods beginning after December 15, 2017. Early adoption is not permitted. We are in the process of evaluating the impact the amendment will have on our Consolidated Financial Statements.
In May 2014, the FASB amended its standards related to revenue recognition. This amendment replaces all existing revenue recognition guidance and provides a single, comprehensive revenue recognition model for all contracts with customers. The standard contains principles that we will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that we will recognize revenue in a manner that depicts 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 estimates 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 and assets recognized from costs incurred to fulfill a contract. The standard allows either full or modified retrospective adoption effective for annual and interim periods beginning January 1, 2018. We are in the process of evaluating the impact the amendment will have on our Consolidated Financial Statements. We expect to adopt the standard using the modified retrospective approach. While we have not yet completed our evaluation process, we have identified that a change will be required related to our accounting for remanufactured product sales that include an exchange of the used product, referred to as core. Revenue is not currently recognized related to the core component unless the used product is not returned. Under the new standard, the transaction will be accounted for as a gross sale and a purchase of inventory. As a result the exchange will increase both sales and cost of sales, in equal amounts, related to core. This will not impact gross margin dollars, but will impact the gross margin percentage. We are still quantifying the amount of this change. We have also identified transactions where revenue recognition is currently limited to the amount of billings not contingent on our future performance. With the allocation provisions of the new model, we expect to accelerate the timing of revenue recognition for amounts related to satisfied performance obligations that would have been delayed under the current guidance. We do not expect the impact of this change to be material, but we are still quantifying the impact.
NOTE 13. SUBSEQUENT EVENT
On April 10, 2017, we entered into an agreement to form a joint venture with Eaton Corporation PLC, subject to regulatory approvals. We will purchase a 50 percent interest in the new venture named Eaton Cummins Automated Transmission Technologies, for approximately $600 million in cash. The joint venture will design, assemble, sell and support medium-duty and heavy-duty automated transmissions for the commercial vehicle market, including new product launches. We expect the transaction to close in the third quarter of 2017, at which time we will consolidate the results of the joint venture in our Components segment as we have a majority voting interest in the venture by virtue of a tie-breaking vote on the board of directors.

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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;
a major customer experiencing financial distress;
lower than expected acceptance of new or existing products or services;
any significant problems in our new engine platforms;
a further slowdown in infrastructure development and/or continuing depressed commodity prices;
unpredictability in the adoption, implementation and enforcement of emission standards around the world;
foreign currency exchange rate changes;
the actions of, and income from, joint ventures and other investees that we do not directly control;
the integration of our previously partially-owned United States and Canadian distributors;
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;
variability in material and commodity costs;
product recalls;
competitor activity;
increasing competition, including increased global competition among our customers in emerging markets; 
exposure to potential security breaches or other disruptions to our information technology systems and data security;
political, economic and other risks from operations in numerous countries;
changes in taxation;
global legal and ethical compliance costs and risks;
aligning our capacity and production with our demand;
product liability claims;
increasingly stringent environmental laws and regulations;
the price and availability of energy;
the performance of our pension plan assets and volatility of discount rates;
labor relations;

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changes in accounting standards;
future bans or limitations on the use of diesel-powered vehicles;
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 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.


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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 2016 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

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EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS
We are a global power leader that designs, manufactures, distributes and services diesel and natural gas engines and engine-related component products, including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems and electric power generation systems. We sell our products to original equipment manufacturers (OEMs), distributors and other customers worldwide. We have long-standing relationships with many of the leading manufacturers in the markets we serve, including PACCAR Inc, Daimler Trucks North America, Navistar International Corporation and Fiat Chrysler Automobiles. We serve our customers through a network of approximately 600 wholly-owned and independent distributor locations and over 7,400 dealer locations in more than 190 countries and territories.
Our reportable operating segments consist of Engine, Distribution, Components and Power Systems. 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 and fuel systems. 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.
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 revenues increased 7 percent in the three months ended April 2, 2017, as compared to the same period in 2016, primarily due to higher demand in most global industrial markets, increased demand in all Components businesses, organic sales growth in our Distribution segment and the consolidation of North American distributors since December 31, 2015, partially offset by unfavorable foreign currency fluctuations and decreased demand in most on-highway markets. International demand growth (excludes the U.S. and Canada) in the first quarter of 2017 improved revenues by 17 percent, with sales up in most of our markets, especially in China, India, Russia and the U.K. The increase in international sales was primarily due to increased demand in industrial markets (especially construction markets in China and mining markets in Eastern Europe) and increased demand in all Components businesses (especially in China), partially offset by unfavorable foreign currency impacts of 3 percent (primarily in the British pound and Chinese renminbi). Revenue in the U.S. and Canada improved by 1 percent primarily due to increased Distribution segment sales related to organic growth and the consolidation of North American distributors, partially offset by decreased demand in the North American on-highway markets.
The following tables contain sales and earnings before interest expense, income tax expense and noncontrolling interests (EBIT) by operating segment for the three months ended April 2, 2017 and April 3, 2016Refer to the section titled “OPERATING SEGMENT RESULTS” for a more detailed discussion of sales and EBIT by operating segment, including the reconciliation of segment EBIT to net income attributable to Cummins Inc.

