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 July 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 July 2, 2017, there were 167,620,608 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 and six months ended July 2, 2017 and July 3, 2016
 
Condensed Consolidated Statements of Comprehensive Income for the three and six months ended July 2, 2017 and July 3, 2016
 
Condensed Consolidated Balance Sheets at July 2, 2017 and December 31, 2016
 
Condensed Consolidated Statements of Cash Flows for the six months ended July 2, 2017 and July 3, 2016
 
Condensed Consolidated Statements of Changes in Equity for the six months ended July 2, 2017 and July 3, 2016
 
 
 
 
 

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Table of Contents

PART I.  FINANCIAL INFORMATION 
ITEM 1.  Condensed Consolidated Financial Statements 
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
Three months ended
 
Six months ended
In millions, except per share amounts 
 
July 2,
2017
 
July 3,
2016
 
July 2,
2017
 
July 3,
2016
NET SALES (a)
 
$
5,078

 
$
4,528

 
$
9,667

 
$
8,819

Cost of sales
 
3,829

 
3,331

 
7,290

 
6,566

GROSS MARGIN
 
1,249

 
1,197

 
2,377

 
2,253

OPERATING EXPENSES AND INCOME
 
 

 
 

 
 

 
 

Selling, general and administrative expenses
 
596

 
524

 
1,133

 
1,014

Research, development and engineering expenses
 
174

 
155

 
332

 
321

Equity, royalty and interest income from investees (Note 4)
 
98

 
88

 
206

 
160

Loss contingency (Note 9)
 

 
39

 

 
39

Other operating income (expense), net
 
18

 

 
23

 
(2
)
OPERATING INCOME
 
595

 
567

 
1,141

 
1,037

Interest income
 
5

 
6

 
7

 
12

Interest expense (Note 7)
 
21

 
16

 
39

 
35

Other income (expense), net
 
20

 
18

 
38

 
26

INCOME BEFORE INCOME TAXES
 
599

 
575

 
1,147

 
1,040

Income tax expense
 
158

 
148

 
301

 
280

CONSOLIDATED NET INCOME
 
441

 
427

 
846

 
760

Less: Net income attributable to noncontrolling interests
 
17

 
21

 
26

 
33

NET INCOME ATTRIBUTABLE TO CUMMINS INC.
 
$
424

 
$
406

 
$
820

 
$
727

 
 
 
 
 
 
 
 
 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
 
 

 
 

 
 

 
 

Basic
 
$
2.53

 
$
2.41

 
$
4.90

 
$
4.27

Diluted
 
$
2.53

 
$
2.40

 
$
4.88

 
$
4.26

 
 
 
 
 
 
 
 
 
WEIGHTED AVERAGE SHARES OUTSTANDING
 
 

 
 

 
 

 
 

Basic
 
167.3

 
168.8

 
167.4

 
170.3

Dilutive effect of stock compensation awards
 
0.5

 
0.2

 
0.5

 
0.2

Diluted
 
167.8

 
169.0

 
167.9

 
170.5

 
 
 
 
 
 
 
 
 
CASH DIVIDENDS DECLARED PER COMMON SHARE
 
$
1.025

 
$
0.975

 
$
2.05

 
$
1.95

____________________________________
(a) Includes sales to nonconsolidated equity investees of $283 million and $550 million and $276 million and $518 million for the three and six months ended July 2, 2017 and July 3, 2016, respectively.
 
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 COMPREHENSIVE INCOME
(Unaudited)
 
 
 
Three months ended
 
Six months ended
In millions 
 
July 2,
2017
 
July 3,
2016
 
July 2,
2017
 
July 3,
2016
CONSOLIDATED NET INCOME
 
$
441

 
$
427

 
$
846

 
$
760

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

 
 

 
 

 
 

Foreign currency translation adjustments
 
102

 
(213
)
 
182

 
(270
)
Unrealized gain (loss) on derivatives
 

 
(6
)
 
1

 
(27
)
Change in pension and other postretirement defined benefit plans
 
15

 
9

 
36

 
18

Unrealized gain (loss) on marketable securities
 
1

 
1

 
1

 
1

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

 
(209
)
 
220

 
(278
)
COMPREHENSIVE INCOME
 
559

 
218

 
1,066

 
482

Less: Comprehensive income attributable to noncontrolling interests
 
18

 
15

 
40

 
27

COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC.
 
