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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended October 1, 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 October 1, 2017, there were 165,967,528 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.

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CUMMINS INC. AND SUBSIDIARIES

TABLE OF CONTENTS

QUARTERLY REPORT ON FORM 10-Q



		Page
	PART I. FINANCIAL INFORMATION
ITEM 1.	Condensed Consolidated Financial Statements (Unaudited)	3
	Condensed Consolidated Statements of Income for the three and nine months ended October 1, 2017 and October 2, 2016	3
	Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended October 1, 2017 and October 2, 2016	4
	Condensed Consolidated Balance Sheets at October 1, 2017 and December 31, 2016	5
	Condensed Consolidated Statements of Cash Flows for the nine months ended October 1, 2017 and October 2, 2016	6
	Condensed Consolidated Statements of Changes in Equity for the nine months ended October 1, 2017 and October 2, 2016	7
	Notes to Condensed Consolidated Financial Statements	8
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	50
ITEM 4.	Controls and Procedures	50
	PART II. OTHER INFORMATION
ITEM 1.	Legal Proceedings	51
ITEM 1A.	Risk Factors	51
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
ITEM 3.	Defaults Upon Senior Securities	52
ITEM 4.	Mine Safety Disclosures	52
ITEM 5.	Other Information	52
ITEM 6.	Exhibits	52
	Signatures	53

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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				Nine months ended
In millions, except per share amounts	October 1, 2017		October 2, 2016		October 1, 2017		October 2, 2016
NET SALES ^(a)	$	5,285	$	4,187	$	14,952	$	13,006
Cost of sales	3,946		3,108		11,236		9,674
GROSS MARGIN	1,339		1,079		3,716		3,332
OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses	624		513		1,757		1,527
Research, development and engineering expenses	213		157		545		478
Equity, royalty and interest income from investees (Note 4)	95		74		301		234
Loss contingency (Note 9)	—		99		—		138
Other operating income (expense), net	32		—		55		(2		)
OPERATING INCOME	629		384		1,770		1,421
Interest income	4		6		11		18
Interest expense (Note 7)	18		16		57		51
Other income (expense), net	7		8		45		34
INCOME BEFORE INCOME TAXES	622		382		1,769		1,422
Income tax expense	165		82		466		362
CONSOLIDATED NET INCOME	457		300		1,303		1,060
Less: Net income attributable to noncontrolling interests	4		11		30		44
NET INCOME ATTRIBUTABLE TO CUMMINS INC.	$	453	$	289	$	1,273	$	1,016

EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
Basic	$	2.72	$	1.72	$	7.62	$	5.99
Diluted	$	2.71	$	1.72	$	7.60	$	5.99

WEIGHTED AVERAGE SHARES OUTSTANDING
Basic	166.3		167.8		167.0		169.5
Dilutive effect of stock compensation awards	0.7		0.4		0.6		0.2
Diluted	167.0		168.2		167.6		169.7

CASH DIVIDENDS DECLARED PER COMMON SHARE	$	1.08	$	1.025	$	3.13	$	2.975

____________________________________

^(a)Includes sales to nonconsolidated equity investees of $285 million and $835 million and $275 million and $793 million for the three and nine months ended October 1, 2017 and October 2, 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						Nine months ended
In millions	October 1, 2017			October 2, 2016			October 1, 2017		October 2, 2016
CONSOLIDATED NET INCOME	$	457		$	300		$	1,303	$	1,060
Other comprehensive income (loss), net of tax (Note 10)
Change in pension and other postretirement defined benefit plans	16			13			52		31
Foreign currency translation adjustments	94			(29		)	276		(299		)
Unrealized gain (loss) on marketable securities	—			—			1		1
Unrealized gain (loss) on derivatives	(1		)	7			—		(20		)
Total other comprehensive income (loss), net of tax	109			(9		)	329		(287		)
COMPREHENSIVE INCOME	566			291			1,632		773
Less: Comprehensive income attributable to noncontrolling interests	2			14			42		41
COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC.	$	564		$	277		$	1,590	$	732