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Three months ended
Operating Segments
 
April 2, 2017
 
April 3, 2016
 
Percent change
 
 
 
 
Percent
 
 
 
 
 
Percent
 
 
 
2017 vs. 2016
In millions
 
Sales
 
of Total
 
EBIT
 
Sales
 
of Total
 
EBIT
 
Sales
 
EBIT
Engine
 
$
2,023

 
44
 %
 
$
229

 
$
1,976

 
46
 %
 
$
197

 
2
%
 
16
%
Distribution
 
1,645

 
36
 %
 
100

 
1,463

 
34
 %
 
87

 
12
%
 
15
%
Components
 
1,344

 
29
 %
 
179

 
1,237

 
29
 %
 
163

 
9
%
 
10
%
Power Systems
 
882

 
19
 %
 
57

 
808

 
19
 %
 
46

 
9
%
 
24
%
Intersegment eliminations
 
(1,305
)
 
(28
)%
 

 
(1,193
)
 
(28
)%
 

 
9
%
 

Non-segment
 

 

 
1

 

 

 
(9
)
 

 
NM

Total
 
$
4,589

 
100
 %
 
$
566

 
$
4,291

 
100
 %
 
$
484

 
7
%
 
17
%
 
Net income attributable to Cummins was $396 million, or $2.36 per diluted share, on sales of $4.6 billion for the three months ended April 2, 2017, versus the comparable prior year period net income attributable to Cummins of $321 million, or $1.87 per diluted share, on sales of $4.3 billion. The increase in net income and earnings per diluted share was driven by higher gross margin, improved equity, royalty and interest income from investees and a lower effective tax rate, partially offset by increased selling, general and administrative expenses. The increase in gross margin was primarily due to higher volumes and favorable pricing, partially offset by higher warranty costs of $34 million due to a change in estimate in the first quarter of 2017 driven by higher claims for certain 2013 and 2014 engines in our Engine Segment. Diluted earnings per share for the three months ended April 2, 2017, benefited $0.01 from fewer weighted average shares outstanding due to purchases under the stock repurchase programs.
 
We generated $379 million of operating cash flows for the three months ended April 2, 2017, compared to $267 million for the comparable period in 2016. 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 three months of 2017, we repurchased $51 million, or 0.3 million shares of common stock.
Our debt to capital ratio (total capital defined as debt plus equity) at April 2, 2017, was flat at 20.6 percent, compared to December 31, 2016. At April 2, 2017, we had $1.5 billion in cash and marketable securities on hand and access to our credit facilities, if necessary, to meet currently anticipated investment and funding needs.
 
Our global pension plans, including our unfunded and non-qualified plans, were 110 percent funded at December 31, 2016. Our U.S. qualified plans, which represent approximately 56 percent of the worldwide pension obligation, were 118 percent funded and our U.K. plans were 121 percent funded. We expect to contribute $134 million to our U.S. and U.K. pension plans in 2017. In addition, we expect our 2017 net periodic pension cost to approximate $83 million. See Note 3, "PENSION AND OTHER POSTRETIREMENT BENEFITS," to the Condensed Consolidated Financial Statements for additional information.
We expect our effective tax rate for the full year of 2017 to approximate 26.0 percent, excluding any one-time tax items.
On April 10, 2017, we entered into an agreement to form a joint venture with Eaton Corporation PLC, subject to regulatory approvals. We will purchase a 50 percent interest in the new venture named Eaton Cummins Automated Transmission Technologies, for approximately $600 million in cash. The joint venture will design, assemble, sell and support medium-duty and heavy-duty automated transmissions for the commercial vehicle market, including new product launches. We expect the transaction to close in the third quarter of 2017, at which time we will consolidate the results of the joint venture in our Components segment as we have a majority voting interest in the venture by virtue of a tie-breaking vote on the board of directors.

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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 2017.
Positive Trends
Demand for pick-up trucks in North America remains strong.
Market demand in off-highway markets in China and India may continue to improve.
Industry production of medium-duty trucks in North America should remain strong.
North American construction markets may begin to show improvement.
Market demand may continue to improve in global mining and North American oil and gas markets.
North American heavy-duty truck demand may begin to increase from first quarter levels.
Challenges
Power generation markets may remain soft.
Weak economic conditions in Brazil may continue to negatively impact demand across our businesses.
Foreign currency could continue to put pressure on our results.
Demand is starting to improve in certain markets and we expect demand will continue to improve over time, as in prior economic cycles. We are well-positioned to benefit as market conditions improve.

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RESULTS OF OPERATIONS
 
 
Three months ended
 
Favorable/
 
 
April 2,
2017
 
April 3,
2016
 
(Unfavorable)
In millions, except per share amounts
 
 
Amount
 
Percent
NET SALES
$
4,589

 
$
4,291

 
$
298

 
7
 %
Cost of sales
3,461

 
3,235

 
(226
)
 
(7
)%
GROSS MARGIN
1,128

 
1,056

 
72

 
7
 %
OPERATING EXPENSES AND INCOME
 

 
 

 
 

 


Selling, general and administrative expenses
537

 
490

 
(47
)
 
(10
)%
Research, development and engineering expenses
158

 
166

 
8

 
5
 %
Equity, royalty and interest income from investees
108

 
72

 
36

 
50
 %
Other operating income (expense), net
5

 
(2
)
 
7

 
NM

OPERATING INCOME
546

 
470

 
76

 
16
 %
Interest income
2

 
6

 
(4
)
 
(67
)%
Interest expense
18

 
19

 
1

 
5
 %
Other income (expense), net
18

 
8

 
10

 
NM

INCOME BEFORE INCOME TAXES
548

 
465

 
83

 
18
 %
Income tax expense
143

 
132

 
(11
)
 
(8
)%
CONSOLIDATED NET INCOME
405

 
333

 
72

 
22
 %
Less: Net income attributable to noncontrolling interests
9

 
12

 
3

 
25
 %
NET INCOME ATTRIBUTABLE TO CUMMINS INC.
$
396

 
$
321

 
$
75

 
23
 %
Diluted Earnings Per Common Share Attributable to Cummins Inc.
$
2.36

 
$
1.87

 
$
0.49

 
26
 %
______________________________________
"NM" - not meaningful information
 
 
Three months ended
 
Favorable/
(Unfavorable)
 
 
April 2,
2017
 
April 3,
2016
 
Percent of sales
 
 
 
Percentage Points
Gross margin
 
24.6
%
 
24.6
%
 

Selling, general and administrative expenses
 
11.7
%
 
11.4
%
 
(0.3
)
Research, development and engineering expenses
 
3.4
%
 
3.9
%
 
0.5

Net Sales
Net sales for the three months ended April 2, 2017, increased by $298 million versus the comparable period in 2016. The primary drivers were as follows:
Distribution segment sales increased 12 percent primarily due to an increase in organic sales and higher sales related to the acquisition of North American distributors since December 31, 2015.
Components segment sales increased 9 percent primarily due to higher demand across all lines of businesses, primarily in China.
Power Systems segment sales increased 9 percent, across all product lines, primarily due to higher demand in industrial markets, especially European mining and North American rail markets.
Engine segment sales increased 2 percent primarily due to higher demand in off-highway markets, partially offset by lower demand in heavy-duty truck and light-duty automotive markets.
These increases were unfavorably impacted by foreign currency fluctuations of approximately 1 percent, primarily in the British pound and Chinese renminbi.
Sales to international markets (excluding the U.S. and Canada), based on location of customers, for the three months ended April 2, 2017, were 43 percent of total net sales compared with 39 percent of total net sales for the comparable period in 2016. A more detailed discussion of sales by segment is presented in the “OPERATING SEGMENT RESULTS” section.

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Gross Margin
Gross margin increased $72 million for the three months ended April 2, 2017, versus the comparable period in 2016 and remained flat as a percentage of sales. The increase in gross margin dollars was primarily due to higher volumes and favorable pricing, partially offset by higher warranty costs of $34 million due to a change in estimate in the first quarter of 2017 driven by higher claims for certain 2013 and 2014 engines in our Engine Segment.
The provision for base warranties issued, excluding campaigns, as a percent of sales for the three months ended April 2, 2017, was 1.9 percent compared to 2.0 percent for the comparable period in 2016. 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 $47 million for the three months ended April 2, 2017, versus the comparable period in 2016, primarily due to higher consulting expenses ($20 million) and higher compensation expenses ($19 million). Compensation and related expenses include salaries, fringe benefits and variable compensation. Overall, selling, general and administrative expenses, as a percentage of sales, increased to 11.7 percent in the three months ended April 2, 2017, from 11.4 percent in the comparable period in 2016.
Research, Development and Engineering Expenses
Research, development and engineering expenses decreased $8 million for the three months ended April 2, 2017, versus the comparable period in 2016, primarily due to increased expense recovery from customers and external parties ($7 million). Overall, research, development and engineering expenses, as a percentage of sales, decreased to 3.4 percent in the three months ended April 2, 2017, from 3.9 percent in the comparable period in 2016.
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 $36 million for the three months ended April 2, 2017, versus the comparable period in 2016, primarily due to higher earnings at Beijing Foton Cummins Engine Co., Ltd. and Dongfeng Cummins Engine Company, Ltd.
 
 
 
 
 
 
Other Operating Income (Expense), Net
Other operating income (expense), net was as follows:
 
 
Three months ended
In millions
 
April 2,
2017
 
April 3,
2016
Royalty income, net
 
$
9

 
$
7

Loss on write off of assets
 
(1
)
 
(5
)
Amortization of intangible assets
 
(2
)
 
(3
)
Other, net
 
(1
)
 
(1
)
Total other operating income (expense), net
 
$
5

 
$
(2
)
Interest Income
Interest income for the three months ended April 2, 2017, decreased $4 million versus the comparable period in 2016, primarily due to lower short-term investments during the current quarter.
Interest Expense
Interest expense for the three months ended April 2, 2017, remained relatively flat versus the comparable period in 2016.

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Other Income (Expense), Net
Other income (expense), net was as follows:
 
 
Three months ended
In millions
 
April 2,
2017
 
April 3,
2016
Change in cash surrender value of corporate owned life insurance
 
$
13

 
$
8

Foreign currency gain (loss), net
 
2

 
(3
)
Dividend income
 
1

 
1

Bank charges
 
(3
)
 
(3
)
Other, net
 
5

 
5

Total other income (expense), net
 
$
18

 
$
8

Income Tax Expense
Our effective tax rate for the year is expected to approximate 26.0 percent, excluding any one-time items that may arise. Our tax rate is generally less than the 35 percent U.S. statutory income tax rate primarily due to lower tax rates on foreign income and the research tax credit.
Our effective tax rate for the three months ended April 2, 2017, was 26.1 percent and contained only immaterial discrete items.
Our effective tax rate for the three months ended April 3, 2016, was 28.4 percent and did not include any discrete items.
The decrease in the effective tax rate for the three months ended April 2, 2017, versus the comparable period in 2016, was primarily due to favorable changes in the jurisdictional mix of pre-tax income.
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 months ended April 2, 2017, decreased $3 million versus the comparable period in 2016, primarily due to the acquisition of the remaining interest in Wuxi Cummins Turbo Technologies Co. Ltd, in the fourth quarter of 2016.
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 April 2, 2017, increased $75 million and $0.49 per share, respectively versus the comparable period in 2016, primarily due to higher gross margin, improved equity, royalty and interest income from investees and a lower effective tax rate, partially offset by increased selling, general and administrative expenses. Diluted earnings per share for the three months ended April 2, 2017, benefited $0.01 from fewer weighted average shares outstanding due to purchases under the stock repurchase programs.

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Comprehensive Income - Foreign Currency Translation Adjustment
The foreign currency translation adjustment was a net gain of $80 million for the three months ended April 2, 2017, compared to a net loss of $57 million for the three months ended April 3, 2016 and was driven by the following:
 
 
Three months ended
 
 
April 2, 2017
 
April 3, 2016
In millions
 
Translation adjustment
 
Primary currency driver vs. U.S. dollar
 
Translation adjustment
 
Primary currency driver vs. U.S. dollar
Wholly owned subsidiaries
 
$
57

 
Indian rupee, British pound
 
$
(62
)
 
British pound offset by Brazilian real
Equity method investments
 
10

 
Indian rupee, Chinese renminbi
 
5

 
Mexican peso (1), Chinese renminbi
Consolidated subsidiaries with a noncontrolling interest
 
13

 
Indian rupee
 

 
Indian rupee offset by Chinese renminbi
Total
 
$
80

 
 
 
$
(57
)
 
 
____________________________________
(1) The Mexican peso adjustment related to a reclassification out of other comprehensive income at the time of the sale of an equity investment in the first quarter of 2016.
 
 
 
 
 
 
 
 
 


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OPERATING SEGMENT RESULTS
Our reportable operating segments consist of the Engine, Distribution, Components and Power Systems segments. This reporting structure is organized according to the products and markets each segment serves. We use segment EBIT as a primary basis for the CODM to evaluate the performance of each of our operating segments. Segment amounts exclude certain expenses not specifically identifiable to segments. See Note 11, "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/
 
 
April 2,
 
April 3,
 
(Unfavorable)
In millions
 
2017
 
2016
 
Amount
 
Percent
External sales (1)
 
$
1,457

 
$
1,489

 
$
(32
)
 
(2
)%
Intersegment sales (1)
 
566

 
487

 
79

 
16
 %
Total sales
 
2,023

 
1,976

 
47

 
2
 %
Depreciation and amortization
 
44

 
39

 
(5
)
 
(13
)%
Research, development and engineering expenses
 
54

 
57

 
3

 
5
 %
Equity, royalty and interest income from investees
 
72

 
36

 
36

 
100
 %
Interest income
 
1

 
2

 
(1
)
 
(50
)%
Segment EBIT
 
229

 
197

 
32

 
16
 %
 
 
 
 
 
 
 
 
 
 
 
 

 
 

 
Percentage Points
Segment EBIT as a percentage of total sales
 
11.3
%
 
10.0
%
 
 

 
1.3

____________________________________
(1) Due to the acquisitions of North American distributors, sales previously recognized as external sales are now included in intersegment sales.
Sales for our Engine segment by market were as follows:
 
 
Three months ended
 
Favorable/
 
 
April 2,
 
April 3,
 
(Unfavorable)
In millions
 
2017
 
2016
 
Amount
 
Percent
Heavy-duty truck
 
$
620

 
$
631

 
$
(11
)
 
(2
)%
Medium-duty truck and bus
 
544

 
549

 
(5
)
 
(1
)%
Light-duty automotive
 
423

 
433

 
(10
)
 
(2
)%
Total on-highway
 
1,587

 
1,613

 
(26
)
 
(2
)%
Off-highway
 
436

 
363

 
73

 
20
 %
Total sales
 
$
2,023

 
$
1,976

 
$
47

 
2
 %
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/
 
 
April 2,
 
April 3,
 
(Unfavorable)
 
 
2017
 
2016
 
Amount
 
Percent
Heavy-duty
 
19,200

 
19,700

 
(500
)
 
(3
)%
Medium-duty
 
60,300

 
55,400

 
4,900

 
9
 %
Light-duty
 
63,100

 
61,700

 
1,400

 
2
 %
Total unit shipments
 
142,600

 
136,800

 
5,800

 
4
 %

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Sales
Engine segment sales for the three months ended April 2, 2017, increased $47 million versus the comparable period in 2016, driven by higher off-highway sales of $73 million primarily due to improved demand in most global industrial markets with increased unit shipments of 66 percent in international construction markets.
The increase above was partially offset by the following:
Heavy-duty truck sales decreased $11 million primarily due to lower demand in the North American heavy-duty truck market with decreased engine shipments of 14 percent.
Light-duty automotive sales decreased $10 million primarily due to lower sales to Nissan and lower sales of light commercial vehicles, partially offset by higher sales to Chrysler.
Total on-highway-related sales for the three months ended April 2, 2017, were 78 percent of total engine segment sales, compared to 82 percent for the comparable period in 2016.
Segment EBIT
Engine segment EBIT for the three months ended April 2, 2017, increased $32 million versus the comparable period in 2016, primarily due to higher equity, royalty and interest income from investees, partially offset by higher selling, general and administrative expenses. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows:
 
 
Three months ended
 
 
April 2, 2017 vs. April 3, 2016
 
 
Favorable/(Unfavorable) Change
In millions
 
Amount
 
Percent
 
Percentage point
change as a percent
of total sales
Gross margin
 
$

 
 %
 
(0.5
)
Selling, general and administrative expenses
 
(13
)
 
(10
)%
 
(0.5
)
Research, development and engineering expenses
 
3

 
5
 %
 
0.2

Equity, royalty and interest income from investees
 
36

 
100
 %
 
1.8

Gross margin was flat for the three months ended April 2, 2017, versus the comparable period in 2016, as favorable pricing, increased volumes and lower material and commodity costs were offset by increased warranty costs due to a change in estimate in the first quarter of 2017 primarily related to higher claims for certain 2013 and 2014 engines. The increase in selling, general and administrative expenses was primarily due to higher consulting and higher compensation expenses. The increase in equity, royalty and interest income from investees was primarily due to higher earnings at Beijing Foton Cummins Engine Co., Ltd. and Dongfeng Cummins Engine Company, Ltd.

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Distribution Segment Results 
Financial data for the Distribution segment was as follows:
 
 
Three months ended
 
Favorable/
 
 
April 2,
 
April 3,
 
(Unfavorable)
In millions
 
2017
 
2016
 
Amount
 
Percent
External sales
 
$
1,637

 
$
1,458

 
$
179

 
12
 %
Intersegment sales
 
8

 
5

 
3

 
60
 %
Total sales
 
1,645

 
1,463

 
182

 
12
 %
Depreciation and amortization
 
30

 
28

 
(2
)
 
(7
)%
Research, development and engineering expenses
 
4

 
4

 

 
 %
Equity, royalty and interest income from investees
 
11

 
18

 
(7
)
 
(39
)%
Interest income
 
1

 
1

 

 
 %
Segment EBIT
 
100

 
87

 
13

 
15
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Percentage Points
Segment EBIT as a percentage of total sales
 
6.1
%
 
5.9
%
 
 

 
0.2

In the first quarter of 2017, the Distribution segment reorganized its regions to align with how the business is managed. All prior year amounts have been reclassified to conform to our new regional structure. Sales for our Distribution segment by region were as follows:
 
 
Three months ended
 
Favorable/
 
 
April 2,
 
April 3,
 
(Unfavorable)
In millions
 
2017
 
2016
 
Amount
 
Percent
North America
 
$
1,113

 
$
945

 
$
168

 
18
 %
Asia Pacific
 
170

 
169

 
1

 
1
 %
Europe
 
97

 
101

 
(4
)
 
(4
)%
Africa and Middle East
 
95

 
89

 
6

 
7
 %
China
 
58

 
59

 
(1
)
 
(2
)%
India
 
43

 
41

 
2

 
5
 %
Latin America
 
35

 
33

 
2

 
6
 %
Russia
 
34

 
26

 
8

 
31
 %
Total sales
 
$
1,645

 
$
1,463

 
$
182

 
12
 %
Sales for our Distribution segment by product line were as follows:
 
 
Three months ended
 
Favorable/
 
 
April 2,
 
April 3,
 
(Unfavorable)
In millions
 
2017
 
2016
 
Amount
 
Percent
Parts
 
$
745

 
$
648

 
$
97

 
15
%
Service
 
319

 
299

 
20

 
7
%
Power generation
 
306

 
275

 
31

 
11
%
Engines
 
275

 
241

 
34

 
14
%
Total sales
 
$
1,645

 
$
1,463

 
$
182

 
12
%
Sales
Distribution segment sales for the three months ended April 2, 2017, increased $182 million versus the comparable period in 2016, primarily due to an increase in organic sales of $101 million (primarily in North America) and $89 million of sales related to the acquisition of North American distributors since December 31, 2015.

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Segment EBIT
Distribution segment EBIT for the three months ended April 2, 2017, increased $13 million versus the comparable period in 2016, primarily due to higher gross margin, partially offset by higher selling, general and administrative expenses (mainly related to the acquisition of North American distributors since December 31, 2015). Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows:
 
 
Three months ended
 
 
April 2, 2017 vs. April 3, 2016
 
 
Favorable/(Unfavorable) Change
In millions
 
Amount
 
Percent
 
Percentage point
change as a percent
of total sales
Gross margin
 
$
33

 
13
 %
 
0.1

Selling, general and administrative expenses
 
(15
)
 
(8
)%
 
0.4

Equity, royalty and interest income from investees
 
(7
)
 
(39
)%
 
(0.5
)
The increase in gross margin dollars for the three months ended April 2, 2017, versus the comparable period in 2016, was primarily due to improved pricing, higher volumes and the acquisition of North American distributors since December 31, 2015, partially offset by unfavorable material costs. The increase in selling, general and administrative expenses was primarily due to higher compensation expenses related to the acquisition of North American distributors and higher consulting expenses. The decrease in equity, royalty and interest income from investees was primarily related to the acquisition of North American distributors.
Components Segment Results
Financial data for the Components segment was as follows:
 
 
Three months ended
 
Favorable/
 
 
April 2,
 
April 3,
 
(Unfavorable)
In millions
 
2017
 
2016
 
Amount
 
Percent
External sales (1)
 
$
980

 
$
897

 
$
83

 
9
 %
Intersegment sales (1)
 
364

 
340

 
24

 
7
 %
Total sales
 
1,344

 
1,237

 
107

 
9
 %
Depreciation and amortization
 
37

 
31

 
(6
)
 
(19
)%
Research, development and engineering expenses
 
50

 
56

 
6

 
11
 %
Equity, royalty and interest income from investees
 
13

 
8

 
5

 
63
 %
Interest income
 

 
1

 
(1
)
 
(100
)%
Segment EBIT
 
179

 
163

 
16

 
10
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Percentage Points
Segment EBIT as a percentage of total sales
 
13.3
%
 
13.2
%
 
 

 
0.1

____________________________________
(1) Due to the acquisitions of North American distributors, sales previously recognized as external sales are now included in intersegment sales.
In the first quarter of 2017, our Components segment reorganized its reporting structure to move an element of the emission solutions business to the fuel systems business to enhance operational, administrative and product development efficiencies. Prior year balances were reclassified to conform with this change. Sales for our Components segment by business were as follows:

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Three months ended
 
Favorable/
 
 
April 2,
 
April 3,
 
(Unfavorable)
In millions
 
2017
 
2016
 
Amount
 
Percent
Emission solutions
 
$
616

 
$
589

 
$
27

 
5
%
Turbo technologies
 
287

 
265

 
22

 
8
%
Filtration
 
277

 
252

 
25

 
10
%
Fuel systems
 
164

 
131

 
33

 
25
%
Total sales
 
$
1,344

 
$
1,237

 
$
107

 
9
%
Sales
Components segment sales for the three months ended April 2, 2017, increased $107 million, across all lines of business, versus the comparable period in 2016. The following were the primary drivers:
Fuel systems sales increased $33 million primarily due to higher demand in China.
Emission solutions sales increased $27 million primarily due to higher demand in China, Western Europe and India, partially offset by unfavorable pricing in North America.
Filtration sales increased $25 million primarily due to higher demand in North America, Australia, Southeast Asia and China.
Turbo technologies sales increased $22 million primarily due to higher demand in China.
These increases were partially offset by unfavorable foreign currency fluctuations, primarily in the Chinese renminbi and British pound.
Segment EBIT 
Components segment EBIT for the three months ended April 2, 2017, increased $16 million versus the comparable period in 2016, primarily due to higher gross margin, lower research, development and engineering expenses and higher equity, royalty and interest income from investees, partially offset by higher selling, general and administrative expenses. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows:
 
 
Three months ended
 
 
April 2, 2017 vs. April 3, 2016
 
 
Favorable/(Unfavorable) Change
In millions
 
Amount
 
Percent
 
Percentage point
change as a percent
of total sales
Gross margin
 
$
18

 
6
 %
 
(0.5
)
Selling, general and administrative expenses
 
(16
)
 
(20
)%
 
(0.7
)
Research, development and engineering expenses
 
6

 
11
 %
 
0.8

Equity, royalty and interest income from investees
 
5

 
63
 %
 
0.3

The increase in gross margin for the three months ended April 2, 2017, versus the comparable period in 2016, was primarily due to higher volumes and lower material costs, partially offset by unfavorable pricing and mix. The increase in selling, general and administrative expenses was primarily due to higher consulting and compensation expenses. The decrease in research, development and engineering expenses was primarily due to higher expense recovery from customers and external parties.

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Power Systems Segment Results
Financial data for the Power Systems segment was as follows:
 
 
Three months ended
 
Favorable/
 
 
April 2,
 
April 3,
 
(Unfavorable)
In millions
 
2017
 
2016
 
Amount
 
Percent
External sales (1)
 
$
515

 
$
447

 
$
68

 
15
 %
Intersegment sales (1)
 
367

 
361

 
6

 
2
 %
Total sales
 
882

 
808

 
74

 
9
 %
Depreciation and amortization
 
28

 
29

 
1

 
3
 %
Research, development and engineering expenses
 
50

 
49

 
(1
)
 
(2
)%
Equity, royalty and interest income from investees
 
12

 
10

 
2

 
20
 %
Interest income
 

 
2

 
(2
)
 
(100
)%
Segment EBIT
 
57

 
46

 
11

 
24
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Percentage Points
Segment EBIT as a percentage of total sales
 
6.5
%
 
5.7
%
 
 

 
0.8

____________________________________
(1) Due to the acquisitions of North American distributors, sales previously recognized as external sales are now included in intersegment sales.
In the first quarter of 2017, the Power Systems segment reorganized its product lines to better reflect how the business is managed. Prior year sales have been reclassified to reflect these changes. Sales for our Power Systems segment by product line were as follows:
 
 
Three months ended
 
Favorable/
 
 
April 2,
 
April 3,
 
(Unfavorable)
In millions
 
2017
 
2016
 
Amount
 
Percent
Power generation
 
$
526

 
$
518

 
$
8

 
2
%
Industrial
 
275

 
215

 
60

 
28
%
Generator technologies
 
81

 
75

 
6

 
8
%
Total sales
 
$
882

 
$
808

 
$
74

 
9
%
High-horsepower unit shipments by engine classification were as follows:
 
 
Three months ended
 
Favorable/
 
 
April 2,
 
April 3,
 
(Unfavorable)
Units
 
2017
 
2016
 
Amount
 
Percent
Power generation
 
1,900

 
1,800

 
100

 
6
%
Industrial
 
1,300

 
1,000

 
300

 
30
%
Total engine shipments
 
3,200

 
2,800

 
400

 
14
%
Sales
Power Systems segment sales for the three months ended April 2, 2017, increased $74 million, across all product lines, versus the comparable period in 2016. The following were the primary drivers:
Industrial sales increased $60 million primarily due to higher demand in international mining markets and North American rail markets.
Power generation sales increased $8 million primarily due to higher demand in Western Europe, partially offset by lower demand in the Middle East.
These increases were partially offset by unfavorable foreign currency fluctuations, primarily due to the British pound.

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Segment EBIT
Power Systems segment EBIT for the three months ended April 2, 2017, increased $11 million versus the comparable period in 2016, primarily due to higher gross margin and favorable foreign currency fluctuations (primarily in the British pound), partially offset by higher selling, general and administrative expenses. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows:
 
 
Three months ended
 
 
April 2, 2017 vs. April 3, 2016
 
 
Favorable/(Unfavorable) Change
In millions
 
Amount
 
Percent
 
Percentage point
change as a percent
of total sales
Gross margin
 
$
15

 
8
 %
 
(0.2
)
Selling, general and administrative expenses
 
(3
)
 
(3
)%
 
0.7

Research, development and engineering expenses
 
(1
)
 
(2
)%
 
0.4

Equity, royalty and interest income from investees
 
2

 
20
 %
 
0.2

The increase in gross margin for the three months ended April 2, 2017, versus the comparable period in 2016, was primarily due to higher volumes and favorable foreign currency fluctuations (primarily in the British pound), partially offset by unfavorable mix and higher commodity costs. The increase in selling, general and administrative expenses was primarily due to higher consulting expenses.
Reconciliation of Segment EBIT 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
In millions
 
April 2,
2017
 
April 3,
2016
TOTAL SEGMENT EBIT
 
$
565

 
$
493

Non-segment EBIT (1)
 
1

 
(9
)
TOTAL EBIT
 
566

 
484

Less: Interest expense
 
18

 
19

INCOME BEFORE INCOME TAXES
 
548

 
465

Less: Income tax expense
 
143

 
132

CONSOLIDATED NET INCOME
 
405

 
333

Less: Net income attributable to noncontrolling interest
 
9

 
12

NET INCOME ATTRIBUTABLE TO CUMMINS INC.
 
$
396

 
$
321

____________________________________
(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 April 2, 2017 and April 3, 2016.

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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
 
April 2,
2017
 
December 31,
2016
Working capital (1)
 
$
3,497

 
$
3,382

Current ratio
 
1.75

 
1.78

Accounts and notes receivable, net
 
$
3,247

 
$
3,025

Days’ sales in receivables
 
62

 
61

Inventories
 
$
2,894

 
$
2,675

Inventory turnover
 
4.8

 
4.7

Accounts payable (principally trade)
 
$
2,168

 
$
1,854

Days' payable outstanding
 
52

 
51

Total debt
 
$
1,945

 
$
1,856

Total debt as a percent of total capital
 
20.6
%
 
20.6
%
____________________________________
(1) Working capital includes cash and cash equivalents.
Cash Flows
Cash and cash equivalents were impacted as follows:
 
 
Three months ended
 
 
In millions
 
April 2,
2017
 
April 3,
2016
 
Change
Net cash provided by operating activities
 
$
379

 
$
267

 
$
112

Net cash used in investing activities
 
(27
)
 
(388
)
 
361

Net cash used in financing activities
 
(164
)
 
(636
)
 
472

Effect of exchange rate changes on cash and cash equivalents
 
14

 
(39
)
 
53

Net increase (decrease) in cash and cash equivalents
 
$
202

 
$
(796
)
 
$
998

 
Net cash provided by operating activities increased $112 million for the three months ended April 2, 2017, versus the comparable period in 2016, primarily due to higher consolidated net income, the absence of restructuring payments and lower working capital levels. During the first three months of 2017, the lower working capital requirements resulted in a cash outflow of $128 million compared to a cash outflow of $140 million in the comparable period in 2016
Net cash used in investing activities decreased $361 million for the three months ended April 2, 2017, versus the comparable period in 2016, primarily due to lower net investments in marketable securities of $377 million.
Net cash used in financing activities decreased $472 million for the three months ended April 2, 2017, versus the comparable period in 2016, primarily due to lower repurchases of common stock of $524 million and higher borrowings of commercial paper of $12 million, partially offset by lower proceeds from borrowings of $105 million.
The effect of exchange rate changes on cash and cash equivalents for the three months ended April 2, 2017, versus the comparable period in 2016, increased $53 million primarily due to the British pound, which increased cash and cash equivalents by $46 million.
Sources of Liquidity 
We generate significant ongoing cash flow. Cash provided by operations is our principal source of liquidity with $379 million provided in the three months ended April 2, 2017.

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At April 2, 2017, our other sources of liquidity included:
 
 
April 2, 2017
In millions
 
Total
 
U.S.
 
International
 
Primary location of international balances
Cash and cash equivalents
 
$
1,322

 
$
438

 
$
884

 
U.K., Singapore, China, Australia, Canada
Marketable securities (1)
 
145

 
40

 
105

 
India
Total
 
$
1,467

 
$
478

 
$
989

 
 
Available credit capacity
 

 
 
 
 
 
 
Revolving credit facility (2)
 
$
1,476

 
 
 
 
 
 
International and other uncommitted domestic credit facilities (3)
 
153

 
 
 
 
 
 
____________________________________
(1) The majority of marketable securities could be liquidated into cash within a few days.
(2) The revolving credit facility is maintained primarily to provide backup liquidity for our commercial paper borrowings and general corporate purposes. At April 2, 2017, we had $274 million of commercial paper outstanding, which effectively reduced the available capacity under our revolving credit facility to $1.48 billion.
(3) The available capacity is net of letters of credit.
Cash, Cash Equivalents and Marketable Securities
A significant portion of our cash flows is generated outside the U.S. The geographic location of our cash and marketable securities aligns well with our ongoing investments. 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 can issue up to $1.75 billion of unsecured short-term promissory notes ("commercial paper") pursuant to a commercial paper program. The program facilitates the private placement of unsecured short-term debt through third party brokers. We intend to use the net proceeds from the commercial paper program for general corporate purposes.
We have a $1.75 billion revolving credit facility, the proceeds of which can be used for general corporate purposes. This facility expires on November 13, 2020. The revolving credit facility is maintained primarily to provide backup liquidity for our commercial paper borrowings, letters of credit and general corporate purposes. The total combined borrowing capacity under the revolving credit facility and commercial paper program should not exceed $1.75 billion.
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
Share 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 three months of 2017, we made the following purchases under the 2015 stock repurchase program:
In millions, except per share amounts
 
Shares
Purchased
 
Average Cost
Per Share
 
Total Cost of
Repurchases
 
Remaining
Authorized
Capacity
(1)
April 2
 
0.3

 
$
151.32

 
$
51

 
$
445

____________________________________
(1) The remaining authorized capacity under the 2015 Plan was calculated based on the cost to purchase the shares but excludes commission expenses in accordance with the authorized Plan.

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We may continue to repurchase outstanding shares from time to time during 2017 to enhance shareholder value and to offset the dilutive impact of employee stock based compensation plans.
Dividends
In July 2016, our Board of Directors authorized an increase to our quarterly dividend of 5.1 percent from $0.975 per share to $1.025 per share. We paid dividends of $171 million during the three months ended April 2, 2017.
Agreement to Form a Joint Venture
On April 10, 2017, we entered into an agreement to form a joint venture with Eaton Corporation PLC, subject to regulatory approvals. We will purchase a 50 percent interest in the new venture named Eaton Cummins Automated Transmission Technologies, for approximately $600 million, which we will fund with a combination of cash and short-term debt. We expect the transaction to close in the third quarter of 2017.
Capital Expenditures
Capital expenditures and spending on internal use software for the three months ended April 2, 2017, were $108 million compared to $84 million in the comparable period in 2016We continue to invest in new product lines and targeted capacity expansions. We plan to spend between $500 million and $530 million in 2017 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 2017.
Pensions
Our global pension plans, including our unfunded and non-qualified plans, were 110 percent funded at December 31, 2016. Our U.S. qualified plans, which represent approximately 56 percent of the worldwide pension obligation, were 118 percent funded and our U.K. plans were 121 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 three months of 2017, the investment return on our U.S. pension trust was 3.1 percent while our U.K. pension trust return was 2.7 percent. Approximately 77 percent of our pension plan assets are held in highly liquid investments such as fixed income and equity securities. The remaining 23 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 2017 of $91 million for our U.S. and U.K pension plans. Approximately $133 million of the estimated $134 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 2017 net periodic pension cost to approximate $83 million.
Current Maturities of Short and Long-Term Debt
We had $274 million of commercial paper outstanding at April 2, 2017, 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 $4 million to $45 million over the next five years (including the remainder of 2017).
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 provides us with the financial flexibility

38

Table of Contents

needed to fund working capital, common stock repurchases, acquisitions, capital expenditures, dividend payments, projected pension obligations and debt service obligations. We continue to generate cash from operations and maintain access to our revolving credit facility as noted above.


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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 2016 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 2016 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 three months of 2017.
RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 12, "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 2016 Form 10-K. There have been no material changes in this information since the filing of our 2016 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 and Chief Financial Officer 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 Chief Executive Officer and our Chief Financial Officer 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 Chief Executive Officer and Chief Financial Officer, 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 April 2, 2017, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 

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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.
The disclosure set forth under "Loss Contingency" in Note 9, "COMMITMENTS AND CONTINGENCIES," to the Condensed Consolidated Financial Statements is incorporated herein by reference.
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, 2016, 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
 
(a) Total
Number of
Shares
Purchased(1)
 
(b) Average
Price Paid
per Share
 
(c) Total Number of
Shares Purchased
as Part of Publicly
Announced
Plans or Programs
 
(d) Maximum
Number of Shares
that May Yet Be
Purchased Under the
Plans or Programs(2)
January 1 - February 5
 
950

 
$
147.01

 

 
61,703

February 6 - March 5
 
323,609

 
151.60

 
305,057

 
43,132

March 6 - April 2
 
38,543

 
149.66

 
33,538

 
38,727

Total
 
363,102

 
151.38

 
338,595

 
 

____________________________________
(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 programs.
(2)  These values reflect the sum of shares held in loan status under our Key Employee Stock Investment Plan. The repurchase programs authorized by the Board of Directors do 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 such programs as of April 2, 2017, was $1.4 billion.
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 November 2015, our Board of Directors authorized the acquisition of up to $1 billion of additional common stock upon the completion of the 2014 repurchase plan. During the three months ended April 2, 2017, we repurchased $51 million of common stock under the 2015 Board of Directors authorized plan.

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Table of Contents

During the three months ended April 2, 2017, we repurchased 24,507 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 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
See Exhibit Index at the end of this Quarterly Report on Form 10-Q.

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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:
May 2, 2017
 
 
 
 
 
 
 
 
 
 
By:
/s/ PATRICK J. WARD
 
By:
/s/ CHRISTOPHER CLULOW
 
 
Patrick J. Ward
 
 
Christopher Clulow
 
 
Vice President and Chief Financial Officer
 
 
Vice President-Corporate Controller
 
 
(Principal Financial Officer)
 
 
(Principal Accounting Officer)

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Table of Contents

CUMMINS INC.
EXHIBIT INDEX
 
Exhibit No.
 
Description of Exhibit
12
 
Calculation of Ratio of Earnings to Fixed Charges.
31(a)
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31(b)
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32
 
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
 
XBRL Instance 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.

44