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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 July 1, 2018

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 1, 2018, there were 163,311,209 shares of common stock outstanding with a par value of $2.50 per share.

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CUMMINS INC. AND SUBSIDIARIES

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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 six months ended July 1, 2018 and July 2, 2017	3
	Condensed Consolidated Statements of Comprehensive Income for the three and six months ended July 1, 2018 and July 2, 2017	4
	Condensed Consolidated Balance Sheets at July 1, 2018 and December 31, 2017	5
	Condensed Consolidated Statements of Cash Flows for the six months ended July 1, 2018 and July 2, 2017	6
	Condensed Consolidated Statements of Changes in Equity for the six months ended July 1, 2018 and July 2, 2017	7
	Notes to Condensed Consolidated Financial Statements	8
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	53
ITEM 4.	Controls and Procedures	53
	PART II. OTHER INFORMATION
ITEM 1.	Legal Proceedings	54
ITEM 1A.	Risk Factors	54
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
ITEM 3.	Defaults Upon Senior Securities	55
ITEM 4.	Mine Safety Disclosures	55
ITEM 5.	Other Information	55
ITEM 6.	Exhibits	55
	Signatures	56

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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				Six months ended
In millions, except per share amounts	July 1, 2018		July 2, 2017		July 1, 2018		July 2, 2017
NET SALES ^(a)(Note 3)	$	6,132	$	5,078	$	11,702	$	9,667
Cost of sales	4,692		3,827		9,062		7,284
GROSS MARGIN	1,440		1,251		2,640		2,383
OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses	613		606		1,190		1,153
Research, development and engineering expenses	219		175		429		333
Equity, royalty and interest income from investees (Note 5)	110		98		225		206
Other operating income (expense), net	4		18		6		23
OPERATING INCOME	722		586		1,252		1,126
Interest income	10		5		17		7
Interest expense	28		21		52		39
Other income, net	11		29		21		53
INCOME BEFORE INCOME TAXES	715		599		1,238		1,147
Income tax expense (Note 6)	161		158		359		301
CONSOLIDATED NET INCOME	554		441		879		846
Less: Net income attributable to noncontrolling interests	9		17		9		26
NET INCOME ATTRIBUTABLE TO CUMMINS INC.	$	545	$	424	$	870	$	820

EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
Basic	$	3.33	$	2.53	$	5.30	$	4.90
Diluted	$	3.32	$	2.53	$	5.27	$	4.88

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic	163.8		167.3		164.3		167.4
Dilutive effect of stock compensation awards	0.5		0.5		0.7		0.5
Diluted	164.3		167.8		165.0		167.9

CASH DIVIDENDS DECLARED PER COMMON SHARE	$	1.08	$	1.025	$	2.16	$	2.05

____________________________________

^(a)Includes sales to nonconsolidated equity investees of $340 million and $637 million and $283 million and $550 million for the three and six months ended July 1, 2018 and July 2, 2017, 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					Six months ended
In millions	July 1, 2018			July 2, 2017		July 1, 2018			July 2, 2017
CONSOLIDATED NET INCOME	$	554		$	441	$	879		$	846
Other comprehensive income (loss), net of tax (Note 13)
Change in pension and other postretirement defined benefit plans	13			15		21			36
Foreign currency translation adjustments	(299		)	102		(215		)	182
Unrealized gain on marketable securities	—			1		—			1
Unrealized gain on derivatives	—			—		7			1
Total other comprehensive income (loss), net of tax	(286		)	118		(187		)	220
COMPREHENSIVE INCOME	268			559		692			1,066
Less: Comprehensive (loss) income attributable to noncontrolling interests	(7		)	18		(14		)	40
COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC.	$	275		$	541	$	706		$	1,026

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	July 1, 2018			December 31, 2017
ASSETS
Current assets
Cash and cash equivalents	$	1,318		$	1,369
Marketable securities (Note 7)	214			198
Total cash, cash equivalents and marketable securities	1,532			1,567
Accounts and notes receivable, net
Trade and other	3,794			3,311
Nonconsolidated equity investees	301			307
Inventories (Note 8)	3,559			3,166
Prepaid expenses and other current assets	649			577
Total current assets	9,835			8,928
Long-term assets
Property, plant and equipment	7,982			8,058
Accumulated depreciation	(4,158		)	(4,131		)
Property, plant and equipment, net	3,824			3,927
Investments and advances related to equity method investees	1,303			1,156
Goodwill	1,079			1,082
Other intangible assets, net	940			973
Pension assets	1,022			1,043
Other assets	912			966
Total assets	$	18,915		$	18,075

LIABILITIES
Current liabilities
Accounts payable (principally trade)	$	2,981		$	2,579
Loans payable (Note 9)	55			57
Commercial paper (Note 9)	802			298
Accrued compensation, benefits and retirement costs	468			811
Current portion of accrued product warranty (Note 10)	464			454
Current portion of deferred revenue	479			500
Other accrued expenses (Note 11)	806			915
Current maturities of long-term debt (Note 9)	49			63
Total current liabilities	6,104			5,677
Long-term liabilities
Long-term debt (Note 9)	1,556			1,588
Postretirement benefits other than pensions	289			289
Pensions	331			330
Other liabilities and deferred revenue (Note 11)	2,441			2,027
Total liabilities	$	10,721		$	9,911

Commitments and contingencies (Note 12)

EQUITY
Cummins Inc. shareholders’ equity
Common stock, $2.50 par value, 500 shares authorized, 222.4 and 222.4 shares issued	$	2,239		$	2,210
Retained earnings	12,009			11,464
Treasury stock, at cost, 59.1 and 56.7 shares	(5,276		)	(4,905		)
Common stock held by employee benefits trust, at cost, 0.5 and 0.5 shares	(6		)	(7		)
Accumulated other comprehensive loss (Note 13)	(1,667		)	(1,503		)
Total Cummins Inc. shareholders’ equity	7,299			7,259
Noncontrolling interests	895			905
Total equity	$	8,194		$	8,164
Total liabilities and equity	$	18,915		$	18,075

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)

	Six months ended
In millions	July 1, 2018			July 2, 2017
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income	$	879		$	846
Adjustments to reconcile consolidated net income to net cash provided by operating activities
Depreciation and amortization	308			284
Deferred income taxes	(21		)	—
Equity in income of investees, net of dividends	(163		)	(132		)
Pension contributions under (in excess of) expense, net (Note 4)	25			(44		)
Other post retirement benefits payments in excess of expense, net (Note 4)	—			(8		)
Stock-based compensation expense	28			23
Loss contingency payments	(65		)	—
Translation and hedging activities	(21		)	31
Changes in current assets and liabilities
Accounts and notes receivable	(555		)	(488		)
Inventories	(475		)	(264		)
Other current assets	(42		)	21
Accounts payable	442			403
Accrued expenses	94			132
Changes in other liabilities and deferred revenue	5			103
Other, net	34			(81		)
Net cash provided by operating activities	473			826

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures	(186		)	(182		)
Investments in internal use software	(35		)	(40		)
Investments in and advances to equity investees	(15		)	(64		)
Investments in marketable securities—acquisitions (Note 7)	(143		)	(69		)
Investments in marketable securities—liquidations (Note 7)	116			162
Cash flows from derivatives not designated as hedges	(9		)	19
Other, net	36			14
Net cash used in investing activities	(236		)	(160		)

CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) of commercial paper (Note 9)	504			(78		)
Payments on borrowings and capital lease obligations	(33		)	(29		)
Distributions to noncontrolling interests	(11		)	(10		)
Dividend payments on common stock	(355		)	(343		)
Repurchases of common stock	(379		)	(120		)
Other, net	21			36
Net cash used in financing activities	(253		)	(544		)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	(35		)	51
Net (decrease) increase in cash and cash equivalents	(51		)	173
Cash and cash equivalents at beginning of year	1,369			1,120
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	1,318		$	1,293

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, 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 13)															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

BALANCE AT DECEMBER 31, 2017	$	556	$	1,654		$	11,464		$	(4,905	)	$	(7	)	$	(1,503	)	$	7,259		$	905		$	8,164
Impact of adopting accounting standards (Notes 3 and 14)						30												30			—			30
Net income						870												870			9			879
Other comprehensive income (loss), net of tax (Note 13)															(164		)	(164		)	(23		)	(187		)
Issuance of common stock			8															8			—			8
Employee benefits trust activity			8									1						9			—			9
Repurchases of common stock									(379		)							(379		)	—			(379		)
Cash dividends on common stock						(355		)										(355		)	—			(355		)
Distributions to noncontrolling interests																		—			(11		)	(11		)
Stock based awards			(4		)				8									4			—			4
Other shareholder transactions			17															17			15			32
BALANCE AT JULY 1, 2018	$	556	$	1,683		$	12,009		$	(5,276	)	$	(6	)	$	(1,667	)	$	7,299		$	895		$	8,194

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, and one of the first diesel engine manufacturers. In 2001, we changed our name to Cummins Inc. 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, electric power generation systems, batteries and electrified power systems. We sell our products to original equipment manufacturers (OEMs), distributors and other customers worldwide. We serve our customers through a network of approximately 500 wholly-owned and independent distributor locations and over 7,500 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 (SEC) 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, 2017. 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 2018 and 2017 ended on July 1 and July 2, respectively. Our fiscal year ends on December 31, regardless of the day of the week on which December 31 falls.

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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:



	Three months ended		Six months ended
	July 1, 2018	July 2, 2017	July 1, 2018	July 2, 2017
Options excluded	909,394	6,155	458,130	61,345

NOTE 3. REVENUE RECOGNITION

Revenue Recognition Accounting Pronouncement Adoption

In May 2014, the Financial Accounting Standards Board (FASB) amended its standards related to revenue recognition to replace all existing revenue recognition guidance and provide a single, comprehensive model for all contracts with customers. The revised standard contains principles to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that we recognize revenue to depict 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 estimation 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 as well as assets recognized from costs incurred to fulfill these contracts.

The standard allows either full or modified retrospective adoption effective for annual and interim periods beginning January 1, 2018. We adopted the standard using the modified retrospective approach. We elected to apply this guidance retrospectively only to contracts that were not completed at January 1, 2018.

We identified a change in the manner in which we account for certain license income. We license certain technology to our unconsolidated joint ventures that meets the definition of functional under the standard, which requires that revenue be recognized at a point in time rather than the previous requirement of recognizing it over the license term. Using the modified retrospective adoption method, we recorded an adjustment to our opening equity balance at January 1, 2018, to account for the differences between existing license income recorded and what would have been recorded under the new standard for contracts for which we started recognizing revenue prior to the adoption date. There was not a material impact on any individual year from this change.

We also identified transactions where revenue recognition was historically limited to the amount of billings not contingent on our future performance. With the allocation provisions of the new model, we accelerated the timing of revenue recognition for amounts related to satisfied performance obligations that would be delayed under the historical guidance. The impact of this change was not material.

On an ongoing basis, this amendment is not expected to have a material impact on our Condensed Consolidated Financial Statements, including our internal controls over financial reporting, but will result in expanded disclosures in the Notes to our Condensed Consolidated Financial Statements.

We recorded a net increase to opening retained earnings of $28 million, net of tax, as of January 1, 2018, due to the cumulative impact of adopting the new revenue standard, with the impact primarily related to our technology licenses that now qualify for point in time recognition rather than over time. The impact to any individual financial statement line item as a result of applying the new standard, as compared to the old standard, was not material for the six months ended July 1, 2018.

Revenue Recognition Policies

Revenue Recognition Sales of Products

We sell to customers either through long-term arrangements or standalone purchase orders. Our long-term arrangements generally do not include committed volumes until underlying purchase orders are issued. Our performance obligations vary by contract, but may include diesel and natural gas engines and engine-related component products, including filtration,

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aftertreatment, turbochargers, fuel systems, controls systems, air handling systems, transmissions, electric power generation systems, batteries, parts, maintenance services and extended coverage.

Typically, we recognize revenue on the products we sell at a point in time, generally in accordance with shipping terms, which reflects the transfer of control to the customer. Since control of construction projects transfer to the customer as the work is performed, revenue on these projects is recognized based on the percentage of inputs incurred to date compared to the total expected cost of inputs, which is reflective of the value transferred to the customer. Revenue is recognized under long-term maintenance and other service agreements over the term of the agreement as underlying services are performed based on the percentage of the cost of services provided to date compared to the total expected cost of services to be provided under the contract. Sales of extended coverage are recognized based on the pattern of expected costs over the extended coverage period or, if such a pattern is unknown, on a straight-line basis over the coverage period as the customer is considered to benefit from our stand ready obligation over the coverage period. In all cases, we believe cost incurred is the most representative depiction of the extent of service performed to date on a particular contract.

Our arrangements may include the act of shipping products to our customers after the performance obligation related to that product has been satisfied. We have elected to account for shipping and handling as activities to fulfill the promise to transfer goods and have not allocated revenue to the shipping activity. All related shipping and handling costs are accrued at the time of shipment.

Our sales arrangements may include the collection of sales and other similar taxes that are then remitted to the related taxing authority. We have elected to present the amounts collected for these taxes net of the related tax expense rather than presenting them as additional revenue.

We grant credit limits and terms to customers based upon traditional practices and competitive conditions. Typical terms vary by market, but payments are generally due in 90 days or less from invoicing for most of our product and service sales, while payments on construction and other similar arrangements may be due on an installment basis.

For contracts where the time between cash collection and performance is less than one year, we have elected to use the practical expedient that allows us to ignore the possible existence of a significant financing component within the contract. For contracts where this time period exceeds one year, generally the timing difference is the result of business concerns other than financing. We do have a limited amount of customer financing for which we charge or impute interest, but such amounts are immaterial to our Condensed Consolidated Statements of Income.

Sales Incentives

We provide various sales incentives to both our distribution network and OEM customers. These programs are designed to promote the sale of our products in the channel or encourage the usage of our products by OEM customers. When there is uncertainty surrounding these sales incentives, we may limit the amount of revenue we recognize under a contract until the uncertainty has been resolved. Sales incentives primarily fall into three categories:


•	Volume rebates;


•	Market share rebates; and


•	Aftermarket rebates.

For volume rebates, we provide certain customers with rebate opportunities for attaining specified volumes during a particular quarter or year. We consider the expected amount of these rebates at the time of the original sale as we determine the overall transaction price. We update our assessment of the amount of rebates that will be earned quarterly based on our best estimate of the volume levels the customer will reach during the measurement period. For market share rebates, we provide certain customers with rebate opportunities based on the percentage of their production that utilizes our product. These rebates are typically measured either quarterly or annually and we assess them at least quarterly to determine our current estimates of amounts expected to be earned. These estimates are considered in the determination of transaction price at the time of the original sale based on the current market shares, with adjustments made as the level changes. For aftermarket rebates, we provide incentives to promote sales to certain dealers and end-markets. These rebates are typically paid on a quarterly, or more frequent basis. At the time of the sales, we consider the expected amount of these rebates when determining the overall transaction price. Estimates are adjusted at the end of each quarter based on the amounts yet to be paid. These estimates are based on historical experience with the particular program.

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Sales Returns

The initial determination of the transaction price may also be impacted by expected product returns. Rights of return do not exist for the majority of our sales other than for quality issues. We do offer certain return rights in our aftermarket business, where some aftermarket customers are permitted to return small amounts of parts and filters each year, and in our power generation business, which sells portable generators to retail customers. An estimate of future returns is accounted for at the time of sale as a reduction in the overall contract transaction price based on historical return rates.