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	October 1, 2017			December 31, 2016
ASSETS
Current assets
Cash and cash equivalents	$	1,290		$	1,120
Marketable securities (Note 5)	154			260
Total cash, cash equivalents and marketable securities	1,444			1,380
Accounts and notes receivable, net
Trade and other	3,532			2,803
Nonconsolidated equity investees	278			222
Inventories (Note 6)	3,146			2,675
Prepaid expenses and other current assets	656			627
Total current assets	9,056			7,707
Long-term assets
Property, plant and equipment	7,901			7,635
Accumulated depreciation	(4,085		)	(3,835		)
Property, plant and equipment, net	3,816			3,800
Investments and advances related to equity method investees	1,213			946
Goodwill	1,036			480
Other intangible assets, net	964			332
Pension assets	912			731
Other assets	995			1,015
Total assets	$	17,992		$	15,011

LIABILITIES
Current liabilities
Accounts payable (principally trade)	$	2,486		$	1,854
Loans payable (Note 7)	64			41
Commercial paper (Note 7)	514			212
Accrued compensation, benefits and retirement costs	674			412
Current portion of accrued product warranty (Note 8)	462			333
Current portion of deferred revenue	528			468
Other accrued expenses	968			970
Current maturities of long-term debt (Note 7)	62			35
Total current liabilities	5,758			4,325
Long-term liabilities
Long-term debt (Note 7)	1,615			1,568
Postretirement benefits other than pensions	319			329
Pensions	328			326
Other liabilities and deferred revenue	1,411			1,289
Total liabilities	$	9,431		$	7,837

Commitments and contingencies (Note 9)

EQUITY
Cummins Inc. shareholders’ equity
Common stock, $2.50 par value, 500 shares authorized, 222.4 and 222.4 shares issued	$	2,198		$	2,153
Retained earnings	11,791			11,040
Treasury stock, at cost, 56.4 and 54.2 shares	(4,849		)	(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)	(1,504		)	(1,821		)
Total Cummins Inc. shareholders’ equity	7,629			6,875
Noncontrolling interests	932			299
Total equity	$	8,561		$	7,174
Total liabilities and equity	$	17,992		$	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)

	Nine months ended
In millions	October 1, 2017			October 2, 2016
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income	$	1,303		$	1,060
Adjustments to reconcile consolidated net income to net cash provided by operating activities
Depreciation and amortization	433			391
Deferred income taxes	26			60
Equity in income of investees, net of dividends	(166		)	(94		)
Pension contributions in excess of expense (Note 3)	(63		)	(92		)
Other post retirement benefits payments in excess of expense (Note 3)	(4		)	(16		)
Stock-based compensation expense	34			28
Restructuring payments	—			(53		)
Loss contingency (Note 9)	—			138
Translation and hedging activities	61			(39		)
Changes in current assets and liabilities, net of acquisitions
Accounts and notes receivable	(722		)	(112		)
Inventories	(401		)	(150		)
Other current assets	(28		)	138
Accounts payable	567			101
Accrued expenses	369			(279		)
Changes in other liabilities and deferred revenue	177			188
Other, net	(115		)	45
Net cash provided by operating activities	1,471			1,314

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures	(282		)	(312		)
Investments in internal use software	(59		)	(42		)
Proceeds from disposals of property, plant and equipment	104			11
Investments in and advances to equity investees	(71		)	(29		)
Acquisitions of businesses, net of cash acquired (Note 11)	(600		)	(1		)
Investments in marketable securities—acquisitions (Note 5)	(106		)	(447		)
Investments in marketable securities—liquidations (Note 5)	218			291
Cash flows from derivatives not designated as hedges	9			(64		)
Other, net	1			3
Net cash used in investing activities	(786		)	(590		)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings	4			111
Net borrowings of commercial paper	302			273
Payments on borrowings and capital lease obligations	(38		)	(156		)
Net borrowings under short-term credit agreements	19			25
Distributions to noncontrolling interests	(29		)	(42		)
Dividend payments on common stock	(522		)	(505		)
Repurchases of common stock	(391		)	(745		)
Other, net	55			(6		)
Net cash used in financing activities	(600		)	(1,045		)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	85			(139		)
Net increase (decrease) in cash and cash equivalents	170			(460		)
Cash and cash equivalents at beginning of year	1,120			1,711
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	1,290		$	1,251