$
541

 
$
203

 
$
1,026

 
$
455

 
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 BALANCE SHEETS
(Unaudited)
In millions, except par value
 
July 2,
2017
 
December 31,
2016
ASSETS
 
 

 
 

Current assets
 
 

 
 

Cash and cash equivalents
 
$
1,293

 
$
1,120

Marketable securities (Note 5)
 
174

 
260

Total cash, cash equivalents and marketable securities
 
1,467

 
1,380

Accounts and notes receivable, net
 
 
 
 
Trade and other
 
3,237

 
2,803

Nonconsolidated equity investees
 
316

 
222

Inventories (Note 6)
 
2,982

 
2,675

Prepaid expenses and other current assets
 
600

 
627

Total current assets
 
8,602

 
7,707

Long-term assets
 
 

 
 

Property, plant and equipment
 
7,804

 
7,635

Accumulated depreciation
 
(4,017
)
 
(3,835
)
Property, plant and equipment, net
 
3,787

 
3,800

Investments and advances related to equity method investees
 
1,162

 
946

Goodwill
 
488

 
480

Other intangible assets, net
 
339

 
332

Pension assets
 
852

 
731

Other assets
 
1,030

 
1,015

Total assets
 
$
16,260

 
$
15,011

 
 
 
 
 
LIABILITIES
 
 

 
 

Current liabilities
 
 

 
 

Accounts payable (principally trade)
 
$
2,300

 
$
1,854

Loans payable (Note 7)
 
54

 
41

Commercial paper (Note 7)
 
134

 
212

Accrued compensation, benefits and retirement costs
 
475

 
412

Current portion of accrued product warranty (Note 8)
 
392

 
333

Current portion of deferred revenue
 
520

 
468

Other accrued expenses
 
974

 
970

Current maturities of long-term debt (Note 7)
 
45

 
35

Total current liabilities
 
4,894

 
4,325

Long-term liabilities
 
 

 
 

Long-term debt (Note 7)
 
1,564

 
1,568

Postretirement benefits other than pensions
 
318

 
329

Pensions
 
327

 
326

Other liabilities and deferred revenue
 
1,335

 
1,289

Total liabilities
 
$
8,438

 
$
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
 
$
2,184

 
$
2,153

Retained earnings
 
11,517

 
11,040

Treasury stock, at cost, 54.7 and 54.2 shares
 
(4,586
)
 
(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)
 
(1,615
)
 
(1,821
)
Total Cummins Inc. shareholders’ equity
 
7,493

 
6,875

Noncontrolling interests
 
329

 
299

Total equity
 
$
7,822

 
$
7,174

Total liabilities and equity
 
$
16,260

 
$
15,011


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 CASH FLOWS
(Unaudited)
 
 
Six months ended
In millions
 
July 2,
2017
 
July 3,
2016
CASH FLOWS FROM OPERATING ACTIVITIES
 
 

 
 

Consolidated net income
 
$
846

 
$
760

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

 
 

Depreciation and amortization
 
284

 
259

Deferred income taxes
 

 
2

Equity in income of investees, net of dividends (Note 4)
 
(132
)
 
(87
)
Pension contributions in excess of expense (Note 3)
 
(44
)
 
(82
)
Other post-retirement benefits payments in excess of expense (Note 3)
 
(8
)
 
(17
)
Stock-based compensation expense
 
23

 
20

Restructuring payments
 

 
(42
)
Loss contingency (Note 9)
 

 
39

Translation and hedging activities
 
31

 
(45
)
Changes in current assets and liabilities
 
 
 
 

Accounts and notes receivable
 
(488
)
 
(252
)
Inventories
 
(264
)
 
(101
)
Other current assets
 
21

 
189

Accounts payable
 
403

 
143

Accrued expenses
 
132

 
(209
)
Changes in other liabilities and deferred revenue
 
103

 
129

Other, net
 
(81
)
 
32

Net cash provided by operating activities
 
826

 
738

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 

 
 

Capital expenditures
 
(182
)
 
(189
)
Investments in internal use software
 
(40
)
 
(27
)
Investments in and advances to equity investees
 
(64
)
 
(17
)
Investments in marketable securities—acquisitions (Note 5)
 
(69
)
 
(379
)
Investments in marketable securities—liquidations (Note 5)
 
162

 
237

Cash flows from derivatives not designated as hedges
 
19

 
(21
)
Other, net
 
14

 
5

Net cash used in investing activities
 
(160
)
 
(391
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 

 
 

Proceeds from borrowings
 
2

 
109

Net (payments) borrowings of commercial paper (Note 7)
 
(78
)
 
200

Payments on borrowings and capital lease obligations
 
(29
)
 
(133
)
Distributions to noncontrolling interests
 
(10
)
 
(24
)
Dividend payments on common stock
 
(343
)
 
(333
)
Repurchases of common stock (Note 2)
 
(120
)
 
(695
)
Other, net
 
34

 
(20
)
Net cash used in financing activities
 
(544
)
 
(896
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
 
51

 
(117
)
Net increase (decrease) in cash and cash equivalents
 
173

 
(666
)
Cash and cash equivalents at beginning of year
 
1,120

 
1,711

CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
1,293

 
$
1,045


 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


 


 
727

 


 


 


 
727

 
33

 
760

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


 


 


 


 


 
(272
)
 
(272
)
 
(6
)
 
(278
)
Issuance of common stock


 
4

 


 


 


 


 
4

 

 
4

Employee benefits trust activity


 
14

 


 


 
2

 


 
16

 

 
16

Repurchases of common stock (Note 2)


 


 


 
(695
)
 


 


 
(695
)
 

 
(695
)
Cash dividends on common stock


 


 
(333
)
 


 


 


 
(333
)
 

 
(333
)
Distributions to noncontrolling interests


 


 


 


 


 


 

 
(31
)
 
(31
)
Stock based awards


 
(6
)
 


 
8

 


 


 
2

 

 
2

Other shareholder transactions


 
6

 


 


 


 


 
6

 
(6
)
 

BALANCE AT JULY 3, 2016
$
556

 
$
1,640

 
$
10,716

 
$
(4,422
)
 
$
(9
)
 
$
(1,620
)
 
$
6,861

 
$
334

 
$
7,195

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE AT DECEMBER 31, 2016
$
556

 
$
1,597

 
$
11,040

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

 
$
299

 
$
7,174

Net income


 


 
820

 


 


 


 
820

 
26

 
846

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


 


 


 


 


 
206

 
206

 
14

 
220

Issuance of common stock


 
3

 


 


 


 


 
3

 

 
3

Employee benefits trust activity


 
12

 


 


 
1

 


 
13

 

 
13

Repurchases of common stock


 


 


 
(120
)
 


 


 
(120
)
 

 
(120
)
Cash dividends on common stock


 


 
(343
)
 


 


 


 
(343
)
 

 
(343
)
Distributions to noncontrolling interests


 


 


 


 


 


 

 
(10
)
 
(10
)
Stock based awards


 


 


 
23

 


 


 
23

 

 
23

Other shareholder transactions


 
16

 


 


 


 


 
16

 

 
16

BALANCE AT JULY 2, 2017
$
556

 
$
1,628

 
$
11,517

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

 
$
329

 
$
7,822

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

7

Table of Contents

CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
NOTE 1. NATURE OF OPERATIONS
Cummins Inc. (“Cummins,” “we,” “our” or “us”) was founded in 1919 as Cummins Engine Company, a corporation in Columbus, Indiana, 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 and six month periods presented are not necessarily indicative of results to be expected for any other interim period or for the entire year. The year-end Condensed Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.
Reclassifications
Certain amounts for prior year periods have been reclassified to conform to the presentation of the current year.
Use of Estimates in Preparation of Financial Statements
Preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts presented and disclosed in our Condensed Consolidated Financial Statements. Significant estimates and assumptions in these Condensed Consolidated Financial Statements require the exercise of judgment and are used for, but not limited to, allowance for doubtful accounts, estimates of future cash flows and other assumptions associated with goodwill and long-lived asset impairment tests, useful lives for depreciation and amortization, warranty programs, determination of discount rate and other assumptions for pension and other postretirement benefit costs, income taxes and deferred tax valuation allowances, lease classification and contingencies. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be different from these estimates.
Reporting Period
Our reporting period usually ends on the Sunday closest to the last day of the quarterly calendar period. The second quarters of 2017 and 2016 ended on July 2 and July 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:

8

Table of Contents

 
 
Three months ended
 
Six months ended
 
July 2,
2017
 
July 3,
2016
 
July 2,
2017
 
July 3,
2016
Options excluded
6,155

 
1,262,469

 
61,345

 
1,475,068

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 initially received approximately 4.1 million shares 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. In the second quarter of 2016, the ASR was completed, and we received approximately 0.6 million additional shares, based on our volume-weighted average stock price during the term of the transaction, less a discount, for a total of 4.7 million shares purchased under the ASR at an average purchase price of $105.50 per share. The settlement resulted in the reclassification of the $100 million reduction of additional paid-in capital recognized in the first quarter of 2016 to treasury stock.
The delivery of shares resulted in a reduction to our common stock outstanding used to calculate earnings per share in the quarter the shares were received and subsequent quarters.
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
 
Six months ended
In millions
 
July 2,
2017
 
July 3,
2016
 
July 2,
2017
 
July 3,
2016
Defined benefit pension plans
 
 

 
 

 
 

 
 

Voluntary contribution
 
$
41

 
$
37

 
$
84

 
$
85

Mandatory contribution
 

 
6

 

 
18

Defined benefit pension contributions
 
$
41

 
$
43

 
$
84

 
$
103

 
 
 
 
 
 
 
 
 
Other postretirement plans
 
$
3

 
$
15

 
$
18

 
$
28

 
 
 
 
 
 
 
 
 
Defined contribution pension plans
 
$
19

 
$
14

 
$
48

 
$
35

We anticipate making additional defined benefit pension contributions during the remainder of 2017 of $50 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
 
July 2,
2017
 
July 3,
2016
 
July 2,
2017
 
July 3,
2016
 
July 2,
2017
 
July 3,
2016
Service cost
 
$
26

 
$
23

 
$
7

 
$
6

 
$

 
$

Interest cost
 
27

 
28

 
10

 
13

 
4

 
4

Expected return on plan assets
 
(52
)
 
(51
)
 
(17
)
 
(19
)
 

 

Recognized net actuarial loss
 
9

 
7

 
10

 
4

 
1

 
2

Net periodic benefit cost
 
$
10

 
$
7

 
$
10

 
$
4

 
$
5

 
$
6


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Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension
 
 
 
 
 
 
U.S. Plans
 
U.K. Plans
 
Other Postretirement Benefits
 
 
Six months ended
In millions
 
July 2,
2017
 
July 3,
2016
 
July 2,
2017
 
July 3,
2016
 
July 2,
2017
 
July 3,
2016
Service cost
 
$
53

 
$
46

 
$
13

 
$
11

 
$

 
$

Interest cost
 
53

 
56

 
20

 
26

 
7

 
8

Expected return on plan assets
 
(103
)
 
(102
)
 
(34
)
 
(38
)
 

 

Recognized net actuarial loss
 
18

 
14

 
20

 
8

 
3

 
3

Net periodic benefit cost
 
$
21

 
$
14

 
$
19

 
$
7

 
$
10

 
$
11

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
 
Six months ended
In millions
 
July 2,
2017
 
July 3,
2016
 
July 2,
2017
 
July 3,
2016
Distribution entities
 
 
 
 
 
 
 
 
Komatsu Cummins Chile, Ltda.
 
$
8

 
$
8

 
$
15

 
$
18

North American distributors
 

 
6

 

 
11

All other distributors
 

 
1

 

 
1

Manufacturing entities
 
 
 
 
 
 

 
 

Beijing Foton Cummins Engine Co., Ltd.
 
22

 
22

 
55

 
40

Dongfeng Cummins Engine Company, Ltd.
 
19

 
15

 
41

 
22

Chongqing Cummins Engine Company, Ltd.
 
10

 
9

 
19

 
17

All other manufacturers
 
27

 
16

 
51

 
32

Cummins share of net income
 
86

 
77

 
181

 
141

Royalty and interest income
 
12

 
11

 
25

 
19

Equity, royalty and interest income from investees
 
$
98

 
$
88

 
$
206

 
$
160

NOTE 5. MARKETABLE SECURITIES
A summary of marketable securities, all of which are classified as current, was as follows:
 
 
 
July 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
 
$
157

 
$

 
$
157

 
$
132

 
$

 
$
132

Bank debentures
 
3

 

 
3

 
114

 

 
114

Equity mutual funds
 
12

 
1

 
13

 
12

 

 
12

Government debt securities
 
1

 

 
1

 
2

 

 
2

Total marketable securities
 
$
173

 
$
1

 
$
174

 
$
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 half 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:

10


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.
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
 
Six months ended
In millions
 
July 2,
2017
 
July 3,
2016
 
July 2,
2017
 
July 3,
2016
Proceeds from sales and maturities of marketable securities (1)
 
$
15

 
$
202

 
$
162

 
$
237

____________________________________
(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)
 
July 2,
2017
1 year or less
 
$
160

1 - 5 years
 
1

Total
 
$
161

NOTE 6. INVENTORIES
Inventories are stated at the lower of cost or market. Inventories included the following:
 
In millions
 
July 2,
2017
 
December 31,
2016
Finished products
 
$
1,905

 
$
1,779

Work-in-process and raw materials
 
1,192

 
1,005

Inventories at FIFO cost
 
3,097

 
2,784

Excess of FIFO over LIFO
 
(115
)
 
(109
)
Total inventories
 
$
2,982

 
$
2,675


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NOTE 7. DEBT
Loans Payable and Commercial Paper
Loans payable, commercial paper and the related weighted-average interest rates were as follows:
In millions
 
July 2, 2017
 
December 31, 2016
Loans payable (1)
 
$
54

 
$
41

Commercial paper (2)
 
134

 
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 1.20 percent and 0.79 percent at July 2, 2017 and December 31, 2016, respectively.
Long-term Debt
A summary of long-term debt was as follows:
 
In millions
 
July 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
 
56

 
51

Unamortized discount
 
(55
)
 
(56
)
Fair value adjustments due to hedge on indebtedness
 
45

 
47

Capital leases
 
90

 
88

Total long-term debt
 
1,609

 
1,603

Less: Current maturities of long-term debt
 
45

 
35

Long-term debt
 
$
1,564

 
$
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
 
$
18

 
$
45

 
$
36

 
$
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 values and carrying values of total debt, including current maturities, were as follows:
 
In millions
 
July 2,
2017
 
December 31,
2016
Fair value of total debt (1)
 
$
2,036

 
$
2,077

Carrying value of total debt
 
1,797

 
1,856

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

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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 
 
July 2,
2017
 
July 3,
2016
Balance, beginning of year
 
$
1,414

 
$
1,404

Provision for warranties issued
 
239

 
181

Deferred revenue on extended warranty contracts sold
 
101

 
116

Payments
 
(199
)
 
(199
)
Amortization of deferred revenue on extended warranty contracts
 
(109
)
 
(98
)
Changes in estimates for pre-existing warranties
 
74

 
12

Foreign currency translation
 
1

 
(5
)
Balance, end of period
 
$
1,521

 
$
1,411

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

 
 
Current portion
 
$
232

 
Current portion of deferred revenue
Long-term portion
 
505

 
Other liabilities and deferred revenue
Total
 
$
737

 
 
 
 
 
 
 
Long-term portion of warranty liability
 
$
392

 
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
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

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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 $39 million and $99 million in the second and third quarter, respectively, 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.
We are funding the Campaign, which began in the fourth quarter of 2016, with a combination of cash and credit memos. The remaining accrual of $159 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 July 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 July 2, 2017, if we were to stop purchasing from each of these suppliers, the aggregate amount of the penalty would be approximately $107 million, of which $35 million relates to a contract with a components supplier that extends to 2018 and $28 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 July 2, 2017, the total commitments under these contracts were $43 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 $82 million at July 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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Table of Contents

NOTE 10. ACCUMULATED OTHER COMPREHENSIVE LOSS
Following are the changes in accumulated other comprehensive income (loss) by component for the three months ended:
 
 
Three months ended
In millions
 
Change in
pensions and
other
postretirement
defined benefit
plans
 
Foreign
currency
translation
adjustment
 
Unrealized gain
(loss) on
marketable
securities
 
Unrealized gain
(loss) on
derivatives
 
Total
attributable to
Cummins Inc.
 
Noncontrolling
interests
 
Total other comprehensive income (loss)
Balance at April 3, 2016
 
$
(645
)
 
$
(753
)
 
$
(2
)
 
$
(17
)
 
$
(1,417
)
 
 

 
 

Other comprehensive income before reclassifications
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Before tax amount
 

 
(207
)
 
1

 
(10
)
 
(216
)
 
$
(6
)
 
$
(222
)
Tax benefit (expense)
 

 

 

 
2

 
2

 

 
2

After tax amount
 

 
(207
)
 
1

 
(8
)
 
(214
)
 
(6
)
 
(220
)
Amounts reclassified from accumulated other comprehensive loss(1)(2)
 
9

 

 

 
2

 
11

 

 
11

Net current period other comprehensive income (loss)
 
9

 
(207
)
 
1

 
(6
)
 
(203
)
 
$
(6
)
 
$
(209
)
Balance at July 3, 2016
 
$
(636
)
 
$
(960
)
 
$
(1
)
 
$
(23
)
 
$
(1,620
)
 
 

 
 

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

 
 

Other comprehensive income before reclassifications
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Before tax amount
 

 
105

 
1

 
(2
)
 
104

 
$
1

 
$
105

Tax benefit (expense)
 

 
(4
)
 
(1
)
 
1

 
(4
)
 

 
(4
)
After tax amount
 

 
101

 

 
(1
)
 
100

 
1

 
101

Amounts reclassified from accumulated other comprehensive loss(1)(2)
 
15

 

 
1

 
1

 
17

 

 
17

Net current period other comprehensive income (loss)
 
15

 
101

 
1

 

 
117

 
$
1

 
$
118

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

 
$
(7
)
 
$
(1,615
)
 
 

 
 

____________________________________
(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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Table of Contents

Following are the changes in accumulated other comprehensive income (loss) by component for the six months ended:
 
 
 
Six months ended
In millions
 
Change in
pensions and
other
postretirement
defined benefit
plans
 
Foreign
currency
translation
adjustment
 
Unrealized gain
(loss) on
marketable
securities
 
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
 

 
(265
)
 
1

 
(36
)
 
(300
)
 
$
(6
)
 
$
(306
)
Tax benefit (expense)
 

 
1

 

 
6

 
7

 

 
7

After tax amount
 

 
(264
)
 
1

 
(30
)
 
(293
)
 
(6
)
 
(299
)
Amounts reclassified from accumulated other comprehensive loss(1)(2)
 
18

 

 

 
3

 
21

 

 
21

Net current period other comprehensive income (loss)
 
18

 
(264
)
 
1

 
(27
)
 
(272
)
 
$
(6
)
 
$
(278
)
Balance at July 3, 2016
 
$
(636
)
 
$
(960
)
 
$
(1
)
 
$
(23
)
 
$
(1,620
)
 
 

 
 

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

 
 

Other comprehensive income before reclassifications
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Before tax amount
 
8

 
180

 
2

 
(8
)
 
182

 
$
14

 
$
196

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

 
(13
)
 

 
(13
)
After tax amount
 
5

 
168

 
1

 
(5
)
 
169

 
14

 
183

Amounts reclassified from accumulated other comprehensive loss(1)(2)
 
31

 

 

 
6

 
37

 

 
37

Net current period other comprehensive income (loss)
 
36

 
168

 
1

 
1

 
206

 
$
14

 
$
220

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

 
$
(7
)
 
$
(1,615
)
 
 

 
 

____________________________________
(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.

16

Table of Contents

NOTE 11. ACQUISITION

In April 2017, we entered into an agreement to form a joint venture with Eaton Corporation PLC and we closed the transaction on July 31, 2017. We purchased a 50 percent interest in the new venture named Eaton Cummins Automated Transmission Technologies for $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 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. We expect to record total assets of approximately $1.2 billion upon consolidation, the substantial majority of which will be intangible assets and goodwill.
NOTE 12. OPERATING SEGMENTS
Operating segments under GAAP are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (CODM), or decision-making group, in deciding how to allocate resources and in assessing performance. Our CODM is the President and Chief Operating Officer.
Our reportable operating segments consist of Engine, Distribution, Components 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.

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Table of Contents

Summarized financial information regarding our reportable operating segments is shown in the table below:
In millions
 
Engine
 
Distribution
 
Components
 
Power Systems
 
Intersegment Eliminations (1)
 
Total
Three months ended July 2, 2017
 
 

 
 
 
 

 
 

 
 

 
 

External sales
 
$
1,711

 
$
1,716

 
$
1,064

 
$
587

 
$

 
$
5,078

Intersegment sales
 
596

 
6

 
390

 
430

 
(1,422
)
 

Total sales
 
2,307

 
1,722