Multiple Performance Obligations

Our sales arrangements may include multiple performance obligations. We identify each of the material performance obligations in these arrangements and allocate the total transaction price to each performance obligation based on its relative selling price. In most cases, the individual performance obligations are also sold separately and we use that price as the basis for allocating revenue to the included performance obligations. When an arrangement includes multiple performance obligations and invoicing to the customer does not match the allocated portion of the transaction price, unbilled revenue or deferred revenue is recorded reflecting that difference. Unbilled and deferred revenue are discussed in more detail below.

Long-term Contracts

Our long-term maintenance agreements often include a variable component of the transaction price. We are generally compensated under such arrangements on a cost per hour of usage basis. We typically can estimate the expected usage over the life of the contract, but reassess the transaction price each quarter and adjust our recognized revenue accordingly. Certain maintenance agreements apply to generators used to provide standby power, which have limited expectations of usage. These agreements may include monthly minimum payments, providing some certainty to the total transaction price. For these particular contracts that relate to standby power, we limit revenue recognized to date to an amount representing the total minimums earned to date under the contract plus any cumulative billings earned in excess of the minimums. We reassess the estimates of progress and transaction price on a quarterly basis. For prime power arrangements, revenue is not subject to such a constraint and is generally equal to the current estimate on a percentage of completion basis times the total expected revenue under the contract.

Most of our contracts are for a period of less than one year. We have certain long-term maintenance agreements, construction contracts and extended warranty coverage arrangements that span a period in excess of one year. The aggregate amount of the transaction price for long-term maintenance agreements and construction contracts allocated to performance obligations that have not been satisfied as of July 1, 2018, was $676 million. We expect to recognize the related revenue of $247 million over the next 12 months and $429 million over periods up to 10 years. See NOTE 10 ,"PRODUCT WARRANTY LIABILITY," for additional disclosures on extended warranty coverage arrangements. Our other contracts generally are for a duration of less than one year or include payment terms that correspond to the value we are providing our customers.

Deferred and Unbilled Revenue

The timing of our billing does not always match the timing of our revenue recognition. We record deferred revenue when we are entitled to bill a customer in advance of when we are permitted to recognize revenue. Deferred revenue may arise in construction contracts, where billings may occur in advance of performance or in accordance with specific milestones. Deferred revenue may also occur in long-term maintenance contracts, where billings are often based on usage of the underlying equipment, which generally follows a predictable pattern that often will result in the accumulation of collections in advance of our performance of the related maintenance services. Finally, deferred revenue exists in our extended coverage contracts, where the cash is collected prior to the commencement of the coverage period. Deferred revenue is included in our Condensed Consolidated Balance Sheets as a component of current liabilities for those expected to be recognized in revenue in a period of less than one year and long-term liabilities for those expected to be recognized as revenue in a period beyond one year. Deferred revenue is recognized as revenue as (or when) control of the underlying product, project or service passes to the customer under the related contract.

We recognize unbilled revenue when the revenue has been earned, but not yet billed. Unbilled revenue is included in our Condensed Consolidated Balance Sheets as a component of current assets for those expected to be collected in a period of less than one year and long-term assets for those expected to be collected in a period beyond one year. Unbilled revenue relates to our right to consideration for our completed performance under a contract. Unbilled revenue generally arises from contractual provisions that delay a portion of the billings on genset deliveries until commissioning occurs. Unbilled revenue may also occur when billings trail the provision of service in construction and long-term maintenance contracts. We periodically assess our unbilled revenue for impairment.

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The following is a summary of our unbilled and deferred revenue and related activity:



In millions	July 1, 2018			January 1, 2018
Unbilled revenue	$	56		$	6
Deferred revenue, primarily extended warranty	1,101			1,052
Revenue recognized ⁽¹⁾	(206		)	—

____________________________________

⁽¹⁾ Relates to year-to-date revenues recognized from amounts included in contract liabilities at the beginning of the period.

Revenue recognized in the period from performance obligations satisfied in previous periods was immaterial.

We did not record any impairment losses on our unbilled revenues during the three and six months ended July 1, 2018.

Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable represent amounts billed to customers and not yet collected or amounts that have been earned, but may not be billed until the passage of time, and are recorded when the right to consideration becomes unconditional. Trade accounts receivable are recorded at the invoiced amount, which approximates net realizable value, and generally do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. We determine the allowance based on our historical collection experience and by performing an analysis of our accounts receivable in light of the current economic environment. We review our allowance for doubtful accounts on a regular basis. In addition, when necessary, we provide an allowance for the full amount of specific accounts deemed to be uncollectible. Account balances are charged off against the allowance in the period in which we determine that it is probable the receivable will not be recovered. The allowance for doubtful accounts balances for the periods ended July 1, 2018 and December 31, 2017, were $16 million and $16 million, respectively, and bad debt write-offs were not material.

Contract Costs

We are required to record an asset for the incremental costs of obtaining a contract with a customer and other costs to fulfill a contract not otherwise required to be immediately expensed when we expect to recover those costs. The only material incremental cost we incur is commission expense, which is generally incurred in the same period as the underlying revenue. Costs to fulfill a contract are generally limited to customer-specific engineering expenses that do not meet the definition of research and development expenses. As a practical expedient, we have elected to recognize these costs of obtaining a contract as an expense when the related contract period is less than one year. When the period exceeds one year, this asset is amortized over the life of the contract. We did not have any material capitalized balances at July 1, 2018.

Extended Warranty

In addition, we sell extended warranty coverage on most of our engines and on certain components. We consider a warranty to be extended coverage in any of the following situations:


•	When a warranty is sold separately or is optional (extended coverage contracts, for example) or


•	When a warranty provides additional services.

The consideration collected is initially deferred and is recognized as revenue in proportion to the costs expected to be incurred in performing services over the contract period. We compare the remaining deferred revenue balance quarterly to the estimated amount of future claims under extended warranty programs and provide an additional accrual when the deferred revenue balance is less than expected future costs.

Disaggregation of Revenue

Consolidated Revenue

The table below presents our consolidated sales by geographic area. Net sales attributed to geographic areas were based on the location of the customer.

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	Three months ended		Six months ended
In millions	July 1, 2018		July 1, 2018
United States	$	3,384	$	6,422
China	644		1,194
India	247		482
Other International	1,857		3,604
Total net sales	$	6,132	$	11,702

Segment Revenue

Engine segment external sales by market were as follows:



	Three months ended		Six months ended
In millions	July 1, 2018		July 1, 2018
Heavy-duty truck	$	730	$	1,344
Medium-duty truck and bus	714		1,341
Light-duty automotive	330		653
Total on-highway	1,774		3,338
Off-highway	276		525
Total sales	$	2,050	$	3,863

Distribution segment external sales by region were as follows:



	Three months ended		Six months ended
In millions	July 1, 2018		July 1, 2018
North America	$	1,349	$	2,623
Asia Pacific	211		398
Europe	143		274
China	84		161
Africa and Middle East	62		123
India	49		93
Latin America	45		83
Russia	45		80
Total sales	$	1,988	$	3,835

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Distribution segment external sales by product line were as follows:



	Three months ended		Six months ended
In millions	July 1, 2018		July 1, 2018
Parts	$	815	$	1,618
Engines	460		828
Service	368		719
Power generation	345		670
Total sales	$	1,988	$	3,835

Components segment external sales by business were as follows:



	Three months ended		Six months ended
In millions	July 1, 2018		July 1, 2018
Emission solutions	$	735	$	1,419
Turbo technologies	201		398
Filtration	257		514
Automated transmissions	141		258
Electronics and fuel systems	68		126
Total sales	$	1,402	$	2,715

Power Systems segment external sales by product line were as follows:



	Three months ended		Six months ended
In millions	July 1, 2018		July 1, 2018
Power generation	$	390	$	700
Industrial	208		409
Generator technologies	93		177
Total sales	$	691	$	1,286

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NOTE 4. 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 1,
2018

July 2,
2017

July 1,
2018

July 2,
2017

Defined benefit pension plans

Voluntary contribution