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 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						1,016												1,016			44			1,060
Other comprehensive income (loss), net of tax (Note 10)															(284		)	(284		)	(3		)	(287		)
Issuance of common stock			5															5			—			5
Employee benefits trust activity			19									3						22			—			22
Repurchases of common stock									(745		)							(745		)	—			(745		)
Cash dividends on common stock						(505		)										(505		)	—			(505		)
Distributions to noncontrolling interests																		—			(49		)	(49		)
Stock based awards			(7		)				12									5			—			5
Other shareholder transactions			14															14			(6		)	8
BALANCE AT OCTOBER 2, 2016	$	556	$	1,653		$	10,833		$	(4,468	)	$	(8	)	$	(1,632	)	$	6,934		$	330		$	7,264

BALANCE AT DECEMBER 31, 2016	$	556	$	1,597		$	11,040		$	(4,489	)	$	(8	)	$	(1,821	)	$	6,875		$	299		$	7,174
Net income						1,273												1,273			30			1,303
Other comprehensive income (loss), net of tax (Note 10)															317			317			12			329
Issuance of common stock			5															5			—			5
Employee benefits trust activity			14									1						15			—			15
Repurchases of common stock									(391		)							(391		)	—			(391		)
Cash dividends on common stock						(522		)										(522		)	—			(522		)
Distributions to noncontrolling interests																		—			(29		)	(29		)
Stock based awards			2						31									33			—			33
Acquisition of business																		—			600			600
Other shareholder transactions			24															24			20			44
BALANCE AT OCTOBER 1, 2017	$	556	$	1,642		$	11,791		$	(4,849	)	$	(7	)	$	(1,504	)	$	7,629		$	932		$	8,561

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

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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, transmissions 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 nine 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 third quarters of 2017 and 2016 ended on October 1 and October 2, 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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	Three months ended		Nine months ended
	October 1, 2017	October 2, 2016	October 1, 2017	October 2, 2016
Options excluded	3,728	936,857	42,139	1,295,664

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				Nine months ended
In millions	October 1, 2017		October 2, 2016		October 1, 2017		October 2, 2016
Defined benefit pension plans
Voluntary contribution	$	41	$	16	$	125	$	101
Mandatory contribution	—		5		—		23
Defined benefit pension contributions	$	41	$	21	$	125	$	124

Other postretirement plans	$	1	$	4	$	19	$	32

Defined contribution pension plans	$	19	$	17	$	67	$	53

We anticipate making additional defined benefit pension contributions during the remainder of 2017 of $10 million for our U.S. and U.K. pension plans. Approximately $134 million of the estimated $135 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	October 1, 2017			October 2, 2016			October 1, 2017			October 2, 2016			October 1, 2017		October 2, 2016
Service cost	$	27		$	22		$	7		$	5		$	—	$	—
Interest cost	26			26			10			13			3		4
Expected return on plan assets	(50		)	(50		)	(18		)	(17		)	—		—
Recognized net actuarial loss	10			9			10			3			2		1
Net periodic benefit cost	$	13		$	7		$	9		$	4		$	5	$	5




	Pension
	U.S. Plans						U.K. Plans						Other Postretirement Benefits
	Nine months ended
In millions	October 1, 2017			October 2, 2016			October 1, 2017			October 2, 2016			October 1, 2017		October 2, 2016
Service cost	$	80		$	68		$	20		$	16		$	—	$	—
Interest cost	79			82			30			39			10		12
Expected return on plan assets	(153		)	(152		)	(52		)	(55		)	—		—
Recognized net actuarial loss	28			23			30			11			5		4
Net periodic benefit cost	$	34		$	21		$	28		$	11		$	15	$	16

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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					Nine months ended
In millions	October 1, 2017			October 2, 2016		October 1, 2017			October 2, 2016
Distribution entities
Komatsu Cummins Chile, Ltda.	$	8		$	8	$	23		$	26
North American distributors	—			7		—			18
All other distributors	(1		)	1		(1		)	2
Manufacturing entities
Beijing Foton Cummins Engine Co., Ltd.	24			19		79			59
Dongfeng Cummins Engine Company, Ltd.	15			10		56			32
Chongqing Cummins Engine Company, Ltd.	11			11		30			28
All other manufacturers	27			8		78			40
Cummins share of net income	84			64		265			205
Royalty and interest income	11			10		36			29
Equity, royalty and interest income from investees	$	95		$	74	$	301		$	234

NOTE 5. MARKETABLE SECURITIES

A summary of marketable securities, all of which are classified as current, was as follows: