Table of Contents


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

cumminslogo.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, 20171, 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 2, 20171, 2018, there were 167,620,608163,311,209 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.
 

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 six months ended July 2, 20171, 2018 and July 3, 20162, 2017
3
 Condensed Consolidated Statements of Comprehensive Income for the three and six months ended July 2, 20171, 2018 and July 3, 20162, 2017
4
 Condensed Consolidated Balance Sheets at July 2, 20171, 2018 and December 31, 20162017
5
 Condensed Consolidated Statements of Cash Flows for the six months ended July 2, 20171, 2018 and July 3, 20162, 2017
6
 Condensed Consolidated Statements of Changes in Equity for the six months ended July 2, 20171, 2018 and July 3, 20162, 2017
7
 
Notes to Condensed Consolidated Financial Statements
8
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
2130
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
4653
ITEM 4.
Controls and Procedures
4653
 
PART II. OTHER INFORMATION
 
ITEM 1.
Legal Proceedings
4754
ITEM 1A.
Risk Factors
4754
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
4754
ITEM 3.
Defaults Upon Senior Securities
4855
ITEM 4.
Mine Safety Disclosures
4855
ITEM 5.
Other Information
4855
ITEM 6.
Exhibits
4855
 
Signatures
49
Cummins Inc. Exhibit Index
5056

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 Three months ended Six months ended
In millions, except per share amounts  July 2,
2017		 July 3,
2016		 July 2,
2017		 July 3,
2016		 July 1,
2018		 July 2,
2017		 July 1,
2018		 July 2,
2017
NET SALES (a)
 $5,078
 $4,528
 $9,667
 $8,819
NET SALES (a) (Note 3)
 $6,132
 $5,078
 $11,702
 $9,667
Cost of sales 3,829
 3,331
 7,290
 6,566
 4,692
 3,827
 9,062
 7,284
GROSS MARGIN 1,249
 1,197
 2,377
 2,253
 1,440
 1,251
 2,640
 2,383
OPERATING EXPENSES AND INCOME  
  
  
  
  
  
  
  
Selling, general and administrative expenses 596
 524
 1,133
 1,014
 613
 606
 1,190
 1,153
Research, development and engineering expenses 174
 155
 332
 321
 219
 175
 429
 333
Equity, royalty and interest income from investees (Note 4) 98
 88
 206
 160
Loss contingency (Note 9) —
 39
 —
 39
Equity, royalty and interest income from investees (Note 5) 110
 98
 225
 206
Other operating income (expense), net 18
 —
 23
 (2) 4
 18
 6
 23
OPERATING INCOME 595
 567
 1,141
 1,037
 722
 586
 1,252
 1,126
Interest income 5
 6
 7
 12
 10
 5
 17
 7
Interest expense (Note 7) 21
 16
 39
 35
Other income (expense), net 20
 18
 38
 26
Interest expense 28
 21
 52
 39
Other income, net 11
 29
 21
 53
INCOME BEFORE INCOME TAXES 599
 575
 1,147
 1,040
 715
 599
 1,238
 1,147
Income tax expense 158
 148
 301
 280
Income tax expense (Note 6) 161
 158
 359
 301
CONSOLIDATED NET INCOME 441
 427
 846
 760
 554
 441
 879
 846
Less: Net income attributable to noncontrolling interests 17
 21
 26
 33
 9
 17
 9
 26
NET INCOME ATTRIBUTABLE TO CUMMINS INC. $424
 $406
 $820
 $727
 $545
 $424
 $870
 $820
                
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.  
  
  
  
  
  
  
  
Basic $2.53
 $2.41
 $4.90
 $4.27
 $3.33
 $2.53
 $5.30
 $4.90
Diluted $2.53
 $2.40
 $4.88
 $4.26
 $3.32
 $2.53
 $5.27
 $4.88
                
WEIGHTED AVERAGE SHARES OUTSTANDING  
  
  
  
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING  
  
  
  
Basic 167.3
 168.8
 167.4
 170.3
 163.8
 167.3
 164.3
 167.4
Dilutive effect of stock compensation awards 0.5
 0.2
 0.5
 0.2
 0.5
 0.5
 0.7
 0.5
Diluted 167.8
 169.0
 167.9
 170.5
 164.3
 167.8
 165.0
 167.9
                
CASH DIVIDENDS DECLARED PER COMMON SHARE $1.025
 $0.975
 $2.05
 $1.95
 $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 and $276 million and $518 million for the three and six months ended July 1, 2018 and July 2, 2017, and July 3, 2016, respectively.
 
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 Three months ended Six months ended Three months ended Six months ended
In millions  July 2,
2017		 July 3,
2016		 July 2,
2017		 July 3,
2016		 July 1,
2018		 July 2,
2017		 July 1,
2018		 July 2,
2017
CONSOLIDATED NET INCOME $441
 $427
 $846
 $760
 $554
 $441
 $879
 $846
Other comprehensive income (loss), net of tax (Note 10)  
  
  
  
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 102
 (213) 182
 (270) (299) 102
 (215) 182
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
Unrealized gain on marketable securities —
 1
 —
 1
Unrealized gain on derivatives —
 —
 7
 1
Total other comprehensive income (loss), net of tax 118
 (209) 220
 (278) (286) 118
 (187) 220
COMPREHENSIVE INCOME 559
 218
 1,066
 482
 268
 559
 692
 1,066
Less: Comprehensive income attributable to noncontrolling interests 18
 15
 40
 27
Less: Comprehensive (loss) income attributable to noncontrolling interests (7) 18
 (14) 40
COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC. $541
 $203
 $1,026
 $455
 $275
 $541
 $706
 $1,026
 
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
In millions, except par value July 2,
2017		 December 31,
2016		 July 1,
2018		 December 31,
2017
ASSETS  
  
  
  
Current assets  
  
  
  
Cash and cash equivalents $1,293
 $1,120
 $1,318
 $1,369
Marketable securities (Note 5) 174
 260
Marketable securities (Note 7) 214
 198
Total cash, cash equivalents and marketable securities 1,467
 1,380
 1,532
 1,567
Accounts and notes receivable, net        
Trade and other 3,237
 2,803
 3,794
 3,311
Nonconsolidated equity investees 316
 222
 301
 307
Inventories (Note 6) 2,982
 2,675
Inventories (Note 8) 3,559
 3,166
Prepaid expenses and other current assets 600
 627
 649
 577
Total current assets 8,602
 7,707
 9,835
 8,928
Long-term assets  
  
  
  
Property, plant and equipment 7,804
 7,635
 7,982
 8,058
Accumulated depreciation (4,017) (3,835) (4,158) (4,131)
Property, plant and equipment, net 3,787
 3,800
 3,824
 3,927
Investments and advances related to equity method investees 1,162
 946
 1,303
 1,156
Goodwill 488
 480
 1,079
 1,082
Other intangible assets, net 339
 332
 940
 973
Pension assets 852
 731
 1,022
 1,043
Other assets 1,030
 1,015
 912
 966
Total assets $16,260
 $15,011
 $18,915
 $18,075
        
LIABILITIES  
  
  
  
Current liabilities  
  
  
  
Accounts payable (principally trade) $2,300
 $1,854
 $2,981
 $2,579
Loans payable (Note 7) 54
 41
Commercial paper (Note 7) 134
 212
Loans payable (Note 9) 55
 57
Commercial paper (Note 9) 802
 298
Accrued compensation, benefits and retirement costs 475
 412
 468
 811
Current portion of accrued product warranty (Note 8) 392
 333
Current portion of accrued product warranty (Note 10) 464
 454
Current portion of deferred revenue 520
 468
 479
 500
Other accrued expenses 974
 970
Current maturities of long-term debt (Note 7) 45
 35
Other accrued expenses (Note 11) 806
 915
Current maturities of long-term debt (Note 9) 49
 63
Total current liabilities 4,894
 4,325
 6,104
 5,677
Long-term liabilities  
  
  
  
Long-term debt (Note 7) 1,564
 1,568
Long-term debt (Note 9) 1,556
 1,588
Postretirement benefits other than pensions 318
 329
 289
 289
Pensions 327
 326
 331
 330
Other liabilities and deferred revenue 1,335
 1,289
Other liabilities and deferred revenue (Note 11) 2,441
 2,027
Total liabilities $8,438
 $7,837
 $10,721
 $9,911
        
Commitments and contingencies (Note 9) 

 

Commitments and contingencies (Note 12) 


 


  
  
  
  
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
Common stock, $2.50 par value, 500 shares authorized, 222.4 and 222.4 shares issued $2,239
 $2,210
Retained earnings 11,517
 11,040
 12,009
 11,464
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)
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 7,493
 6,875
 7,299
 7,259
Noncontrolling interests 329
 299
 895
 905
Total equity $7,822
 $7,174
 $8,194
 $8,164
Total liabilities and equity $16,260
 $15,011
 $18,915
 $18,075


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

CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Six months ended Six months ended
In millions July 2,
2017		 July 3,
2016		 July 1,
2018		 July 2,
2017
CASH FLOWS FROM OPERATING ACTIVITIES  
  
  
  
Consolidated net income $846
 $760
 $879
 $846
Adjustments to reconcile consolidated net income to net cash provided by operating activities  
  
  
  
Depreciation and amortization 284
 259
 308
 284
Deferred income taxes —
 2
 (21) —
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)
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 23
 20
 28
 23
Restructuring payments —
 (42)
Loss contingency (Note 9) —
 39
Loss contingency payments (65) —
Translation and hedging activities 31
 (45) (21) 31
Changes in current assets and liabilities    
    
Accounts and notes receivable (488) (252) (555) (488)
Inventories (264) (101) (475) (264)
Other current assets 21
 189
 (42) 21
Accounts payable 403
 143
 442
 403
Accrued expenses 132
 (209) 94
 132
Changes in other liabilities and deferred revenue 103
 129
 5
 103
Other, net (81) 32
 34
 (81)
Net cash provided by operating activities 826
 738
 473
 826
        
CASH FLOWS FROM INVESTING ACTIVITIES  
  
  
  
Capital expenditures (182) (189) (186) (182)
Investments in internal use software (40) (27) (35) (40)
Investments in and advances to equity investees (64) (17) (15) (64)
Investments in marketable securities—acquisitions (Note 5) (69) (379)
Investments in marketable securities—liquidations (Note 5) 162
 237
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 19
 (21) (9) 19
Other, net 14
 5
 36
 14
Net cash used in investing activities (160) (391) (236) (160)
        
CASH FLOWS FROM FINANCING ACTIVITIES  
  
  
  
Proceeds from borrowings 2
 109
Net (payments) borrowings of commercial paper (Note 7) (78) 200
Net borrowings (payments) of commercial paper (Note 9) 504
 (78)
Payments on borrowings and capital lease obligations (29) (133) (33) (29)
Distributions to noncontrolling interests (10) (24) (11) (10)
Dividend payments on common stock (343) (333) (355) (343)
Repurchases of common stock (Note 2) (120) (695)
Repurchases of common stock (379) (120)
Other, net 34
 (20) 21
 36
Net cash used in financing activities (544) (896) (253) (544)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 51
 (117) (35) 51
Net increase (decrease) in cash and cash equivalents 173
 (666)
Net (decrease) increase in cash and cash equivalents (51) 173
Cash and cash equivalents at beginning of year 1,120
 1,711
 1,369
 1,120
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,293
 $1,045
 $1,318
 $1,293


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

CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
 
In millionsCommon
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		 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
 $556
 $1,597
 $11,040
 $(4,489) $(8) $(1,821) $6,875
 $299
 $7,174
Net income

 

 820
 

 

 

 820
 26
 846
 

 

 820
 

 

 

 820
 26
 846
Other comprehensive income (loss), net of tax (Note 10)

 

 

 

 

 206
 206
 14
 220
Other comprehensive income (loss), net of tax (Note 13) 

 

 

 

 

 206
 206
 14
 220
Issuance of common stock

 3
 

 

 

 

 3
 —
 3
 

 3
 

 

 

 

 3
 —
 3
Employee benefits trust activity

 12
 

 

 1
 

 13
 —
 13
 

 12
 

 

 1
 

 13
 —
 13
Repurchases of common stock

 

 

 (120) 

 

 (120) —
 (120) 

 

 

 (120) 

 

 (120) —
 (120)
Cash dividends on common stock

 

 (343) 

 

 

 (343) —
 (343) 

 

 (343) 

 

 

 (343) —
 (343)
Distributions to noncontrolling interests

 

 

 

 

 

 —
 (10) (10) 

 

 

 

 

 

 —
 (10) (10)
Stock based awards

 

 

 23
 

 

 23
 —
 23
 

 


 

 23
 

 

 23
 —
 23
Other shareholder transactions

 16
 

 

 

 

 16
 —
 16
 

 16
 

 

 

 

 16
 —
 16
BALANCE AT JULY 2, 2017$556
 $1,628
 $11,517
 $(4,586) $(7) $(1,615) $7,493
 $329
 $7,822
 $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.

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, asand one of the first diesel engine manufacturers. WeIn 2001, 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, andtransmissions, 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 600500 wholly-owned and independent distributor locations and over 7,4007,500 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, 2016.2017. 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 20172018 and 20162017 ended on July 21 and July 3,2, respectively. Our fiscal year ends on December 31, regardless of the day of the week on which December 31 falls.
Weighted-average
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 excluded909,394
 6,155
 458,130
 61,345

 Three months ended Six months ended
 July 2,
2017		 July 3,
2016		 July 2,
2017		 July 3,
2016
Options excluded6,155
 1,262,469
 61,345
 1,475,068
NOTE 3. REVENUE RECOGNITION
Accelerated Share Repurchase
On February 9, 2016,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 entered intorecognize revenue to depict the transfer of goods or services to customers at an accelerated share repurchase (ASR) agreement withamount that we expect to be entitled to in exchange for those goods or services. The guidance provides a third party financial institutionfive-step analysis of transactions to repurchase $500 milliondetermine 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 common stockunconsolidated 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 previously announced share repurchase plans. Pursuantopening 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 termsadoption 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 agreement,new model, we paidaccelerated the full $500timing 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 priceorders. 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 initially received approximately 4.1 million shares representing approximately 80 percentnatural gas engines and engine-related component products, including filtration,

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 shares expectedvalue transferred to be repurchased. The unsettled portion of the ASR met the criteria to be accounted for as a forward contract indexed to our stockcustomer. Revenue is recognized under long-term maintenance 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 duringother 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 lessprice. 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 discount,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.


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 totalperiod of 4.7less 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 shares purchasedover 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 ASR at an average purchase pricerelated 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 $105.50 per share. The settlement resultedcurrent assets for those expected to be collected in the reclassificationa 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 $100 million reductionbillings on genset deliveries until commissioning occurs. Unbilled revenue may also occur when billings trail the provision of additional paid-in capitalservice in construction and long-term maintenance contracts. We periodically assess our unbilled revenue for impairment.

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 first quarterperiod 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 2016time, and are recorded when the right to treasury stock.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 deliveryconsideration 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 shares resulted in a reduction to our common stock outstanding used to calculate earnings per share infuture claims under extended warranty programs and provide an additional accrual when the quarter the shares were received and subsequent quarters.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.

  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


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



NOTE 3.4. 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 $4
 $41
 $7
 $84
Mandatory contribution 5
 —
 11
 —
Defined benefit pension contributions $9
 $41
 $18
 $84
         
Other postretirement benefit plans        
Benefit payments (rebates), net $(2) $3
 $5
 $18
         
Defined contribution pension plans $21
 $19
 $61
 $48
  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 20172018 of $50$20 million for our U.S. and U.K. pension plans. Approximately $133$14 million of the estimated $134$38 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 20172018 net periodic pension cost to approximate $83$86 million.
On January 1, 2018, we adopted the new accounting standard related to the presentation of pension and other postretirement benefit costs. See NOTE 15, "RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS," for detailed information about the adoption of this standard.
The components of net periodic pension and other postretirement benefit costs under our plans were as follows:
 Pension     Pension    
 U.S. Plans U.K. Plans Other Postretirement Benefits U.S. Plans U.K. Plans Other Postretirement Benefits
 Three months ended Three months ended
In millions July 2,
2017		 July 3,
2016		 July 2,
2017		 July 3,
2016		 July 2,
2017		 July 3,
2016		 July 1,
2018		 July 2,
2017		 July 1,
2018		 July 2,
2017		 July 1,
2018		 July 2,
2017
Service cost $26
 $23
 $7
 $6
 $—
 $—
 $30
 $26
 $7
 $7
 $—
 $—
Interest cost 27
 28
 10
 13
 4
 4
 24
 27
 10
 10
 3
 4
Expected return on plan assets (52) (51) (17) (19) —
 —
 (49) (52) (18) (17) —
 —
Recognized net actuarial loss 9
 7
 10
 4
 1
 2
 9
 9
 8
 10
 —
 1
Net periodic benefit cost $10
 $7
 $10
 $4
 $5
 $6
 $14
 $10
 $7
 $10
 $3
 $5
  Pension    
  U.S. Plans U.K. Plans Other Postretirement Benefits
  Six months ended
In millions July 1,
2018		 July 2,
2017		 July 1,
2018		 July 2,
2017		 July 1,
2018		 July 2,
2017
Service cost $60
 $53
 $15
 $13
 $—
 $—
Interest cost 49
 53
 21
 20
 5
 7
Expected return on plan assets (98) (103) (36) (34) —
 —
Recognized net actuarial loss 17
 18
 15
 20
 —
 3
Net periodic benefit cost $28
 $21
 $15
 $19
 $5
 $10



             
  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 4.5. 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 1,
2018		 July 2,
2017		 July 1,
2018		 July 2,
2017
Manufacturing entities        
Beijing Foton Cummins Engine Co., Ltd. $24
 $22
 $45
 $55
Dongfeng Cummins Engine Company, Ltd. 17
 19
 34
 41
Chongqing Cummins Engine Company, Ltd. 15
 10
 32
 19
Cummins Westport, Inc. 6
 4
 12
 5
Dongfeng Cummins Emission Solutions Co., Ltd. 4
 4
 9
 7
All other manufacturers 24
 19
 49
 39
Distribution entities      
  
Komatsu Cummins Chile, Ltda. 6
 8
 13
 15
Cummins share of net income 96
 86
 194
 181
Royalty and interest income 14
 12
 31
 25
Equity, royalty and interest income from investees $110
 $98
 $225
 $206
  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 6. INCOME TAXES
Our effective tax rate for the year is expected to approximate 23.0 percent, excluding any discrete tax items that may arise.
Our effective tax rates for the three and six months ended July 1, 2018, were 22.5 percent and 29.0 percent, respectively. The three months ended July 1, 2018, contained only immaterial discrete items. The six months ended July 1, 2018, contained $74 million, or $0.45 per share, of unfavorable net discrete tax items, primarily due to $80 million of discrete items related to the 2017 Tax Cuts and Jobs Act (Tax Legislation). This includes $45 million associated with changes related to the Tax Legislation measurement period adjustment, detailed below, and $35 million associated with the one-time recognition of deferred tax charges at historical tax rates on intercompany profit in inventory.
Our effective tax rates for the three and six months ended July 2, 2017, were 26.4 percent and 26.2 percent, respectively and contained only immaterial discrete tax items.
The SEC issued guidance which addressed the uncertainty in the application of GAAP to the Tax Legislation where certain income tax effects could not be finalized at December 31, 2017. This guidance allows entities to record provisional amounts based on current estimates that are updated on a quarterly basis. As a result, our accounting for the effects of the Tax Legislation is not considered complete at this time. The final transition impacts of the Tax Legislation may differ from our estimates, possibly materially, due to, among other things, changes in interpretations of the Tax Legislation, any legislative action to address questions that arise because of the Tax Legislation, any changes in accounting standards for income taxes or related interpretations in response to the Tax Legislation, or any updates or changes to estimates we have utilized to calculate the transition impacts. The SEC requires final calculations to be completed within the one-year measurement period ending December 22, 2018, and reflect any additional guidance issued throughout the year. Any adjustments of provisional amounts will be reported in the period in which the estimates change. We have made provisional estimates of the effects of the Tax Legislation in three primary areas: (1) the one-time transition tax; (2) the withholding tax accrued on those earnings no longer considered permanently reinvested at December 31, 2017 and (3) our existing deferred tax balances. The Internal Revenue Service (IRS) continues to issue guidance, which required adjustment of the one-time transition tax as shown in the table below.

The changes during the one-year measurement period for the six months ended July 1, 2018, for each group consisted of the following:
In millions
Tax Valuation Adjustments
as of
July 1, 2018
One-time transition tax$40
Withholding tax accrued5
Net impact of measurement period changes$45

NOTE 5.7. MARKETABLE SECURITIES
A summary of marketable securities, all of which are classified as current, was as follows:
 July 2, 2017 December 31, 2016 July 1, 2018 December 31, 2017
In millions Cost Gross unrealized
gains/(losses)		 Estimated
fair value		 Cost Gross unrealized
gains/(losses)		 Estimated
fair value		 Cost 
Gross unrealized
gains/(losses) (1)
 Estimated
fair value		 Cost 
Gross unrealized
gains/(losses) (1)
 Estimated
fair value
Available-for-sale (1)
  
  
  
  
  
  
Equity securities  
  
  
  
  
  
Debt mutual funds $157
 $—
 $157
 $132
 $—
 $132
 $163
 $—
 $163
 $170
 $—
 $170
Bank debentures 3
 —
 3
 114
 —
 114
Certificates of deposit 34
 —
 34
 12
 —
 12
Equity mutual funds 12
 1
 13
 12
 —
 12
 14
 2
 16
 12
 3
 15
Government debt securities 1
 —
 1
 2
 —
 2
Available-for-sale debt securities 1
 —
 1
 1
 —
 1
Total marketable securities $173
 $1
 $174
 $260
 $—
 $260
 $212
 $2
 $214
 $195
 $3
 $198

(1)Unrealized gains and losses for available-for-sale debt securities are recorded in other comprehensive income (See NOTE 13, "ACCUMULATED OTHER COMPREHENSIVE LOSS," to our Condensed Consolidated Financial Statements for more information). Effective January 1, 2018, with the adoption of the FASB standard, all unrealized gains and losses for equity securities are recorded in other income, net in the Condensed Consolidated Statements of Income. See NOTE 15, "RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS," for detailed information about the adoption of this standard.

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 20172018 and for the year ended 2016.December 31, 2017.

A description of the valuation techniques and inputs used for our Level 2 fair value measures wasis as follows:
•
Debt mutual funds— The fair value measure for the vast majority of these investments is the daily net asset value published on a regulated governmental website. Daily quoted prices are available from the issuing brokerage and are used on a test basis to corroborate this Level 2 input.
•
Certificates of deposit— 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 institution's 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.
•
Available-for-sale 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.

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 1,
2018		 July 2,
2017		 July 1,
2018		 July 2,
2017
Proceeds from sales of marketable securities $12
 $12
 $81
 $44
Proceeds from maturities of marketable securities 22
 3
 35
 118
Investments in marketable securities - liquidations $34
 $15
 $116
 $162
  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 6.8. INVENTORIES
Inventories are stated at the lower of cost or market. Inventories included the following:
In millions July 1,
2018		 December 31,
2017
Finished products $2,329
 $2,078
Work-in-process and raw materials 1,355
 1,216
Inventories at FIFO cost 3,684
 3,294
Excess of FIFO over LIFO (125) (128)
Total inventories $3,559
 $3,166

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

NOTE 7.9. 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 July 1, 2018 December 31,
2017
Loans payable (1)
 $54
 $41
 $55
 $57
Commercial paper (2)
 134
 212
 802
 298

(1)Loans payable consist primarily of notes payable to various domestic and international financial institutions. It is not practicalpracticable to aggregate these notes and calculate a quarterly weighted-average interest rate.
(2)The weighted average interest rate, inclusive of all brokerage fees, was 1.202.08 percent and 0.791.56 percent at July 2, 20171, 2018 and December 31, 2016,2017, respectively.
We can issue up to $2.75 billion of unsecured, short-term promissory notes ("commercial paper") pursuant to our board authorized commercial paper programs. The programs facilitate the private placement of unsecured short-term debt through third party brokers. We intend to use the net proceeds from the commercial paper borrowings for general corporate purposes.
Revolving Credit Facilities
We have access to committed credit facilities that total $2.75 billion, including a $1.0 billion, 364-day facility that expires September 14, 2018 and a $1.75 billion, 5-year facility that expires on November 13, 2020. We intend to maintain credit facilities of a similar aggregate amount by renewing or replacing these facilities before expiration. Revolving credit facilities are maintained primarily to provide backup liquidity for our commercial paper borrowings, letters of credit and general corporate purposes.

Long-term Debt
A summary of long-term debt was as follows:
In millions July 1,
2018		 December 31,
2017
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 55
 76
Unamortized discount (53) (54)
Fair value adjustments due to hedge on indebtedness 18
 35
Capital leases 112
 121
Total long-term debt 1,605
 1,651
Less: Current maturities of long-term debt 49
 63
Long-term debt $1,556
 $1,588

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 2018 2019 2020 2021 2022
Principal payments $30
 $50
 $12
 $8
 $8

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		 July 1,
2018		 December 31,
2017
Fair value of total debt (1)
 $2,036
 $2,077
 $2,668
 $2,301
Carrying value of total debt 1,797
 1,856
Carrying values of total debt 2,462
 2,006

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

NOTE 8.10. 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 1,
2018		 July 2,
2017
Balance, beginning of year $1,687
 $1,414
Provision for warranties issued 222
 182
Deferred revenue on extended warranty contracts sold 139
 101
Campaigns (1)
 403
 57
Payments (212) (199)
Amortization of deferred revenue on extended warranty contracts (118) (109)
Changes in estimates for pre-existing warranties 10
 74
Foreign currency translation (6) 1
     Other 5
 —
Balance, end of period $2,130
 $1,521

(1) See NOTE 12, "COMMITMENTS AND CONTINGENCIES," for additional information on campaigns.
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 sheetCondensed Consolidated Balance Sheets were as follows:
In millions July 1,
2018		 December 31,
2017		 Balance Sheet Location
Deferred revenue related to extended coverage programs  
    
Current portion $228
 $231
 Current portion of deferred revenue
Long-term portion 558
 536
 Other liabilities and deferred revenue
Total $786
 $767
  
       
Long-term portion of warranty liability $880
 $466
 Other liabilities and deferred revenue


NOTE 11. OTHER ACCRUED EXPENSES AND OTHER LIABILITIES AND DEFERRED REVENUE

Other accrued expenses included the following:
In millionsJuly 1, 2018 December 31, 2017
Other taxes payable$178
 $197
Marketing accruals169
 146
Income taxes payable102
 77
Other357
 495
Other accrued expenses$806
 $915


Other liabilities and deferred revenue included the following:
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
In millionsJuly 1,
2018		 December 31,
2017
Accrued warranty$880
 $466
Deferred revenue622
 604
Deferred income taxes400
 391
Income taxes payable(1)
252
 281
Accrued compensation152
 151
Other long-term liabilities135
 134
Other liabilities and deferred revenue$2,441
 $2,027

(1) Long-term income taxes payable are the result of the 2017 Tax Legislation and relate to the non-current portion of
the one-time transition tax on accumulated foreign earnings.

NOTE 9.12. 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 ContingencyEngine System Campaign Accrual
Engine systems sold inDuring 2017, the U.S. must be certified to comply with the Environmental Protection Agency (EPA) and California Air Resources Board (CARB) and the U.S. Environmental Protection Agency (EPA) selected certain of our pre-2013 model year engine systems for additional emissions testing. Some of these engine systems failed CARB and EPA tests as a result of degradation of an aftertreatment component. We recorded charges of $36 millionto cost of sales in our Consolidated Statements of Income during 2017 for the then expected cost of field campaigns to repair some of these engine systems. We concluded based upon additional emission standards. EPAtesting performed, and CARB regulations require that in-use testing be performed on vehicles by the emission certificate holder and reported tofurther discussions with the EPA and CARB in order to ensure ongoing compliance with these emission standards. We are the holder of this emission certificate for our engines, including engines installed in certain vehicles with one customer on which we did not also manufacture or sell the emission aftertreatment system. During 2015, a

quality issue in certain of these third party aftertreatment systems caused some of our inter-related engines to fail in-use emission testing. In the fourthfirst 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 2016,2018, that the Campaignfield campaigns should be expanded to include a larger population of vehicles manufactured by this one OEM. Weour engine systems that are subject to the aftertreatment component degradation, including our model years 2010 through 2015. As a result, we recorded an additional chargescharge of $39$187 million, or $0.87 per share, to cost of sales in our Condensed Consolidated Statements of Income ($94 million recorded in the Components segment and $99$93 million in the Engine segment) in the first quarter of 2018.
In the second quarter of 2018, we reached agreement with the CARB and third quarter, respectively, in 2016EPA regarding our plans to reflectaddress the estimatedaffected populations. In finalizing our plans, we have increased the number of systems to be addressed through hardware replacement compared to our assumptions last quarter. As a result of this agreement and considering that the hardware replacement solution is a higher cost approach than that previously assumed on some of the engine systems, we recorded an additional charge of $181 million, or $0.85 per share, to cost of sales in our participationCondensed Consolidated Statements of Income ($91 million recorded in the Campaign. We continue to work with our OEM customer to resolveEngine segment and $90 million in the allocationComponents segment) in the second quarter of costs for2018. With the Campaign, including pending litigation betweenadditional charge in the parties. The Campaign is not expected to be completed for some time and our final cost could differ fromsecond quarter of 2018, the amount we have recorded.
We do not currently expect any fines or penalties from the EPA or CARBtotal accrual related to this matter.
Wematter is $404 million, which represents our best estimate of the cost to execute the campaigns. The campaigns will launch in phases across the affected population and are funding the Campaign, which beganexpected to begin in the fourththird quarter of 2016,2018 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.projection to be substantially completed by December 31, 2020.

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, 2017,1, 2018, the maximum potential loss related to these guarantees was $43$56 million.
We have arrangements with certain suppliers that require us to purchase minimum volumes or be subject to monetary penalties. At July 2, 2017,1, 2018, 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.$82 million. 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, 2017,1, 2018, the total commitments under these contracts were $43$62 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$110 million at July 2, 2017.1, 2018.
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
•
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.

NOTE 10.13. ACCUMULATED OTHER COMPREHENSIVE LOSS
Following are the changes in accumulated other comprehensive income (loss) by component for the three months ended:
 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) 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
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(2)(1)
 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)  
  
 $(664) $(1,060) $(1) $(7) $(1,732)  
  
Other comprehensive income before reclassifications  
  
  
  
  
  
  
  
  
  
  
  
  
  
Before tax amount —
 105
 1
 (2) 104
 $1
 $105
 —
 105
 1
 (2) 104
 $1
 $105
Tax benefit (expense) —
 (4) (1) 1
 (4) —
 (4) —
 (4) (1) 1
 (4) —
 (4)
After tax amount —
 101
 —
 (1) 100
 1
 101
 —
 101
 —
 (1) 100
 1
 101
Amounts reclassified from accumulated other comprehensive loss(2)(1)
 15
 —
 1
 1
 17
 —
 17
 15
 —
 1
 1
 17
 —
 17
Net current period other comprehensive income (loss) 15
 101
 1
 —
 117
 $1
 $118
 15
 101
 1
 —
 117
 $1
 $118
Balance at July 2, 2017 $(649) $(959) $—
 $(7) $(1,615)  
  
 $(649) $(959) $—
 $(7) $(1,615)  
  
              
Balance at April 1, 2018 $(681) $(720) $—
 $4
 $(1,397)  
  
Other comprehensive income before reclassifications  
  
  
  
  
  
  
Before tax amount —
 (328) —
 4
 (324) $(17) $(341)
Tax benefit (expense) —
 45
 —
 (2) 43
 —
 43
After tax amount —
 (283) —
 2
 (281) (17) (298)
Amounts reclassified from accumulated other comprehensive loss(2)(1)
 13
 —
 —
 (2) 11
 1
 12
Net current period other comprehensive income (loss) 13
 (283) —
 —
 (270) $(16) $(286)
Balance at July 1, 2018 $(668) $(1,003) $—
 $4
 $(1,667)  
  

(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.




















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(1)
 Unrealized gain
(loss) on
derivatives		 Total
attributable to
Cummins Inc.		 Noncontrolling
interests		 Total
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(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)  
  
               
Balance at December 31, 2017 $(689) $(812) $1
 $(3) $(1,503)  
  
Other comprehensive income before reclassifications  
  
  
  
  
  
  
Before tax amount (8) (203) —
 15
 (196) $(24) $(220)
Tax benefit (expense) 2
 12
 —
 (6) 8
 —
 8
After tax amount (6) (191) —
 9
 (188) (24) (212)
Amounts reclassified from accumulated other comprehensive loss(2)
 27
 —
 (1) (2) 24
 1
 25
Net current period other comprehensive income (loss) 21
 (191) (1) 7
 (164) $(23) $(187)
Balance at July 1, 2018 $(668) $(1,003) $—
 $4
 $(1,667)  
  
 
  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) We adopted the new accounting pronouncement "Accounting for Certain Financial Instruments" on January 1, 2018, which moved the treatment of unrealized gains and losses for non-debt securities directly to the
Condensed Consolidated Statements of Income on a prospective basis. The impact of adopting this standard includes a one-time cumulative effect adjustment to opening retained earnings of $2 million. See NOTE 15, "RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS," to our Condensed Consolidated Financial Statements for more information.
(2) Amounts are net of tax.
(2) Reclassifications out of accumulated other comprehensive income (loss) and the related tax effects are immaterial for separate disclosure.


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 12.14. 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, Power Systems and Power Systems.Electrified Power. 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, fuel systems and fuel systems.transmissions. 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 formed the Electrified Power segment, effective January 1, 2018, which will provide fully electric and hybrid powertrain solutions along with innovative components and subsystems to serve all our markets as they adopt electrification, meeting the needs of our OEM partners and end customers.
Our Electrified Power segment will design, manufacture, sell and support electrified power systems ranging from fully electric to hybrid. We are currently developing the Cummins Electric Power Battery and the Cummins Hybrid Plug-In systems for urban bus, which are expected to launch in 2019 and 2020, respectively. We also design and manufacture battery modules, packs and systems for commercial, industrial and material handling applications. We use segment EBITa range of cell chemistries which are suitable for pure electric, hybrid and plug-in hybrid applications. In addition to electrified powertrains for urban bus, we intend to deliver product offerings to future markets, including pick-up and delivery applications and other markets as they adopt electric solutions. We invest in and utilize our internal research and development capabilities, along with strategic acquisitions and partnerships to meet our objectives.
Effective January 1, 2018, we changed our measure to EBITDA (defined as earnings before interest expense, income taxes, noncontrolling interests, depreciation and noncontrolling interests)amortization) as athe primary basis for the CODM to evaluate the performance of each of our reportable operating segments. EBITDA assists investors and debt holders in comparing our performance on a consistent basis without regard for depreciation and amortization, which can vary significantly depending upon many factors. Prior periods have been revised to reflect the current presentation. 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 EBITEBITDA may not be consistent with measures used by other companies.

Summarized financial information regarding our reportable operating segments for the three months ended is shown in the table below:
In millions Engine Distribution Components Power Systems 
Intersegment Eliminations (1)
 Total Engine Distribution Components Power Systems Electrified Power Total Segment 
Intersegment Eliminations (1)
 Total
Three months ended July 1, 2018  
    
  
      
  
External sales $2,050
 $1,988
 $1,402
 $691
 $1
 $6,132
 $—
 $6,132
Intersegment sales 646
 6
 485
 555
 —
 1,692
 (1,692) —
Total sales 2,696
 1,994
 1,887
 1,246
 1
 7,824
 (1,692) 6,132
Research, development and engineering expenses 76
 5
 62
 60
 16
 219
 —
 219
Equity, royalty and interest income from investees 67
 11
 14
 18
 —
 110
 —
 110
Interest income 3
 3
 2
 2
 —
 10
 —
 10
Segment EBITDA 362
 145
 237
 186
 (21) 909
 (12) 897
Depreciation and amortization (2)
 47
 27
 47
 32
 1
 154
 —
 154
                
Three months ended July 2, 2017  
    
  
  
  
  
  
  
  
      
  
External sales $1,711
 $1,716
 $1,064
 $587
 $—
 $5,078
 $1,711
 $1,716
 $1,064
 $587
 $—
 $5,078
 $—
 $5,078
Intersegment sales 596
 6
 390
 430
 (1,422) —
 596
 6
 390
 430
 —
 1,422
 (1,422) —
Total sales 2,307
 1,722
 1,454
 1,017
 (1,422) 5,078
 2,307
 1,722
 1,454
 1,017
 —
 6,500
 (1,422) 5,078
Depreciation and amortization (2)
 46
 31
 38
 29
 —
 144
Research, development and engineering expenses 63
 4
 57
 50
 —
 174
 63
 4
 58
 50
 —
 175
 —
 175
Equity, royalty and interest income from investees 56
 13
 15
 14
 —
 98
 56
 13
 15
 14
 —
 98
 —
 98
Interest income 2
 1
 1
 1
 —
 5
 2
 1
 1
 1
 —
 5
 —
 5
Segment EBIT 277
 96
 190
 61
 (4) 620
            
Three months ended July 3, 2016            
External sales $1,504
 $1,538
 $933
 $553
 $—
 $4,528
Intersegment sales 498
 6
 346
 368
 (1,218) —
Total sales 2,002
 1,544
 1,279
 921
 (1,218) 4,528
Segment EBITDA 323
 127
 228
 90
 —
 768
 (4) 764
Depreciation and amortization (2)
 41
 29
 32
 29
 —
 131
 46
 31
 38
 29
 —
 144
 —
 144
Research, development and engineering expenses 53
 3
 51
 48
 —
 155
Equity, royalty and interest income from investees 46
 19
 12
 11
 —
 88
Loss contingency (3)
 39
 —
 —
 —
 —
 39
Interest income 3
 1
 1
 1
 —
 6
Segment EBIT 206
 87
 190
 90
 18
 591
            
Six months ended July 2, 2017  
  
  
  
  
  
External sales $3,168
 $3,353
 $2,044
 $1,102
 $—
 $9,667
Intersegment sales 1,162
 14
 754
 797
 (2,727) —
Total sales 4,330
 3,367
 2,798
 1,899
 (2,727) 9,667
Depreciation and amortization(2)
 90
 61
 75
 57
 —
 283
Research, development and engineering expenses 117
 8
 107
 100
 —
 332
Equity, royalty and interest income from investees 128
 24
 28
 26
 —
 206
Interest income 3
 2
 1
 1
 —
 7
Segment EBIT 506
 196
 369
 118
 (3) 1,186
            
Six months ended July 3, 2016  
  
  
  
  
  
External sales $2,993
 $2,996
 $1,830
 $1,000
 $—
 $8,819
Intersegment sales 985
 11
 686
 729
 (2,411) —
Total sales 3,978
 3,007
 2,516
 1,729
 (2,411) 8,819
Depreciation and amortization(2)
 80
 57
 63
 58
 —
 258
Research, development and engineering expenses 110
 7
 107
 97
 —
 321
Equity, royalty and interest income from investees 82
 37
 20
 21
 —
 160
Loss contingency (3)
 39
 —
 —
 —
 —
 39
Interest income 5
 2
 2
 3
 —
 12
Segment EBIT 403
 174
 353
 136
 9
 1,075

(1) Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three and six months ended July 2, 20171, 2018 and July 3, 2016.2, 2017.
(2) Depreciation and amortization, as shown on a segment basis, excludes the amortization of debt discount and deferred costs included in the Condensed Consolidated Statements of Income as "Interestinterest expense." A portion of depreciation expense is included in "Research, development and engineering expenses" above.

Summarized financial information regarding our reportable operating segments for the six months ended is shown in the table below:
In millions Engine Distribution Components Power Systems Electrified Power Total Segment 
Intersegment Eliminations (1)
 Total
Six months ended July 1, 2018  
  
  
  
      
  
External sales $3,863
 $3,835
 $2,715
 $1,286
 $3
 $11,702
 $—
 $11,702
Intersegment sales 1,279
 12
 925
 1,034
 —
 3,250
 (3,250) —
Total sales 5,142
 3,847
 3,640
 2,320
 3
 14,952
 (3,250) 11,702
Research, development and engineering expenses 155
 10
 124
 117
 23
 429
 —
 429
Equity, royalty and interest income from investees 134
 24
 30
 37
 —
 225
 —
 225
Interest income 5
 5
 3
 4
 —
 17
 —
 17
Segment EBITDA 648
 268
 464
 328
 (31) 1,677
 (80) 1,597
Depreciation and amortization(2)
 96
 54
 93
 62
 2
 307
 —
 307
                 
Six months ended July 2, 2017  
  
  
  
      
  
External sales $3,168
 $3,353
 $2,044
 $1,102
 $—
 $9,667
 $—
 $9,667
Intersegment sales 1,162
 14
 754
 797
 —
 2,727
 (2,727) —
Total sales 4,330
 3,367
 2,798
 1,899
 —
 12,394
 (2,727) 9,667
Research, development and engineering expenses 117
 8
 108
 100
 —
 333
 —
 333
Equity, royalty and interest income from investees 128
 24
 28
 26
 —
 206
 —
 206
Interest income 3
 2
 1
 1
 —
 7
 —
 7
Segment EBITDA 596
 257
 444
 175
 —
 1,472
 (3) 1,469
Depreciation and amortization(2)
 90
 61
 75
 57
 —
 283
 —
 283

(1) Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the six months ended July 1, 2018 and July 2, 2017.
(2) Depreciation and amortization, as shown on a segment basis, excludes the amortization of debt discount and deferred costs included in the Condensed Consolidated Statements of Income as interest expense. The amortization of debt discount and deferred costs werewas $1 million and $1 million for the six monthsmonth periods ended July 1, 2018 and July 2, 2017, respectively. A portion of depreciation expense is included in "Research, development and July 3, 2016, respectively.engineering expenses" above.
(3) See Note 9, "COMMITMENTS AND CONTINGENCIES,"for additional information.




A reconciliation of our segment information to the corresponding amounts in the Condensed Consolidated Statements of Income is shown in the table below:
  Three months ended Six months ended
In millions July 1,
2018		 July 2,
2017		 July 1,
2018		 July 2,
2017
Total EBITDA $897
 $764
 $1,597
 $1,469
Less:        
Depreciation and amortization 154
 144
 307
 283
Interest expense 28
 21
 52
 39
Income before income taxes $715
 $599
 $1,238
 $1,147

  Three months ended Six months ended
In millions July 2,
2017		 July 3,
2016		 July 2,
2017		 July 3,
2016
Total segment EBIT $620
 $591
 $1,186
 $1,075
Less: Interest expense 21
 16
 39
 35
Income before income taxes $599
 $575
 $1,147
 $1,040

NOTE 13.15. RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Accounting Pronouncements Recently Adopted
In March 2016, the Financial Accounting Standards Board (FASB) amended its standards related to accounting for stock compensation, which became effective for us beginningOn January 1, 2017. The amendment replaced2018, we adopted the requirement to record excess tax benefits and certain tax deficiencies in additional paid-in capital by recording all excess tax benefits and tax deficiencies as income tax expense / benefit in the Condensed Consolidated Statements of Income and was adopted prospectively. Excess tax benefits and deficiencies are required to be recorded as discrete items in the period in which they occur and were not material for the three and six months ended July 2, 2017. In addition, thenew revenue recognition standard impacted our Condensed Consolidated Statements of Cash Flows retrospectively, as excess tax benefits are now required to be presented as an operating activity and the cash paid to tax authorities is required to be presented as a financing activity. This resulted in a net reclassification of $4 million from operating to financing activities for the six months ended July 2, 2017. Finally, in accordance with GAAP.See NOTE 3, "REVENUE RECOGNITION," for detailed information about the standard, we elected to continue our historical approach of estimating forfeitures during the award's vesting period and adjusting our estimate when it is no longer probable that the employee will fulfill the service condition. The adoption of the standard was not material to our diluted earnings per common share.this standard.
Accounting Pronouncements Issued But Not Yet Effective
In March 2017, the FASB amended its standards related to the presentation of pension and other postretirement benefit costs in the financial statements.statements beginning January 1, 2018. Under the new standard, we will beare required to separate service costs from all other elements of pension costs and reflect the other elements of pension costs outside of operating income in ourCondensed Consolidated Statements of Income. In addition, the standard will limitlimits the amount eligible for capitalization (into inventory or self-constructed assets) to the amount of service cost. This portion of the standard will bewas applied on a prospective basis. The remainder of the new standard is effective for uswas applied on a retrospective basis beginning January 1, 2018. While we are still evaluatingusing a practical expedient as the impactestimation basis for the reclassification of this standard, the change in presentation will likely result in a decrease inprior period non-service cost components of net periodic benefit cost from operating income primarily due to non-operating income. As a result, we revised our Condensed Consolidated Statements of Income by the requirement to present the expected return on plan assets outside of operating income.following amounts:
  Favorable / (Unfavorable)
  2017
 In millionsQ1 Q2
 Cost of sales$4
 $2
 Selling, general and administrative expenses(10) (10)
 Research, development and engineering expenses—
 (1)
 Total change in operating income(6) (9)
 Other non operating income, net6
 9
 Total change in income before income taxes$—
 $—

In August 2016, the FASB amended its standards related to the classification of certain cash receipts and cash payments.payments which became effective for us beginning January 1, 2018. The new standard will makemade eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. Adoption of this standard did not have a material impact on our Condensed Consolidated Financial Statements.
In January 2016, the FASB amended its standards related to the accounting for certain financial instruments which became effective for us beginning January 1, 2018. This amendment addresses certain aspects of recognition, measurement, presentation and disclosure. The standard resulted in a cumulative effect increase to opening retained earnings of $2 million in our Condensed Consolidated Financial Statements.
Accounting Pronouncements Issued But Not Yet Effective
In August 2017, the FASB amended its standards related to accounting for derivatives and hedging. These amendments allow the initial hedge effectiveness assessment to be performed by the end of the first quarter in which the hedge is designated rather than concurrently with entering into the hedge transaction. The changes also expand the use of a periodic qualitative hedge effectiveness assessment in lieu of an ongoing quantitative assessment performed throughout the life of the hedge. The revision removes the requirement to record ineffectiveness on cash flow hedges through the income statement when a hedge i

s considered highly effective, for fiscal years beginning after December 15, 2017,instead deferring all related hedge gains and interim periods within those fiscal years. Earlylosses in other comprehensive income until the hedged item impacts earnings. The modifications permit hedging the contractually-specified price of a component of a commodity purchase and revises certain disclosure requirements. The amendments are effective January 1, 2019 and early adoption is permitted includingin any interim period or fiscal year prior to the effective date. The revised standard is required to be adopted on a modified retrospective basis for any cash flow or net investment hedge relationships that exist on the date of adoption in an interim period. If an entity early adoptsand prospectively for disclosures. We do not expect the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that electsto have a material effect on our Consolidated Financial Statements and are still evaluating early adoption must adopt all of the amendments in the same period. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case it would be required to apply the amendments prospectively as of the earliest date practicable. We are in the process of evaluating the impact this standard will have on our Consolidated Statements of Cash Flows.adoption.
In June 2016, the FASB amended its standards related to accounting for credit losses on financial instruments. This amendment introduces new guidance for accounting for credit losses on instruments including trade receivables and held-to-maturity debt securities. The new rules are effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are in the processdo not expect adoption of evaluating thethis standard to have a material impact the amendment will have on our Consolidated Financial Statements.
In February 2016, the FASB amended its standards related to the accounting for leases. Under the new standard, lessees will now be required to recognize substantially all leases on the balance sheet as both a right-of-use-assetright-of-use asset and a liability. The standard will continue to have two types of leases for income statement recognition purposes: operating leases and finance leases. Operating leases will result in the recognition of a single lease expense on a straight-line basis over the lease term

similar to the treatment for operating leases under today's standards. Finance leases will result in an accelerated expense similar to the accounting for capital leases under today's standards. The determination of a lease classification as operating or finance will occur in a manner similar to today's standard. The new standard also contains amended guidance regarding the identification of embedded leases in service contracts and the identification of lease and non-lease components of an arrangement. The new standard is effective on January 1, 2019, with early adoption permitted. The standard currently requires adoption on a full retrospective basis; however, the FASB has recently approved an amendment to allow adoption on a modified retrospective basis.  While the amendment is not yet published, we would expect to adopt on a modified retrospective basis assuming the amendment is published as approved. We are still evaluating the impact the standard could have on our Consolidated Financial Statements, including our internal controls over financial reporting. While we have not yet quantified the amount, we do expect the standard will have a material impact on our Consolidated Balance Sheets due to the recognition of additional assets and liabilities for operating leases.
In January 2016, the FASB amended its standards related to the accounting for certain financial instruments. This amendment addresses certain aspects of recognition, measurement, presentation and disclosure. The new rules will become effective for annual and interim periods beginning after December 15, 2017. Early adoption is not permitted. We are in the process of evaluating the impact the amendment will have on our Consolidated Financial Statements.
In May 2014, the FASB amended its standards related to revenue recognition. This amendment replaces all existing revenue recognition guidance and provides a single, comprehensive revenue recognition model for all contracts with customers. The standard contains principles that we will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that we will recognize revenue in a manner that depicts the transfer of goods or services to customers at an amount that we expect to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of the time value of money in the transaction price and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The amendment also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in those judgments and assets recognized from costs incurred to fulfill a contract. The standard allows either full or modified retrospective adoption effective for annual and interim periods beginning January 1, 2018. We are in the process of evaluating the impact the amendment will have on our Consolidated Financial Statements, including our internal controls over financial reporting. We expect to adopt the standard using the modified retrospective approach. While we have not yet completed our evaluation process, we have identified that a change will be required related to our accounting for remanufactured product sales that include an exchange of the used product, referred to as core. Revenue is not currently recognized related to the core component unless the used product is not returned. Under the new standard, the transaction will be accounted for as a gross sale and a purchase of inventory. As a result, the exchange will increase both sales and cost of sales, in equal amounts, related to core. This will not impact gross margin dollars, but will impact the gross margin percentage. We are still quantifying the amount of this change. We have also identified transactions where revenue recognition is currently limited to the amount of billings not contingent on our future performance. With the allocation provisions of the new model, we expect to accelerate the timing of revenue recognition for amounts related to satisfied performance obligations that would have been delayed under the current guidance. We do not expect the impact of this change to be material, but we are still quantifying the impact. Using the modified retrospective adoption method, we will record an adjustment to our opening equity balance at January 1, 2018, to account for the differences between existing revenue recorded and revenue that would have been recorded under the new standard related to contracts for which we have begun to recognize revenue prior to the adoption date. We are still quantifying the potential amount of this adjustment.

ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cummins Inc. and its consolidated subsidiaries are hereinafter sometimes referred to as “Cummins,” “we,” “our” or “us.”
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
Certain parts of this quarterly report contain forward-looking statements intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include those that are based on current expectations, estimates and projections about the industries in which we operate and management’s beliefs and assumptions. Forward-looking statements are generally accompanied by words such as "anticipates," "expects," "forecasts," "intends," "plans," "believes," "seeks," "estimates," "could," "should" or words of similar meaning. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which we refer to as "future factors," which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Some future factors that could cause our results to differ materially from the results discussed in such forward-looking statements are discussed below and shareholders, potential investors and other readers are urged to consider these future factors carefully in evaluating forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. Future factors that could affect the outcome of forward-looking statements include the following:
a sustained slowdown or significant downturn in our markets;
changes in the engine outsourcing practices of significant customers;
a major customer experiencing financial distress;
•
changes in the engine outsourcing practices of significant customers;
•
the development of new technologies that reduce demand for our current products and services;
•
any significant additional problems in our engine platforms or aftertreatment systems;
•
product recalls;
lower than expected acceptance of new or existing products or services;
any significant problems in our new engine platforms;
a further slowdown in infrastructure development and/or continuing depressed commodity prices;
unpredictability in the adoption, implementation and enforcement of emission standards around the world;
foreign currency exchange rate changes;
the actions of, and income from, joint ventures and other investees that we do not directly control;
changes in taxation;
the integration ofexposure to potential security breaches or other disruptions to our previously partially-owned United Statesinformation technology systems and Canadian distributors;data security;
a major customer experiencing financial distress;
our plan to reposition our portfolio of product offerings through exploring strategic acquisitions and divestitures and related uncertainties of entering such transactions;
supply shortages and supplier financial risk, particularly from any of our single-sourced suppliers;
variability in material and commodity costs;
product recalls;
competitor activity;
•
supply shortages and supplier financial risk, particularly from any of our single-sourced suppliers;
•
competitor activity;
increasing competition, including increased global competition among our customers in emerging markets; 
•
policy changes in international trade;
foreign currency exchange rate changes;
•
variability in material and commodity costs;
•
failure to realize expected results from our investment in Eaton Cummins Automated Transmission Technologies joint venture;
•
political, economic and other risks from operations in numerous countries;
•
global legal and ethical compliance costs and risks;
exposure to potential security breaches or other disruptions to our information technology systems and data security;
political, economic and other risks from operations in numerous countries;
changes in taxation;
global legal and ethical compliance costs and risks;
aligning our capacity and production with our demand;
•
product liability claims;
product liability claims;
increasingly stringent environmental laws and regulations;
the price and availability of energy;
the performance of our pension plan assets and volatility of discount rates;

labor relations;
changes in accounting standards;
future bans or limitations on the use of diesel-powered vehicles;
our sales mix of products;

protectionthe price and validity of our patent and other intellectual property rights;
technological implementation and cost/financial risks in our increasing use of large, multi-year contracts;
the outcome of pending and future litigation and governmental proceedings;
continued availability of financing, financial instruments and financial resources in the amounts, at the times and on the terms required to support our future business; andenergy;
•
the performance of our pension plan assets and volatility of discount rates;
•
labor relations;
•
changes in accounting standards;
•
our sales mix of products;
•
protection and validity of our patent and other intellectual property rights;
•
technological implementation and cost/financial risks in our increasing use of large, multi-year contracts;
•
the outcome of pending and future litigation and governmental proceedings;
•
continued availability of financing, financial instruments and financial resources in the amounts, at the times and on the terms required to support our future business; and
•
other risk factors described in our 2017 Form 10-K, Part I, Item 1A under the caption “Risk Factors.”
other risk factors described in our 2016 Form 10-K, Part I, Item 1A under the caption “Risk Factors.”
Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are made only as of the date of this quarterly report and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.



ORGANIZATION OF INFORMATION
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) was prepared to provide the reader with a view and perspective of our business through the eyes of management and should be read in conjunction with our Management's Discussion and Analysis of Financial Condition and Results of Operations section of our 20162017 Form 10-K. Our MD&A is presented in the following sections:
•Executive Summary and Financial Highlights
•Outlook
•Results of Operations
•Operating Segment Results
•Liquidity and Capital Resources
•Application of Critical Accounting Estimates
•Recently Adopted and Recently Issued Accounting Pronouncements

EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS
We are a global power leader that designs, manufactures, distributes and services diesel and natural gas engines and engine-related component products, including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems, andtransmissions, electric power generation systems, batteries and electrified power systems. We sell our products to original equipment manufacturers (OEMs), distributors and other customers worldwide. We have long-standing relationships with many of the leading manufacturers in the markets we serve, including PACCAR Inc, Daimler Trucks North America, Navistar International Corporation and Fiat Chrysler Automobiles.Automobiles (Chrysler). We serve our customers through a network of approximately 600500 wholly-owned and independent distributor locations and over 7,4007,500 dealer locations in more than 190 countries and territories.
Our reportable operating segments consist of Engine, Distribution, Components, Power Systems and Power Systems.Electrified Power. 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, fuel systems and fuel systems.transmissions. 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 formed the Electrified Power segment, effective January 1, 2018, which will provide fully electric and hybrid powertrain solutions along with innovative components and subsystems to serve all our markets as they adopt electrification, meeting the needs of our OEM partners and end customers.
Our Electrified Power segment will design, manufacture, sell and support electrified power systems ranging from fully electric to hybrid. We are currently developing the Cummins Electric Power Battery and the Cummins Hybrid Plug-In systems for urban bus, which are expected to launch in 2019 and 2020, respectively. We also design and manufacture battery modules, packs and systems for commercial, industrial and material handling applications. We use a range of cell chemistries which are suitable for pure electric, hybrid and plug-in hybrid applications. In addition to electrified powertrains for urban bus, we intend to deliver product offerings to future markets, including pick-up and delivery applications and other markets as they adopt electric solutions. We invest in and utilize our internal research and development capabilities, along with strategic acquisitions and partnerships to meet our objectives.
Our financial performance depends, in large part, on varying conditions in the markets we serve, particularly the on-highway, construction and general industrial markets. Demand in these markets tends to fluctuate in response to overall economic conditions. Our sales may also be impacted by OEM inventory levels, production schedules and stoppages. Economic downturns in markets we serve generally result in reduced sales of our products and can result in price reductions in certain products and/or markets. As a worldwide business, our operations are also affected by currency, political, economic and regulatory matters, including adoption and enforcement of environmental and emission standards, in the countries we serve. As part of our growth strategy, we invest in businesses in certain countries that carry high levels of these risks such as China, Brazil, India, Mexico, Russia and countries in the Middle East and Africa. At the same time, our geographic diversity and broad product and service offerings have helped limit the impact from a drop in demand in any one industry or customer or the economy of any single country on our consolidated results.
Worldwide revenuesnet sales increased 1221 percent in the three months ended July 2, 2017,1, 2018, as compared to the same period in 2016,2017, with all operating segments reporting higher revenue. Revenuesales. Net sales in the U.S. and Canada improved by 1322 percent primarily due to increased demand in the North American on-highway markets (primarily in the heavy- and medium-duty truck and light commercial vehicle markets), increased demand in all of our distribution product lines, sales from the automated transmission business acquired during the third quarter of 2017 and increased industrial demand (especially in the oil and gas market)markets. International demand growth (excludes the U.S. and Canada) improved revenuesnet sales by 11 percent, with sales up in most of our markets (especially in China, India and Russia). The increase in international sales was primarily due to increased demand in industrial markets (especially construction markets in China and mining markets in Europe) and increased demand in all Components businesses (especially on-highway truck demand in China and product sales to meet new emission requirements for trucks in India), partially offset by unfavorable foreign currency impacts of 2 percent (primarily in the Chinese renminbi and British pound).
Worldwide revenues increased 10 percent in the six months ended July 2, 2017, as compared to the same period in 2016, with all operating segments reporting higher revenue. International demand growth (excludes the U.S. and Canada) in 2017 improved revenues by 1218 percent, with sales up in most of our markets, especially in China, India, RussiaEurope, Latin America, Asia Pacific and the U.K.India. The increase in international sales was primarily due to increased on-highway truck demand (especially in Latin America and China), favorable foreign currency impacts of 3 percent of international sales (primarily the Chinese renminbi, Euro and British pound), increased demand in industrial markets (especially construction and mining markets in China and mining markets in Europe) and increased demand in all Components businesses (especially on-highway truck demandfor power generation equipment primarily in China and productthe Middle East.
Worldwide net sales to meet new emission requirements for trucks in India), partially offset by unfavorable foreign currency impacts of 3increased 21 percent (primarily in the British pound and Chinese renminbi). Revenuesix months ended July 1, 2018, as compared to the same period in 2017, with all operating segments reporting higher sales. Net sales in the U.S. and Canada improved by 822 percent primarily due to increased demand in the North American on-highway markets (primarily in the heavy- and medium-duty truck and light commercial vehicle markets), increased demand in all of our distribution product lines, sales from the automated transmission

business acquired during the third quarter of 2017 and increased industrial demand (especially in the construction, oil and gas and argicultureconstruction markets). International demand growth (excludes the U.S. and Canada) improved net sales by 19 percent, with sales up in most of our markets, especially in China, Europe, Latin America, Asia Pacific and India. The increase in international sales was primarily due to increased on-highway truck demand (especially in Latin America and China), favorable foreign currency impacts of 4 percent of international sales (primarily the the Chinese renminbi, Euro and British pound), increased demand in industrial markets (especially construction and mining markets in China and Europe) and increased demand for power generation equipment primarily in China, the Middle East and Australia.
Effective January 1, 2018, we changed our measure to EBITDA (defined as earnings before interest expense, income taxes, noncontrolling interests, depreciation and amortization) as a primary basis for the Chief Operating Decision Maker to evaluate the performance of each of our operating segments. EBITDA assists investors and debt holders in comparing our performance on a consistent basis without regard for depreciation and amortization, which can vary significantly depending upon many factors. Prior periods have been revised to reflect the current presentation. The following tables contain sales and earnings before interest expense, income tax expense and noncontrolling interests (EBIT)EBITDA by operating segment for the three and six months ended July 2, 20171, 2018 and July 3, 2016.2, 2017. Refer to the section titled “OPERATING SEGMENT RESULTS” for a more detailed discussion of sales and EBITEBITDA by operating segment, including the reconciliation of segment EBITEBITDA to net income attributable to Cummins Inc.

  Three months ended
Operating Segments July 1, 2018 July 2, 2017 Percent change
    Percent     Percent   2018 vs. 2017
In millions Sales of Total EBITDA Sales of Total EBITDA Sales EBITDA
Engine $2,696
 44 % $362
 $2,307
 45 % $323
 17% 12%
Distribution 1,994
 33 % 145
 1,722
 34 % 127
 16% 14%
Components 1,887
 31 % 237
 1,454
 29 % 228
 30% 4%
Power Systems 1,246
 20 % 186
 1,017
 20 % 90
 23% NM
Electrified Power 1
 — % (21) —
 — % —
 NM
 NM
Intersegment eliminations (1,692) (28)% (12) (1,422) (28)% (4) 19% NM
Total $6,132
 100 % $897
 $5,078
 100 % $764
 21% 17%
  Three months ended
Operating Segments July 2, 2017 July 3, 2016 Percent change
    Percent     Percent   2017 vs. 2016
In millions Sales of Total EBIT Sales of Total EBIT Sales EBIT
Engine $2,307
 45 % $277
 $2,002
 44 % $206
 15% 34 %
Distribution 1,722
 34 % 96
 1,544
 34 % 87
 12% 10 %
Components 1,454
 29 % 190
 1,279
 28 % 190
 14% — %
Power Systems 1,017
 20 % 61
 921
 21 % 90
 10% (32)%
Intersegment eliminations (1,422) (28)% —
 (1,218) (27)% —
 17% —
Non-segment —
 —
 (4) —
 —
 18
 —
 NM
Total $5,078
 100 % $620
 $4,528
 100 % $591
 12% 5 %

"NM" - not meaningful information

Net income attributable to Cummins was $424$545 million, or $2.53$3.32 per diluted share, on sales of $5.1$6.1 billion for the three months ended July 2, 2017,1, 2018, versus the comparable prior year period net income attributable to Cummins of $406$424 million, or $2.40$2.53 per diluted share, on sales of $4.5$5.1 billion. The increase in net income and earnings per diluted share was driven by significantly higher net sales, higherincreased gross margin and a lower effective tax rate as the absenceresult of an accrual for a loss contingency recorded in the second quarter of 2016, higher equity, royaltyU.S. enacted Tax Cuts and interest income from investees,Jobs Act (Tax Legislation), partially offset by increased selling, general and administrative expenses, higher research, development and engineering expenses and a higher effective tax rate.expenses. The increase in gross margin was primarily due to higher volumes, improved Distribution segment margins related to the acquisition of North American distributors since December 31, 2015pricing and lower material costs, partially offset by higher warranty costs ($87$181 million primarily due to changes in estimatesfor an Engine System Campaign (a campaign in the Components and Engine and Component segments and campaigns in the Power Systems segment)for engine model years 2010 to 2015 related to degradation of an aftertreatment component) and increased variable compensation expense of $93 million.costs. See Note 12, "COMMITMENTS AND CONTINGENCIES," to the Condensed Consolidated Financial Statements for additional information on the Engine System Campaign. Diluted earnings per share for the three months ended July 2, 2017,1, 2018, benefited $0.01 from fewer weighted average shares outstanding due to purchases under the stock repurchase program.
 Six months ended Six months ended
Operating Segments July 2, 2017 July 3, 2016 Percent change July 1, 2018 July 2, 2017 Percent change
   Percent     Percent��  2017 vs. 2016   Percent     Percent   2018 vs. 2017
In millions Sales of Total EBIT Sales of Total EBIT Sales EBIT Sales of Total EBITDA Sales of Total EBITDA Sales EBITDA
Engine $4,330
 45 % $506
 $3,978
 45 % $403
 9% 26 % $5,142
 44 % $648
 $4,330
 45 % $596
 19% 9%
Distribution 3,367
 35 % 196
 3,007
 34 % 174
 12% 13 % 3,847
 33 % 268
 3,367
 35 % 257
 14% 4%
Components 2,798
 29 % 369
 2,516
 28 % 353
 11% 5 % 3,640
 31 % 464
 2,798
 29 % 444
 30% 5%
Power Systems 1,899
 19 % 118
 1,729
 20 % 136
 10% (13)% 2,320
 20 % 328
 1,899
 19 % 175
 22% 87%
Electrified Power 3
 — % (31) —
 — % —
 NM
 NM
Intersegment eliminations (2,727) (28)% —
 (2,411) (27)% —
 13% —
 (3,250) (28)% (80) (2,727) (28)% (3) 19% NM
Non-segment —
 —
 (3) —
 —
 9
 —
 NM
Total $9,667
 100 % $1,186
 $8,819
 100 % $1,075
 10% 10 % $11,702
 100 % $1,597
 $9,667
 100 % $1,469
 21% 9%

"NM" - not meaningful information


Net income attributable to Cummins was $820$870 million, or $4.88$5.27 per diluted share, on sales of $9.7$11.7 billion for the six months ended July 2, 2017,1, 2018, versus the comparable prior year period net income attributable to Cummins of $727$820 million, or $4.26$4.88 per diluted share, on sales of $8.8$9.7 billion. The increase in net income and earnings per diluted share was driven by significantly higher net sales higherand increased gross margin, partially offset by higher equity, royaltyresearch, development and interest income from investees, the absence of an accrual forengineering expenses, a loss contingency recorded in the second quarter of 2016 and a lowerhigher effective tax rate partially offset by($74 million of unfavorable net discrete tax items primarily due to $80 million of discrete items for Tax Legislation passed in December 2017) and increased selling, general and administrative expenses and higher research, development and engineering expenses. See Note 6, "INCOME TAXES," to the Condensed Consolidated Financial Statements for additional information on the tax valuation adjustments. The increase in gross margin was primarily due to higher volumes, improved pricing, lower material costs improved Distribution segment margins related to the acquisition of North American distributors since December 31, 2015, favorable pricing and favorable foreign currency fluctuations (primarily the British pound, South African rand and Brazilian real),mix, partially offset by higher warranty costs ($120$368 million primarily due to changes in estimates in thefor an Engine and Component segments and campaigns in the Power Systems segment)System Campaign and increased variable compensation expense of $109 million.costs. Diluted earnings per share for the six months ended July 2, 2017,1, 2018, benefited $0.01$0.03 from fewer weighted average shares outstanding, primarily due to purchases under the stock repurchase program.programs.


We generated $826$473 million of operating cash flowsfrom operations for the six months ended July 2, 2017,1, 2018, compared to $738$826 million for the comparable period in 2016.2017. Refer to the section titled "Cash Flows" in the "LIQUIDITY AND CAPITAL RESOURCES" section for a discussion of items impacting cash flows.


During the first half of 2017,2018, we repurchased $120$379 million, or 0.82.5 million shares of common stock.

Our debt to capital ratio (total capital defined as debt plus equity) at July 2, 2017,1, 2018, was 18.723.1 percent, compared to 20.619.7 percent at December 31, 2016.2017. The increase was primarily due to the issuance of commercial paper. At July 2, 2017,1, 2018, we had $1.5 billion in cash and marketable securities on hand and access to our $1.75$2.75 billion credit facilities, if necessary, to meet currently anticipated investment and funding needs.

In July 2017,2018, our Board of Directors authorized an increase to our quarterly dividend of 5.45.6 percent from $1.025$1.08 per share to $1.08$1.14 per share.

We expect our effective tax rate for the full year of 20172018 to approximate 26.023.0 percent, excluding any one-timediscrete tax items.
In April 2017, we entered into an agreement to form a joint venture with Eaton Corporation PLCOur global pension plans, including our unfunded and we closed the transaction on Julynon-qualified plans, were 116 percent funded at December 31, 2017. Our U.S. qualified plans, which represent approximately 55 percent of the worldwide pension obligation, were 131 percent funded and our U.K. plans were 118 percent funded. We purchased a 50 percent interest inanticipate making additional defined benefit pension contributions during the new venture named Eaton Cummins Automated Transmission Technologiesremainder of 2018 of $20 million for $600our U.S. and U.K. pension plans. Approximately $14 million in cash. The joint venture will design, assemble, sell and support medium-duty and heavy-duty automated transmissionsof the estimated $38 million of U.K. pension contributions for the commercial vehicle market, including new product launches.full year are voluntary. We will consolidate the results of the joint venture inexpect 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 are still in the process of finalizing the purchase accounting and we do not expect this new venture2018 net periodic pension cost to have a significant impact on our consolidated results in 2017.approximate $86 million.

OUTLOOK
Our outlook reflects the following positive trends and challenges to our business that we expect could impact our revenue and earnings potential for the remainder of 2017.2018.
Positive Trends
DemandWe expect North American medium-duty truck and heavy-duty truck demand will remain strong.
We anticipate demand for pick-up trucks in North America remainswill remain strong.
We believe demand in global mining markets will remain strong.
Global construction markets could remain strong.
We expect power generation markets to remain strong.
Challenges
We are experiencing cost increases as a result of trade tariffs recently imposed by the U.S. and some of its trading partners.  In the event of prolonged trade disputes, demand for our products could be negatively impacted and we could experience additional cost increases.
Market demand in off-highwaytruck markets in China and India remains strong.
Industry production of medium-duty trucks in North America should remain strong.
North American construction markets may stabilize.
Market demand may continueis expected to improve in global mining.
North American heavy-duty truck demand may stabilize.
Challenges
Power generation markets may remain soft.
Weak economic conditions in Brazil may continue to negatively impact demand across our businesses.
Foreign currency could continue to put pressure on our results.decline.
Marine markets are expected to remain weak.
Demand has improved in certain markets andIn summary, we expect demand will continue to improve over time, asor remain strong in prior economic cycles. We are well positioned to benefit as market conditions improve.many of our most important markets.


RESULTS OF OPERATIONS
 Three months ended Favorable/ Six months ended Favorable/ Three months ended Favorable/ Six months ended Favorable/
 July 2,
2017		 July 3,
2016		 (Unfavorable) July 2,
2017		 July 3,
2016		 (Unfavorable) July 1,
2018		 July 2,
2017		 (Unfavorable) July 1,
2018		 July 2,
2017		 (Unfavorable)
In millions, except per share amountsIn millions, except per share amounts Amount Percent Amount PercentIn millions, except per share amounts Amount Percent Amount Percent
NET SALESNET SALES$5,078
 $4,528
 $550
 12 % $9,667
 $8,819
 $848
 10 %NET SALES$6,132
 $5,078
 $1,054
 21 % $11,702
 $9,667
 $2,035
 21 %
Cost of salesCost of sales3,829
 3,331
 (498) (15)% 7,290
 6,566
 (724) (11)%Cost of sales4,692
 3,827
 (865) (23)% 9,062
 7,284
 (1,778) (24)%
GROSS MARGINGROSS MARGIN1,249
 1,197
 52
 4 % 2,377
 2,253
 124
 6 %GROSS MARGIN1,440
 1,251
 189
 15 % 2,640
 2,383
 257
 11 %
OPERATING EXPENSES AND INCOMEOPERATING EXPENSES AND INCOME 
  
  
 

  
  
  
 

OPERATING EXPENSES AND INCOME 
  
  
 

  
  
  
 

Selling, general and administrative expensesSelling, general and administrative expenses596
 524
 (72) (14)% 1,133
 1,014
 (119) (12)%Selling, general and administrative expenses613
 606
 (7) (1)% 1,190
 1,153
 (37) (3)%
Research, development and engineering expensesResearch, development and engineering expenses174
 155
 (19) (12)% 332
 321
 (11) (3)%Research, development and engineering expenses219
 175
 (44) (25)% 429
 333
 (96) (29)%
Equity, royalty and interest income from investeesEquity, royalty and interest income from investees98
 88
 10
 11 % 206
 160
 46
 29 %Equity, royalty and interest income from investees110
 98
 12
 12 % 225
 206
 19
 9 %
Loss contingency—
 39
 39
 100 % —
 39
 39
 100 %
Other operating income (expense), netOther operating income (expense), net18
 —
 18
 NM
 23
 (2) 25
 NM
Other operating income (expense), net4
 18
 (14) (78)% 6
 23
 (17) (74)%
OPERATING INCOMEOPERATING INCOME595
 567
 28
 5 % 1,141
 1,037
 104
 10 %OPERATING INCOME722
 586
 136
 23 % 1,252
 1,126
 126
 11 %
Interest incomeInterest income5
 6
 (1) (17)% 7
 12
 (5) (42)%Interest income10
 5
 5
 100 % 17
 7
 10
 NM
Interest expenseInterest expense21
 16
 (5) (31)% 39
 35
 (4) (11)%Interest expense28
 21
 (7) (33)% 52
 39
 (13) (33)%
Other income (expense), net20
 18
 2
 11 % 38
 26
 12
 46 %
Other income, netOther income, net11
 29
 (18) (62)% 21
 53
 (32) (60)%
INCOME BEFORE INCOME TAXESINCOME BEFORE INCOME TAXES599
 575
 24
 4 % 1,147
 1,040
 107
 10 %INCOME BEFORE INCOME TAXES715
 599
 116
 19 % 1,238
 1,147
 91
 8 %
Income tax expenseIncome tax expense158
 148
 (10) (7)% 301
 280
 (21) (8)%Income tax expense161
 158
 (3) (2)% 359
 301
 (58) (19)%
CONSOLIDATED NET INCOMECONSOLIDATED NET INCOME441
 427
 14
 3 % 846
 760
 86
 11 %CONSOLIDATED NET INCOME554
 441
 113
 26 % 879
 846
 33
 4 %
Less: Net income attributable to noncontrolling interestsLess: Net income attributable to noncontrolling interests17
 21
 4
 19 % 26
 33
 7
 21 %Less: Net income attributable to noncontrolling interests9
 17
 8
 47 % 9
 26
 17
 65 %
NET INCOME ATTRIBUTABLE TO CUMMINS INC.NET INCOME ATTRIBUTABLE TO CUMMINS INC.$424
 $406
 $18
 4 % $820
 $727
 $93
 13 %NET INCOME ATTRIBUTABLE TO CUMMINS INC.$545
 $424
 $121
 29 % $870
 $820
 $50
 6 %
Diluted Earnings Per Common Share Attributable to Cummins Inc.Diluted Earnings Per Common Share Attributable to Cummins Inc.$2.53
 $2.40
 $0.13
 5 % $4.88
 $4.26
 $0.62
 15 %Diluted Earnings Per Common Share Attributable to Cummins Inc.$3.32
 $2.53
 $0.79
 31 % $5.27
 $4.88
 $0.39
 8 %

"NM" - not meaningful information
 Three months ended 
Favorable/
(Unfavorable)
 Six months ended Favorable/
(Unfavorable)		 Three months ended 
Favorable/
(Unfavorable)
 Six months ended Favorable/
(Unfavorable)
 July 2,
2017		 July 3,
2016		 July 2,
2017		 July 3,
2016		  July 1,
2018		 July 2,
2017		 July 1,
2018		 July 2,
2017		 
Percent of sales Percentage Points Percentage Points Percentage Points Percentage Points
Gross margin 24.6% 26.4% (1.8) 24.6% 25.5% (0.9) 23.5% 24.6% (1.1) 22.6% 24.7% (2.1)
Selling, general and administrative expenses 11.7% 11.6% (0.1) 11.7% 11.5% (0.2) 10.0% 11.9% 1.9
 10.2% 11.9% 1.7
Research, development and engineering expenses 3.4% 3.4% —
 3.4% 3.6% 0.2
 3.6% 3.4% (0.2) 3.7% 3.4% (0.3)
Net Sales
Net sales for the three months ended July 2, 2017,1, 2018, increased by $550 million$1.1 billionversus the comparable period in 2016.2017. The primary drivers were as follows:
Components segment sales increased 30 percent primarily due to higher demand across all businesses, especially the emission solutions business, due to stronger market demand for trucks in North America and Europe, and sales from the automated transmission business acquired in the third quarter of 2017.
Engine segment sales increased 1517 percent primarily due to higher demand across all markets, especially in North American heavy-duty truck and global construction markets.
Distribution segment sales increased 16 percent primarily due to higher demand in most geographic regions, especially North America, due to increased demand in the engines, parts and service lines of business.
Power Systems segment sales increased 23 percent primarily due to higher demand for all product lines, especially in industrial markets due to higher demand in North American medium-duty truckoil and bus,gas markets and international mining markets and increased power generation demand.
Foreign currency fluctuations favorably impacted sales by 1 percent of total sales primarily in the Chinese renminbi, Euro and British pound.
Net sales for the six months ended July 1, 2018, increased by $2.0 billionversus the comparable period in 2017. The primary drivers were as follows:

•
Components segment sales increased 30 percent primarily due to higher demand across all businesses, especially the emission solutions business, due to stronger market demand for trucks in North America, Europe and India,andsales from the automated transmission business acquired in the third quarter of 2017.
Engine segment sales increased 19 percent primarily due to higher demand across most markets, especially in North American heavy-duty truck, medium duty truck and bus markets and improvedincreased demand in global off-highwayconstruction markets.
Distribution segment sales increased 12 percent primarily due to an increase in organic sales and higher sales related to the acquisition of North American distributors since December 31, 2015.
Components segment sales increased 14 percent primarily due to higher demand across allin most geographic regions, especially in North America, due to increased demand in the engines, parts and service lines of businesses, primarily in China, North America and India.business.
Power Systems segment sales increased 1022 percent primarily due to higher demand for all product lines, especially in industrial markets.markets due to higher demand in global mining markets, North America oil and gas markets and increased power generation demand.
These increases were unfavorably impacted by foreignForeign currency fluctuations favorably impacted sales by 2 percent of approximately 1 percent,total sales primarily in the Chinese renminbi, Euro and British pound.
Net sales for the six months ended July 2, 2017, increased $848 millionversus the comparable period in 2016. The primary drivers were as follows:

Distribution segment sales increased 12 percent primarily due to an increase in organic sales and higher sales related to the acquisition of North American distributors since December 31, 2015.
Engine segment sales increased 9 percent primarily due to higher demand in off-highway markets, North American medium-duty truck and bus and North American heavy-duty truck markets.
Components segment sales increased 11 percent primarily due to higher demand across all lines of businesses, primarily in China and India.
Power Systems segment sales increased 10 percent primarily due to higher demand in industrial markets, especially global mining, North American oil and gas markets and North American rail markets.
These increases were unfavorably impacted by foreign currency fluctuations of approximately 1 percent, primarily in the British pound and Chinese renminbi.
Sales to international markets (excluding the U.S. and Canada), based on location of customers, for the three and six months months ended July 2, 2017,1, 2018, were 4241 percent and 4241 percent of total net sales, respectively, compared with 42 percent and 4142 percent of total net sales for the comparable periods in 2016.2017. A more detailed discussion of sales by segment is presented in the “OPERATING SEGMENT RESULTS” section.
Cost of Sales    
The types of expenses included in the cost of sales line item include the following: raw materials consumption, including direct and indirect materials; salaries, wages and benefits; depreciation and amortization; estimated costs of warranty programs and campaigns; production utilities; production-related purchasing; warehousing, including receiving and inspection; engineering support costs; repairs and maintenance; production and warehousing facility property insurance; rent for production facilities and other production overhead.
Gross Margin
Gross margin increased $52$189 million for the three months ended July 2, 2017,1, 2018, versus the comparable period in 20162017 and decreased 1.81.1 points as a percentage of sales. The increase in gross margin dollars was primarily due to higher volumes, improved Distribution segment margins related to the acquisition of North American distributors since December 31, 2015pricing and lower material costs, partially offset by higher warranty$181 million for an Engine System Campaign (a campaign in the Components and Engine segments for engine model years 2010 to 2015 related to degradation of an aftertreatment component) and increased compensation costs ($87 milliondriven by headcount growth to support increased sales. The decrease in gross margin percentage was primarily due to changes in estimates in the Engine and Component segments and campaigns in the Power Systems segment) and increased variable compensation expense of $93 million.System Campaign.
Gross margin increased $124$257 million for the six months ended July 2, 2017,1, 2018, versus the comparable period in 20162017, and decreased 0.92.1 points as a percentage of sales. The increase in gross margin dollars was primarily due to higher volumes, improved pricing, lower material costs improved Distribution segment margins related to the acquisition of North American distributors since December 31, 2015, favorable pricing and favorable foreign currency fluctuations (primarily the British pound, South African rand and Brazilian real),mix, partially offset by higher warranty$368 million for an Engine System Campaign and increased compensation costs ($120 milliondriven by headcount growth to support increased sales. The decrease in gross margin percentage was primarily due to changes in estimates in the Engine and Component segments and campaigns in the Power Systems segment) and increased variable compensation expense of $109 million.System Campaign.
The provision for base warranties issued, excluding campaigns, as a percent of sales for the three and six months ended July 2, 2017,1, 2018, was 1.81.9 percent and 1.9 percent, respectively, compared to 1.8 percent and 1.9 percent for the comparable periods in 2016.2017. A detailed discussion of margin by segment is presented in the “OPERATING SEGMENT RESULTS” section.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $72$7 million for the three months ended July 2, 2017,1, 2018, versus the comparable period in 2016,2017, primarily due to higher variable compensation expenses ($49 million)driven by headcount growth and higher consulting expenses ($10 million).expenses. Compensation and related expenses include salaries, fringe benefits and variable compensation. Overall, selling, general and administrative expenses, as a percentage of sales, increaseddecreased to 11.710.0 percent in the three months ended July 2, 2017,1, 2018, from 11.611.9 percent in the comparable period in 2016.2017.
Selling, general and administrative expenses increased $119$37 million for the six months ended July 2, 2017,1, 2018, versus the comparable period in 2016,2017, primarily due to higher variable compensation expenses ($64 million)driven by headcount growth and higher consulting expenses ($30 million).expenses. Overall, selling, general and administrative expenses, as a percentage of sales, increaseddecreased to 11.710.2 percent in the six months ended July 2, 2017,1, 2018, from 11.511.9 percent in the comparable period in 2016.2017.

Research, Development and Engineering Expenses
Research, development and engineering expenses increased $19$44 million for the three months ended July 2, 2017,1, 2018, versus the comparable period in 2016,2017, primarily due to investments in the Electrified Power segment, increased variable compensation expenses ($13 million) and lower expense recovery from customers ($5 million). Overall, research, development and engineering expenses remained flat as a percentage of sales, versus the comparable period in 2016 .
Research, development and engineering expenses increased $11 million for the six months ended July 2, 2017, versus the comparable period in 2016, primarilydriven by headcount growth due to increased variable compensation expense ($13 million), partially offset byinvestments in the Electrified Power segment and the automated transmission business acquired in the third quarter of 2017 and higher

expense recovery from customers ($2 million). consulting expenses. Overall, research, development and engineering expenses as a percentage of sales decreasedincreased to 3.6 percent in the three months ended July 1, 2018, from 3.4 percent in the comparable period in 2017.
Research, development and engineering expenses increased $96 million for the six months ended July 1, 2018, versus the comparable period in 2017, primarily due to investments in the Electrified Power segment, increased compensation expenses driven by headcount growth due to investments in the Electrified Power segment and the automated transmission business acquired in the third quarter of 2017 higher consulting expenses and lower expense recovery. Overall, research, development and engineering expenses as a percentage of sales increased to 3.7 percent in the six months ended July 2, 2017,1, 2018, from 3.63.4 percent in the comparable period in 2016.
2017. Research activities continue to focus on development of new products to meet future emission standards around the world and improvements in fuel economy performance of diesel and natural gas powered engines.
Equity, Royalty and Interest Income from Investees
Equity, royalty and interest income from investees increased $10$12 million for the three months ended July 2, 2017,1, 2018, versus the comparable period in 2016,2017, primarily due to higher earnings at DongfengChongqing Cummins Engine Company, Ltd., Tata Cummins Ltd. and Beijing Foton Cummins Engine Company, Ltd.
Equity, royalty and interest income from investees increased $46$19 million for the six months ended July 2, 2017,1, 2018, versus the comparable period in 2016,2017, primarily due to higher earnings at DongfengChongqing Cummins Engine Company, Ltd., Tata Cummins Ltd. and Cummins Westport, partially offset by lower earnings at Beijing Foton Cummins Engine Company, Ltd. and Beijing FotonDongfeng Cummins Engine Co.,Company, Ltd.
     
Other Operating Income (Expense), Net
Other operating income (expense), net was as follows:
 Three months ended Six months ended Three months ended Six months ended
In millions July 2,
2017		 July 3,
2016		 July 2,
2017		 July 3,
2016		 July 1,
2018		 July 2,
2017		 July 1,
2018		 July 2,
2017
Royalty income, net $11
 $6
 $20
 $13
 $11
 $11
 $18
 $20
Gain on sale of assets, net 3
 8
 3
 5
Loss on write off of assets (4) (1) (4) (2)
Amortization of intangible assets (1) (2) (3) (5) (5) (1) (10) (3)
Loss on write off of assets (1) (4) (2) (9)
Other, net 9
 —
 8
 (1) (1) 1
 (1) 3
Total other operating income (expense), net $18
 $—
 $23
 $(2) $4
 $18
 $6
 $23
Interest Income
Interest income for the three months ended July 2, 2017, remained relatively flat versus the comparable period in 2016. Interest income for theand six months ended July 2, 2017, decreased1, 2018, increased $5 million and $10 million, respectively, versus the comparable periodperiods in 2016,2017, primarily due to lower short-term investments.higher interest rates.
Interest Expense
Interest expense for the three months ended July 2, 2017, increased $5 million versus the comparable period in 2016, primarily due to hedge ineffectiveness on our interest rate swap. Interest expense for theand six months ended July 2, 2017,1, 2018, increased $4$7 million and $13 million, respectively, versus the comparable periodperiods in 2016,2017, primarily due to hedge ineffectiveness on our interest rate swap.higher weighted-average debt outstanding.

Other Income, (Expense), Net
Other income, (expense), net was as follows:
 Three months ended Six months ended Three months ended Six months ended
In millions July 2,
2017		 July 3,
2016		 July 2,
2017		 July 3,
2016		 July 1,
2018		 July 2,
2017		 July 1,
2018		 July 2,
2017
Non-service cost, pension and other postretirement benefits $15
 $9
 $30
 $15
Change in cash surrender value of corporate owned life insurance $16
 $15
 $29
 $23
 1
 16
 (3) 29
Dividend income 2
 1
 3
 2
 —
 2
 2
 3
Foreign currency gain (loss), net 1
 (8) 3
 (11)
Bank charges (2) (1) (5) (4) (2) (2) (5) (5)
Foreign currency (loss) gain, net (13) 1
 (24) 3
Other, net 3
 11
 8
 16
 10
 3
 21
 8
Total other income (expense), net $20
 $18
 $38
 $26
Total other income, net $11
 $29
 $21
 $53
Income Tax Expense
Our effective tax rate for the year is expected to approximate 26.023.0 percent, excluding any one-timediscrete tax items that may arise.
Our effective tax rate is generally less thanrates for the 35three and six months ended July 1, 2018, were 22.5 percent U.S. statutory incomeand 29.0 percent, respectively. The three months ended July 1, 2018, contained only immaterial discrete items. The six months ended July 1, 2018, contained $74 million, or $0.45 per share, of unfavorable net discrete tax rateitems, primarily due to lower$80 million of discrete items related to the 2017 Tax Cuts and Jobs Act (Tax Legislation). This includes $45 million associated with changes related to the Tax Legislation measurement period adjustment and $35 million associated with the one-time recognition of deferred tax charges at historical tax rates on foreign income and the research tax credit.intercompany profit in inventory. See Note 6, "INCOME TAXES," for additional information.

Our effective tax raterates for the three and six months ended July 2, 2017, waswere 26.4 percent and 26.2 percent, respectively, and contained only immaterial discrete items.
Our effective tax rate for the three and six months ended July 3, 2016, was 25.7 percent and 26.9 percent, respectively, and contained only immaterial discrete items.
The changeschange in the effective tax rate for the three andmonths ended July 1, 2018, versus the comparable period in 2017, was primarily due to lower U.S. tax rates in the second quarter of 2018 as a result of Tax Legislation. The change in the effective tax rate for the six months ended July 2, 2017,1, 2018, versus the comparable periodsperiod in 2016, were2017, was primarily due to differences inunfavorable discrete changes associated with the jurisdictional mix of pre-tax income.Tax Legislation.
Noncontrolling Interests
Noncontrolling interests eliminate the income or loss attributable to non-Cummins ownership interests in our consolidated entities. Noncontrolling interests in income of consolidated subsidiaries for the three months ended July 2, 2017, decreased $4 million versus the comparable period in 2016, primarily due to the acquisition of the remaining interest in Wuxi Cummins Turbo Technologies Co. Ltd, in the fourth quarter of 2016.
Noncontrolling interests in income of consolidated subsidiaries for theand six months ended July 2, 2017,1, 2018, decreased $7$8 million and $17 million, respectively, versus the comparable periodperiods in 2016,2017, primarily due to losses at the acquisition of the remaining interest in Wuxi Cummins Turbo Technologies Co. Ltd,automated transmission business acquired in the fourththird quarter of 2016.2017.
Net Income Attributable to Cummins Inc. and Diluted Earnings Per Share Attributable to Cummins Inc.
Net income and diluted earnings per share attributable to Cummins Inc. for the three months ended July 2, 2017,1, 2018, increased $18$121 million and $0.13$0.79 per share, respectively, versus the comparable period in 2016,2017, primarily due to significantly higher net sales, higherincreased gross margin and a lower effective tax rate as the absenceresult of an accrual for a loss contingency recordedTax Legislation passed in the second quarter of 2016, higher equity, royalty and interest income from investees,December 2017, partially offset by increased selling, general and administrative expenses, higher research, development and engineering expenses and a higher effective tax rate.expenses. Diluted earnings per share for the three months ended July 2, 2017,1, 2018, benefited $0.01 from fewer weighted average shares outstanding due to purchases under the stock repurchase program.
Net income and diluted earnings per share attributable to Cummins Inc. for the six months ended July 2, 2017,1, 2018, increased $93$50 million and $0.62$0.39 per share, respectively, versus the comparable period in 2016,2017, primarily due to significantly higher net sales higherand increased gross margin, partially offset by higher equity, royaltyresearch, development and interest income from investees, the absence of an accrual forengineering expenses, a loss contingency recorded in the second quarter of 2016 and a lowerhigher effective tax rate partially offset by($74 million of unfavorable net discrete tax items primarily due to $80 million of discrete items for Tax Legislation passed in December 2017) and increased selling, general and administrative expenses and higher research, development and engineering expenses. Diluted earnings per share for the six months ended July 2, 2017,1, 2018, benefited $0.01$0.03 from fewer weighted average shares outstanding, primarily due to purchases under the stock repurchase program.programs.


Comprehensive Income - Foreign Currency Translation Adjustment
The foreign currency translation adjustment was a net loss of $299 million and $215 million, respectively, for the three months and six months ended July 1, 2018, compared to a net gain of $102 million and $182 million, respectively, for the three and six months ended July 2, 2017, compared to a net loss of $213 million and $270 million for the three and six months ended July 3, 2016, and was driven by the following:
 Three months ended Three months ended
 July 2, 2017 July 3, 2016 July 1, 2018 July 2, 2017
In millions Translation adjustment Primary currency driver vs. U.S. dollar Translation adjustment Primary currency driver vs. U.S. dollar Translation adjustment Primary currency driver vs. U.S. dollar Translation adjustment Primary currency driver vs. U.S. dollar
Wholly-owned subsidiaries $90
 British pound, Chinese renminbi $(193) British pound, Chinese renminbi offset by Brazilian real $(232) 
British pound, Chinese renminbi, Indian rupee, Brazilian real

 $90
 British pound, Chinese renminbi
Equity method investments 11
 Chinese renminbi (14) Chinese renminbi, Indiana rupee offset by Japanese yen (51) Chinese renminbi, Indian rupee, British pound 11
 Chinese renminbi
Consolidated subsidiaries with a noncontrolling interest 1
 Indian rupee (6) Indian rupee, Chinese renminbi (16) Indian rupee 1
 Indian rupee
Total $102
 $(213)  $(299) $102
 


          
 Six months ended Six months ended
 July 2, 2017 July 3, 2016 July 1, 2018 July 2, 2017
In millions Translation adjustment Primary currency driver vs. U.S. dollar Translation adjustment Primary currency driver vs. U.S. dollar Translation adjustment Primary currency driver vs. U.S. dollar Translation adjustment Primary currency driver vs. U.S. dollar
Wholly-owned subsidiaries $147
 
British pound, Indian rupee, Chinese renminbi

 $(255) British pound, Chinese renminbi offset by Brazilian real $(162) 
British pound, Indian rupee, Brazilian real, Chinese renminbi



 $147
 British pound, Indian rupee, Chinese renminbi
Equity method investments 21
 Chinese renminbi, Indian rupee (9) Chinese renminbi, Indian rupee offset by Japanese yen, Mexican peso (29) 
Chinese renminbi, Indian rupee, British pound

 21
 Chinese renminbi, Indian rupee
Consolidated subsidiaries with a noncontrolling interest 14
 Indian rupee (6) Indian rupee, Chinese renminbi (24) Indian rupee 14
 Indian rupee
Total $182
 $(270)  $(215) $182
 
.





OPERATING SEGMENT RESULTS
Our reportable operating segments consist of the Engine, Distribution, Components, and Power Systems and Electrified Power segments. This reporting structure is organized according to the products and markets each segment serves. We use segment EBITEffective January 1, 2018, we changed our measure to EBITDA as a primary basis for the CODMChief Operating Decision Maker to evaluate the performance of each of our reportable operating segments. Segment amounts exclude certain expenses not specifically identifiable to segments. See Note 12,14, "OPERATING SEGMENTS," to the Condensed Consolidated Financial Statements for additional information.
Following is a discussion of results for each of our operating segments.
Engine Segment Results
Financial data for the Engine segment was as follows:
 Three months ended Favorable/ Six months ended Favorable/ Three months ended Favorable/ Six months ended Favorable/
 July 2, July 3, (Unfavorable) July 2, July 3, (Unfavorable) July 1, July 2, (Unfavorable) July 1, July 2, (Unfavorable)
In millions 2017 2016 Amount Percent 2017 2016 Amount Percent 2018 2017 Amount Percent 2018 2017 Amount Percent
External sales (1)
 $1,711
 $1,504
 $207
 14 % $3,168
 $2,993
 $175
 6 % $2,050
 $1,711
 $339
 20 % $3,863
 $3,168
 $695
 22 %
Intersegment sales (1)
 596
 498
 98
 20 % 1,162
 985
 177
 18 % 646
 596
 50
 8 % 1,279
 1,162
 117
 10 %
Total sales 2,307
 2,002
 305
 15 % 4,330
 3,978
 352
 9 % 2,696
 2,307
 389
 17 % 5,142
 4,330
 812
 19 %
Depreciation and amortization 46
 41
 (5) (12)% 90
 80
 (10) (13)%
Research, development and engineering expenses 63
 53
 (10) (19)% 117
 110
 (7) (6)% 76
 63
 (13) (21)% 155
 117
 (38) (32)%
Equity, royalty and interest income from investees 56
 46
 10
 22 % 128
 82
 46
 56 % 67
 56
 11
 20 % 134
 128
 6
 5 %
Loss contingency —
 39
 39
 100 % —
 39
 39
 100 %
Interest income 2
 3
 (1) (33)% 3
 5
 (2) (40)% 3
 2
 1
 50 % 5
 3
 2
 67 %
Segment EBIT 277
 206
 71
 34 % 506
 403
 103
 26 %
Segment EBITDA 362
 323
 39
 12 % 648
 596
 52
 9 %
                                
  
  
 Percentage Points  
  
 Percentage Points  
  
 Percentage Points  
  
 Percentage Points
Segment EBIT as a percentage of total sales 12.0% 10.3%  
 1.7
 11.7% 10.1%  
 1.6
Segment EBITDA as a percentage of total sales 13.4% 14.0%  
 (0.6) 12.6% 13.8%  
 (1.2)

(1) Due to the acquisitions of North American distributors, sales previously recognized as external sales are now included in intersegment sales.
Sales for our Engine segment by market were as follows:
 Three months ended Favorable/ Six months ended Favorable/ Three months ended Favorable/ Six months ended Favorable/
 July 2, July 3, (Unfavorable) July 2, July 3, (Unfavorable) July 1, July 2, (Unfavorable) July 1, July 2, (Unfavorable)
In millions 2017 2016 Amount Percent 2017 2016 Amount Percent 2018 2017 Amount Percent 2018 2017 Amount Percent
Heavy-duty truck $714
 $622
 $92
 15% $1,334
 $1,253
 $81
 6% $920
 $714
 $206
 29% $1,735
 $1,334
 $401
 30 %
Medium-duty truck and bus 701
 600
 101
 17% 1,245
 1,149
 96
 8% 777
 701
 76
 11% 1,469
 1,245
 224
 18 %
Light-duty automotive 429
 394
 35
 9% 852
 827
 25
 3% 444
 429
 15
 3% 846
 852
 (6) (1)%
Total on-highway 1,844
 1,616
 228
 14% 3,431
 3,229
 202
 6% 2,141
 1,844
 297
 16% 4,050
 3,431
 619
 18 %
Off-highway 463
 386
 77
 20% 899
 749
 150
 20% 555
 463
 92
 20% 1,092
 899
 193
 21 %
Total sales $2,307
 $2,002
 $305
 15% $4,330
 $3,978
 $352
 9% $2,696
 $2,307
 $389
 17% $5,142
 $4,330
 $812
 19 %
Unit shipments by engine classification (including unit shipments to Power Systems and off-highway engine units included in their respective classification) were as follows:
 Three months ended Favorable/ Six months ended Favorable/ Three months ended Favorable/ Six months ended Favorable/
 July 2, July 3, (Unfavorable) July 2, July 3, (Unfavorable) July 1, July 2, (Unfavorable) July 1, July 2, (Unfavorable)
 2017 2016 Amount Percent 2017 2016 Amount Percent 2018 2017 Amount Percent 2018 2017 Amount Percent
Heavy-duty 24,100
 20,700
 3,400
 16% 43,300
 40,400
 2,900
 7% 32,000
 24,100
 7,900
 33% 58,600
 43,300
 15,300
 35%
Medium-duty 71,600
 62,300
 9,300
 15% 131,900
 117,700
 14,200
 12% 83,500
 71,600
 11,900
 17% 157,500
 131,900
 25,600
 19%
Light-duty 65,600
 57,100
 8,500
 15% 128,700
 118,800
 9,900
 8% 68,500
 65,600
 2,900
 4% 130,400
 128,700
 1,700
 1%
Total unit shipments 161,300
 140,100
 21,200
 15% 303,900
 276,900
 27,000
 10% 184,000
 161,300
 22,700
 14% 346,500
 303,900
 42,600
 14%

Sales
Engine segment sales for the three months ended July 2, 2017,1, 2018, increased $305$389 million versus the comparable period in 2016, driven by:2017. The following were the primary drivers by market:
•
Heavy-duty truck sales increased $206 million primarily due to higher demand in North American heavy-duty truck markets with increased shipments of 38 percent.
Off-highway sales increased $92 million primarily due to improved demand in global construction markets, with increased international unit shipments of 39 percent primarily in China and Europe, and increased unit shipments of 10 percent in North America.
Medium-duty truck and bus sales increased $101$76 million primarily due to higher demand in North American medium-duty truck markets with increased engine shipments of 3515 percent.
Total on-highway-related sales for the three months ended July 1, 2018, were 79 percent of total Engine segment sales, versus 80 percent for the comparable period in 2017.
Engine segment sales for the six months ended July 1, 2018, increased $812 million versus the comparable period in 2017. The following were the primary drivers by market:
Heavy-duty truck sales increased $92increased $401 million primarily due to higher demand in North American heavy-duty truck markets with increased shipments of 1942 percent.
Off-highway sales increased $77 million primarily due to improved demand in global industrial markets, especially in international construction markets, with increased unit shipments of 45 percent in China.
Total on-highway-related sales for the three months ended July 2, 2017, were 80 percent of total engine segment sales, compared to 81 percent for the comparable period in 2016.
Engine segment sales for the six months ended July 2, 2017, increased $352 million versus the comparable period in 2016. The following were primary drivers:
Off-highway sales increased $150 million primarily due to improved demand in global industrial markets, especially in international construction markets, with increased unit shipments of 54 percent in China and Australia.
Medium-duty truck and bus sales increased $96$224 million primarily due to higher demand in North American medium-duty truck markets with increased engine shipments of 1219 percent.
Heavy-duty truckOff-highway sales increased $193 million due to improved demand in global construction markets with increased international unit shipments of 42 percent, primarily in China and Europe, and increased unit shipments of 27 percent in North America.
Total on-highway-related sales for the six months ended July 1, 2018, were 79 percent of total Engine segment sales, versus 79 percent for the comparable period in 2017.
Segment EBITDA
Engine segment EBITDA for the three months ended July 1, 2018, increased $39 million versus the comparable period in 2017, primarily due to higher gross margin, higher equity, royalty and interest income from investees and lower selling, general and administrative expenses, partially offset by increased research, development and engineering expenses. The increase in gross margin was primarily due to higher volumes and favorable pricing, partially offset by increased Engine System Campaign costs of $91 million. The increase in research, development and engineering expenses was primarily due to higher compensation expense and lower expense recovery. The increase in equity, royalty and interest income from investees was primarily due to higher earnings at Tata Cummins Ltd., Beijing Foton Cummins Engine Co., Ltd. and Cummins Westport, Inc.
Engine segment EBITDA for the six months ended July 1, 2018, increased $52 million versus the comparable period in 2017, primarily due to higher gross margin, lower selling, general and administrative expenses and higher equity, royalty and interest income from investees, partially offset by increased research, development and engineering expenses. The increase in gross margin was primarily due to higher volumes and favorable pricing, partially offset by increased Engine System Campaign costs of $184 million. The increase in research, development and engineering expenses was primarily due to higher compensation expense, lower expense recovery and higher consulting expenses. The increase in equity, royalty and interest income from investees was primarily due to higher earnings at Tata Cummins Ltd. and Cummins Westport, Inc., partially offset by lower earnings at Beijing Foton Cummins Engine Co.

Distribution Segment Results
Financial data for the Distribution segment was as follows:
  Three months ended Favorable/ Six months ended Favorable/
  July 1, July 2, (Unfavorable) July 1, July 2, (Unfavorable)
In millions 2018 2017 Amount Percent 2018 2017 Amount Percent
External sales $1,988
 $1,716
 $272
 16 % $3,835
 $3,353
 $482
 14 %
Intersegment sales 6
 6
 —
 — % 12
 14
 (2) (14)%
Total sales 1,994
 1,722
 272
 16 % 3,847
 3,367
 480
 14 %
Research, development and engineering expenses 5
 4
 (1) (25)% 10
 8
 (2) (25)%
Equity, royalty and interest income from investees 11
 13
 (2) (15)% 24
 24
 —
 — %
Interest income 3
 1
 2
 NM
 5
 2
 3
 NM
Segment EBITDA 145
 127
 18
 14 % 268
 257
 11
 4 %
                 
      Percentage Points     Percentage Points
Segment EBITDA as a percentage of total sales 7.3% 7.4%  
 (0.1) 7.0% 7.6%  
 (0.6)

"NM" - not meaningful information
Sales for our Distribution segment by region were as follows:
  Three months ended Favorable/ Six months ended Favorable/
  July 1, July 2, (Unfavorable) July 1, July 2, (Unfavorable)
In millions 2018 2017 Amount Percent 2018 2017 Amount Percent
North America $1,353
 $1,131
 $222
 20 % $2,629
 $2,244
 $385
 17 %
Asia Pacific 212
 187
 25
 13 % 401
 357
 44
 12 %
Europe 143
 107
 36
 34 % 275
 204
 71
 35 %
China 84
 75
 9
 12 % 162
 133
 29
 22 %
Africa and Middle East 62
 86
 (24) (28)% 122
 181
 (59) (33)%
India 50
 52
 (2) (4)% 95
 95
 —
 — %
Russia 45
 41
 4
 10 % 80
 75
 5
 7 %
Latin America 45
 43
 2
 5 % 83
 78
 5
 6 %
Total sales $1,994
 $1,722
 $272
 16 % $3,847
 $3,367
 $480
 14 %
Sales for our Distribution segment by product line were as follows:
  Three months ended Favorable/ Six months ended Favorable/
  July 1, July 2, (Unfavorable) July 1, July 2, (Unfavorable)
In millions 2018 2017 Amount Percent 2018 2017 Amount Percent
Parts $817
 $759
 $58
 8% $1,625
 $1,504
 $121
 8%
Engines 461
 314
 147
 47% 828
 589
 239
 41%
Service 370
 320
 50
 16% 722
 639
 83
 13%
Power generation 346
 329
 17
 5% 672
 635
 37
 6%
Total sales $1,994
 $1,722
 $272
 16% $3,847
 $3,367
 $480
 14%
Sales
Distribution segment sales for the three months ended July 1, 2018, increased $272 million versus the comparable period in 2017. The following were the primary drivers by region:
North American sales increased $222 million, representing 82 percent of the total change in Distribution segment sales, primarily due to increased demand in the engines, parts and service lines of business.
European sales increased $36 million primarily due to an increase in demand for whole goods.

Foreign currency fluctuations favorably impacted sales primarily in the Euro, Chinese renminbi and Canadian dollar.
Distribution segment sales for the six months ended July 1, 2018, increased $480 million versus the comparable period in 2017. The following were the primary drivers by region:
North American sales increased $385 million, representing 80 percent of the total change in Distribution segment sales, primarily due to increased demand in the engines, parts and service lines of business.
European sales increased $71 million primarily due to an increase in demand for whole goods.
Foreign currency fluctuations favorably impacted sales primarily in the Euro, Chinese renminbi, Canadian dollar and Australian dollar.
Segment EBITDA
Distribution segment EBITDA for the three months ended July 1, 2018, increased $18 million versus the comparable period in 2017, primarily due to higher gross margin. The increase in gross margin was primarily due to higher volumes, partially offset by increased compensation expenses.
Distribution segment EBITDA for the six months ended July 1, 2018, increased $11 million versus the comparable period in 2017, primarily due to higher gross margin, partially offset by increased selling, general and administrative expenses and higher research, development and engineering expenses. The increase in gross margin was primarily due to higher volumes and improved pricing, partially offset by increased compensation expenses. The increase in selling, general and administrative expenses was primarily due to higher compensation expenses and increased consulting expenses.
Components Segment Results
Financial data for the Components segment was as follows:
  Three months ended Favorable/ Six months ended Favorable/
  July 1, July 2, (Unfavorable) July 1, July 2, (Unfavorable)
In millions 2018 2017 Amount Percent 2018 2017 Amount Percent
External sales $1,402
 $1,064
 $338
 32 % $2,715
 $2,044
 $671
 33 %
Intersegment sales 485
 390
 95
 24 % 925
 754
 171
 23 %
Total sales 1,887
 1,454
 433
 30 % 3,640
 2,798
 842
 30 %
Research, development and engineering expenses 62
 58
 (4) (7)% 124
 108
 (16) (15)%
Equity, royalty and interest income from investees 14
 15
 (1) (7)% 30
 28
 2
 7 %
Interest income 2
 1
 1
 100 % 3
 1
 2
 NM
Segment EBITDA 237
 228
 9
 4 % 464
 444
 20
 5 %
                 
      Percentage Points     Percentage Points
Segment EBITDA as a percentage of total sales 12.6% 15.7%  
 (3.1) 12.7% 15.9%  
 (3.2)

"NM" - not meaningful information

Sales for our Components segment by business were as follows:
  Three months ended Favorable/ Six months ended Favorable/
  July 1, July 2, (Unfavorable) July 1, July 2, (Unfavorable)
In millions 2018 2017 Amount Percent 2018 2017 Amount Percent
Emission solutions $841
 $674
 $167
 25% $1,616
 $1,290
 $326
 25%
Turbo technologies 355
 307
 48
 16% 695
 594
 101
 17%
Filtration 324
 291
 33
 11% 644
 568
 76
 13%
Electronics and fuel systems 226
 182
 44
 24% 427
 346
 81
 23%
Automated transmissions 141
 —
 141
 NM
 258
 —
 258
 NM
Total sales $1,887
 $1,454
 $433
 30% $3,640
 $2,798
 $842
 30%

"NM" - not meaningful information

Sales
Components segment sales for the three months ended July 1, 2018, increased $433 million, across all lines of business, versus the comparable period in 2017. The following were the primary drivers by business:
Emission solutions sales increased $167 million primarily due to stronger market demand for trucks in North America and Europe.
Automated transmissions, consolidated during the third quarter of 2017, delivered sales of $141 million in North America.
Turbo technologies sales increased $48 million primarily due to higher demand in North America and Western Europe.
Electronics and fuel systems sales increased $44 million primarily due to higher demand in North America.
Filtration sales increased $33 million primarily due to higher demand in North America and Western Europe.
Foreign currency fluctuations favorably impacted sales primarily in the Chinese renminbi and Euro.
Components segment sales for the six months ended July 1, 2018, increased $842 million, across all lines of business, versus the comparable period in 2017. The following were the primary drivers by business:
Emission solutions sales increased $326 million primarily due to stronger market demand for trucks in North America, Europe and India, and increased sales of products to meet new emission standards in India.
Automated transmissions, consolidated during the third quarter of 2017, delivered sales of $258 million in North America.
Turbo technologies sales increased $101 million primarily due to higher demand in North America and Western Europe.
Electronics and fuel systems sales increased $81 million primarily due to higher demand in North American heavy-duty truck markets.America.
Total on-highway-relatedFiltration sales forincreased $76 million primarily due to higher demand in North America and Western Europe.
Foreign currency fluctuations favorably impacted sales primarily in the six months ended July 2, 2017, were 79 percent of total engineChinese renminbi, Euro and British pound.
Segment EBITDA
Components segment sales, compared to 81 percent for the comparable period in 2016.
Segment EBIT
Engine segment EBITEBITDA for the three months ended July 2, 2017,1, 2018, increased $71$9 million versus the comparable period in 2016, primarily due to2017, as higher gross margin and the absence of a loss contingency recordedfavorable foreign currency fluctuations (primarily in the second quarter of 2016,Chinese renminbi) were partially offset by higher selling, general and administrative expenses.
Engine segment EBIT for the six months ended July 2, 2017,expenses, increased $103 million versus the comparable period in 2016 primarily due to higherresearch, development and engineering expenses and lower equity, royalty and interest income from investees, improved gross margin and the absence of a loss contingency recorded in the second quarter of 2016, partially offset by higher selling, general and administrative expenses. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows:
  Three months ended Six months ended
  July 2, 2017 vs. July 3, 2016 July 2, 2017 vs. July 3, 2016
  Favorable/(Unfavorable) Change Favorable/(Unfavorable) Change
In millions Amount Percent Percentage point
change as a percent
of total sales		 Amount Percent Percentage point
change as a percent
of total sales
Gross margin $44
 11 % (0.7) $44
 6 % (0.5)
Selling, general and administrative expenses (19) (13)% 0.1
 (32) (12)% (0.2)
Research, development and engineering expenses (10) (19)% (0.1) (7) (6)% 0.1
Equity, royalty and interest income from investees 10
 22 % 0.1
 46
 56 % 0.9
Loss contingency (1)
 39
 NM
 NM
 39
 NM
 NM

"NM" - not meaningful information
(1) See Note 9, "COMMITMENTS AND CONTINGENCIES," to the Condensed Consolidated Financial Statements for additional information.
investees. The increase in gross margin dollars for the three months ended July 2, 2017, versus the comparable period in 2016, was primarily due to higher volumes, lower material costs and favorable mix, partially offset by increased warrantyEngine System Campaign costs related to claims for certain 2013of $90 million and 2014 engines and higher variableincreased compensation expense.expenses driven by the acquisition of the automated transmission business in the third quarter of 2017. The increases in selling, general and administrative expenses and research, development and engineering expenses were primarily due to higher variable compensation expenses. The increaseexpense due to the addition of the automated transmission business.
Components segment EBITDA for the six months ended July 1, 2018, increased $20 million versus the comparable period in 2017, as higher gross margin and equity, royalty and interest income from investees was primarily due topartially offset by increased selling, general and administrative expenses and higher earnings at Dongfeng Cummins Engine Company, Ltd.

research, development and engineering expenses. The increase in gross margin dollars for the six months ended July 2, 2017, versus the comparable period in 2016, was primarily due to higher volumes, favorablelower material costs, improved mix and improved pricing,favorable foreign currency fluctuations (primarily the Chinese renminbi), partially offset by increased warrantyEngine System Campaign costs related to claims for certain 2013 and 2014 engines and higher variable compensation expense.of $184 million. The increase in selling, general and administrative expenses was primarily due to higher variableconsulting expense and increased compensation expense and higher consulting expenses.due to the addition of the automated transmission business. The increase in research, development and engineering expenses was primarily due to higher variable compensation expense. The increase in equity, royalty and interest income from investees was primarilyexpense due to higher earnings at Dongfeng Cummins Engine Company, Ltd.the addition of the automated transmission business and Beijing Foton Cummins Engine Co.
Distribution Segment Results
Financial data for the Distribution segment was as follows:
  Three months ended Favorable/ Six months ended Favorable/
  July 2, July 3, (Unfavorable) July 2, July 3, (Unfavorable)
In millions 2017 2016 Amount Percent 2017 2016 Amount Percent
External sales $1,716
 $1,538
 $178
 12 % $3,353
 $2,996
 $357
 12 %
Intersegment sales 6
 6
 —
 — % 14
 11
 3
 27 %
Total sales 1,722
 1,544
 178
 12 % 3,367
 3,007
 360
 12 %
Depreciation and amortization 31
 29
 (2) (7)% 61
 57
 (4) (7)%
Research, development and engineering expenses 4
 3
 (1) (33)% 8
 7
 (1) (14)%
Equity, royalty and interest income from investees 13
 19
 (6) (32)% 24
 37
 (13) (35)%
Interest income 1
 1
 —
 — % 2
 2
 —
 — %
Segment EBIT 96
 87
 9
 10 % 196
 174
 22
 13 %
                 
      Percentage Points     Percentage Points
Segment EBIT as a percentage of total sales 5.6% 5.6%  
 —
 5.8% 5.8%  
 —
In the first quarter of 2017, our Distribution segment reorganized its regions to align with how the segment is managed. All prior year amounts have been reclassified to conform to our new regional structure. Sales for our Distribution segment by region were as follows:
  Three months ended Favorable/ Six months ended Favorable/
  July 2, July 3, (Unfavorable) July 2, July 3, (Unfavorable)
In millions 2017 2016 Amount Percent 2017 2016 Amount Percent
North America $1,131
 $975
 $156
 16 % $2,244
 $1,920
 $324
 17 %
Asia Pacific 187
 187
 —
 — % 357
 356
 1
 — %
Europe 107
 111
 (4) (4)% 204
 212
 (8) (4)%
Africa and Middle East 86
 100
 (14) (14)% 181
 189
 (8) (4)%
China 75
 55
 20
 36 % 133
 114
 19
 17 %
India 52
 46
 6
 13 % 95
 87
 8
 9 %
Latin America 43
 38
 5
 13 % 78
 71
 7
 10 %
Russia 41
 32
 9
 28 % 75
 58
 17
 29 %
Total sales $1,722
 $1,544
 $178
 12 % $3,367
 $3,007
 $360
 12 %

Sales for our Distribution segment by product line were as follows:
  Three months ended Favorable/ Six months ended Favorable/
  July 2, July 3, (Unfavorable) July 2, July 3, (Unfavorable)
In millions 2017 2016 Amount Percent 2017 2016 Amount Percent
Parts $759
 $642
 $117
 18% $1,504
 $1,290
 $214
 17%
Power generation 329
 326
 3
 1% 635
 601
 34
 6%
Service 320
 297
 23
 8% 639
 596
 43
 7%
Engines 314
 279
 35
 13% 589
 520
 69
 13%
Total sales $1,722
 $1,544
 $178
 12% $3,367
 $3,007
 $360
 12%
Sales
Distribution segment sales for the three months ended July 2, 2017, increased $178 million versus the comparable period in 2016, primarily due to an increase in organic sales of $113 million (primarily in North America) and $88 million of sales related to the acquisition of North American distributors since December 31, 2015, partially offset by unfavorable foreign currency fluctuations (primarily in the Chinese renminbi, Canadian dollar and British pound).
Distribution segment sales for the six months ended July 2, 2017, increased $360 million versus the comparable period in 2016 primarily due to an increase in organic sales of $214 million (primarily in North America) and $177 million of segment sales related to the acquisition of North American distributors since December 31, 2015, partially offset by unfavorable foreign currency fluctuations (primarily in the Chinese renminbi and British pound).
Segment EBIT
Distribution segment EBIT for the three months ended July 2, 2017, increased $9 million versus the comparable period in 2016, primarily due to higher gross margin,consulting expenses, partially offset by higher selling, general and administrative expenses (mainly related to the acquisition of North American distributors since December 31, 2015).
Distribution segment EBIT for the six months ended July 2, 2017, increased $22 million versus the comparable period in 2016, primarily due to higher gross margin, partially offset by higher selling, general and administrative expenses (mainly related to the acquisition of North American distributors since December 31, 2015). Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows:
  Three months ended Six months ended
  July 2, 2017 vs. July 3, 2016 July 2, 2017 vs. July 3, 2016
  Favorable/(Unfavorable) Change Favorable/(Unfavorable) Change
In millions Amount Percent Percentage point
change as a percent
of total sales		 Amount Percent Percentage point
change as a percent
of total sales
Gross margin $35
 13 % 0.3
 $68
 13 % 0.1
Selling, general and administrative expenses (27) (14)% (0.3) (42) (11)% 0.1
Equity, royalty and interest income from investees (6) (32)% (0.4) (13) (35)% (0.5)
The increase in gross margin dollars for the three months ended July 2, 2017, versus the comparable period in 2016, was primarily due to higher volumes, the acquisition of North American distributors since December 31, 2015 and improved pricing, partially offset by higher product costs. The increase in selling, general and administrative expenses was primarily due to higher variable compensation expense and increased compensation expenses related to the acquisition of North American distributors. The decrease in equity, royalty and interest income from investees was primarily due to the acquisition of North American distributors.
The increase in gross margin for the six months ended July 2, 2017, versus the comparable period in 2016, was primarily due to improved pricing, the acquisition of North American distributors since December 31, 2015 and higher volumes, partially offset by higher product costs. The increase in selling, general and administrative expenses was primarily due to higher variable compensation expense, increased compensation expenses related to the acquisition of North American distributors and higher consulting expenses. The decrease in equity, royalty and interest income from investees was primarily due to the acquisition of North American distributors.

Components Segment Results
Financial data for the Components segment was as follows:
  Three months ended Favorable/ Six months ended Favorable/
  July 2, July 3, (Unfavorable) July 2, July 3, (Unfavorable)
In millions 2017 2016 Amount Percent 2017 2016 Amount Percent
External sales (1)
 $1,064
 $933
 $131
 14 % $2,044
 $1,830
 $214
 12 %
Intersegment sales (1)
 390
 346
 44
 13 % 754
 686
 68
 10 %
Total sales 1,454
 1,279
 175
 14 % 2,798
 2,516
 282
 11 %
Depreciation and amortization 38
 32
 (6) (19)% 75
 63
 (12) (19)%
Research, development and engineering expenses 57
 51
 (6) (12)% 107
 107
 —
 — %
Equity, royalty and interest income from investees 15
 12
 3
 25 % 28
 20
 8
 40 %
Interest income 1
 1
 —
 — % 1
 2
 (1) (50)%
Segment EBIT 190
 190
 —
 — % 369
 353
 16
 5 %
                 
      Percentage Points     Percentage Points
Segment EBIT as a percentage of total sales 13.1% 14.9%  
 (1.8) 13.2% 14.0%  
 (0.8)

(1) Due to the acquisitions of North American distributors, sales previously recognized as external sales are now included in intersegment sales.
In the first quarter of 2017, our Components segment reorganized its reporting structure to move an element of the emission solutions business to the fuel systems business to enhance operational, administrative and product development efficiencies. Prior year sales were reclassified to conform with this change.
Sales for our Components segment by business were as follows:
  Three months ended Favorable/ Six months ended Favorable/
  July 2, July 3, (Unfavorable) July 2, July 3, (Unfavorable)
In millions 2017 2016 Amount Percent 2017 2016 Amount Percent
Emission solutions $674
 $603
 $71
 12% $1,290
 $1,192
 $98
 8%
Turbo technologies 307
 276
 31
 11% 594
 541
 53
 10%
Filtration 291
 262
 29
 11% 568
 514
 54
 11%
Fuel systems 182
 138
 44
 32% 346
 269
 77
 29%
Total sales $1,454
 $1,279
 $175
 14% $2,798
 $2,516
 $282
 11%
Sales
Components segment sales for the three months ended July 2, 2017, increased $175 million, across all lines of business, versus the comparable period in 2016. The following were the primary drivers:
Emission solutions sales increased $71 million primarily due to higher demand to meet new emission requirements in India and on-highway truck demand in China.
Fuel systems sales increased $44 million primarily due to higher demand in China and Mexico.
Turbo technologies sales increased $31 million primarily due to higher demand in North America and China.
Filtration sales increased $29 million primarily due to higher demand in North America and China.
These increases were partially offset by unfavorable foreign currency fluctuations (primarily in the Chinese renminbi, British pound and euro).
Components segment sales for the six months ended July 2, 2017, increased $282 million, across all lines of business, versus the comparable period in 2016. The following were the primary drivers:
Emission solutions sales increased $98 million primarily due to higher demand in China on-highway truck markets and higher demand to meet new emission requirements in India, partially offset by unfavorable pricing in North America.

Fuel systems sales increased $77 million primarily due to higher demand in China.
Filtration sales increased $54 million primarily due to higher demand in North America and China.
Turbo technologies sales increased $53 million primarily due to higher demand in China and North America.
These increases were partially offset by unfavorable foreign currency fluctuations (primarily in the Chinese renminbi, British pound and euro).
Segment EBIT
Components segment EBIT for the three months ended July 2, 2017, was flat versus the comparable period in 2016, as higher gross margin and higher equity, royalty and interest income from investees were offset by higher selling, general and administrative expenses and higher research, development and engineering expenses.
Components segment EBIT for the six months ended July 2, 2017, increased $16 million versus the comparable period in 2016 primarily due to higher gross margin and higher equity, royalty and interest income from investees, partially offset by higher selling, general and administrative expenses. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows:
  Three months ended Six months ended
  July 2, 2017 vs. July 3, 2016 July 2, 2017 vs. July 3, 2016
  Favorable/(Unfavorable) Change Favorable/(Unfavorable) Change
In millions Amount Percent Percentage point
change as a percent
of total sales		 Amount Percent Percentage point
change as a percent
of total sales
Gross margin $10
 3 % (2.3) $28
 5 % (1.4)
Selling, general and administrative expenses (18) (20)% (0.4) (34) (20)% (0.5)
Research, development and engineering expenses (6) (12)% 0.1
 —
 — % 0.5
Equity, royalty and interest income from investees 3
 25 % 0.1
 8
 40 % 0.2
The increase in gross margin for the three months ended July 2, 2017, versus the comparable period in 2016, was primarily due to higher volumes and lower material costs, partially offset by higher warranty costs driven by changes in estimates and unfavorable pricing in North America. The increase in selling, general and administrative expenses was primarily due to higher variable compensation expense and higher consulting expenses. The increase in research, development and engineering expenses was primarily due to lower expense recovery from customers and higher variable compensation expense.
The increase in gross margin for the six months ended July 2, 2017, versus the comparable period in 2016, was primarily due to higher volumes and lower material costs, partially offset by unfavorable pricing in North America and higher warranty costs driven by changes in estimates. The increase in selling, general and administrative expenses was primarily due to higher variable compensation expense and higher consulting expenses.recovery. The increase in equity, royalty and interest income from investees was primarily due to higher earnings at Dongfeng Cummins Emission Solutions Co., Ltd., Shanghai Fleetguard Filter Co. and Fleetguard Filtration Systems India Pvt.


Power Systems Segment Results
Financial data for the Power Systems segment was as follows:
 Three months ended Favorable/ Six months ended Favorable/ Three months ended Favorable/ Six months ended Favorable/
 July 2, July 3, (Unfavorable) July 2, July 3, (Unfavorable) July 1, July 2, (Unfavorable) July 1, July 2, (Unfavorable)
In millions 2017 2016 Amount Percent 2017 2016 Amount Percent 2018 2017 Amount Percent 2018 2017 Amount Percent
External sales (1)
 $587
 $553
 $34
 6 % $1,102
 $1,000
 $102
 10 % $691
 $587
 $104
 18 % $1,286
 $1,102
 $184
 17 %
Intersegment sales (1)
 430
 368
 62
 17 % 797
 729
 68
 9 % 555
 430
 125
 29 % 1,034
 797
 237
 30 %
Total sales 1,017
 921
 96
 10 % 1,899
 1,729
 170
 10 % 1,246
 1,017
 229
 23 % 2,320
 1,899
 421
 22 %
Depreciation and amortization 29
 29
 —
 — % 57
 58
 1
 2 %
Research, development and engineering expenses 50
 48
 (2) (4)% 100
 97
 (3) (3)% 60
 50
 (10) (20)% 117
 100
 (17) (17)%
Equity, royalty and interest income from investees 14
 11
 3
 27 % 26
 21
 5
 24 % 18
 14
 4
 29 % 37
 26
 11
 42 %
Interest income 1
 1
 —
 — % 1
 3
 (2) (67)% 2
 1
 1
 100 % 4
 1
 3
 NM
Segment EBIT 61
 90
 (29) (32)% 118
 136
 (18) (13)%
Segment EBITDA 186
 90
 96
 NM
 328
 175
 153
 87 %
                                
     Percentage Points     Percentage Points     Percentage Points     Percentage Points
Segment EBIT as a percentage of total sales 6.0% 9.8%  
 (3.8) 6.2% 7.9%  
 (1.7)
Segment EBITDA as a percentage of total sales 14.9% 8.8%  
 6.1
 14.1% 9.2%  
 4.9

(1) Due to the acquisitions of North American distributors, sales previously recognized as external sales are now included in intersegment sales."NM" - not meaningful information
In the first quarter of 2017, our Power Systems segment reorganized its product lines to better reflect how the segment is managed. Prior year sales were reclassified to reflect these changes.
Sales for our Power Systems segment by product line were as follows:
  Three months ended Favorable/ Six months ended Favorable/
  July 1, July 2, (Unfavorable) July 1, July 2, (Unfavorable)
In millions 2018 2017 Amount Percent 2018 2017 Amount Percent
Power generation $666
 $570
 $96
 17% $1,237
 $1,096
 $141
 13%
Industrial 483
 353
 130
 37% 897
 628
 269
 43%
Generator technologies 97
 94
 3
 3% 186
 175
 11
 6%
Total sales $1,246
 $1,017
 $229
 23% $2,320
 $1,899
 $421
 22%
  Three months ended Favorable/ Six months ended Favorable/
  July 2, July 3, (Unfavorable) July 2, July 3, (Unfavorable)
In millions 2017 2016 Amount Percent 2017 2016 Amount Percent
Power generation $570
 $602
 $(32) (5)% $1,096
 $1,120
 $(24) (2)%
Industrial 353
 236
 117
 50 % 628
 451
 177
 39 %
Generator technologies 94
 83
 11
 13 % 175
 158
 17
 11 %
Total sales $1,017
 $921
 $96
 10 % $1,899
 $1,729
 $170
 10 %
High-horsepower unit shipments by engine classification were as follows:
  Three months ended Favorable/ Six months ended Favorable/
  July 2, July 3, (Unfavorable) July 2, July 3, (Unfavorable)
Units 2017 2016 Amount Percent 2017 2016 Amount Percent
Power generation 2,100
 2,200
 (100) (5)% 4,000
 4,000
 —
 —%
Industrial 1,700
 1,100
 600
 55 % 3,000
 2,100
 900
 43%
Total engine shipments 3,800
 3,300
 500
 15 % 7,000
 6,100
 900
 15%
Sales
Power Systems segment sales for the three months ended July 2, 2017,1, 2018, increased $96$229 million versus the comparable period in 20162017. The following were the primary drivers by product line:
Industrial sales increased $130 million primarily due to increased industrial sales of $117 million principally due to higher demand in international mining markets and North American oil and gas markets.
These increases were partially offset by the following:
Power generation sales decreased $32 million primarily due to lower demandmarkets in the Middle East,North America and global mining markets, especially in China and Africa, partially offset by higher demand in WesternEastern Europe.
Foreign currency fluctuations negatively impacted sales, primarily due to the British pound.

•
Power generation sales increased $96 million primarily due to higher demand in North America, China and the Middle East.
Power Systems segment sales for the six months ended July 2, 2017,1, 2018, increased $170$421 million versus the comparable period in 2016.2017. The following were the primary drivers:drivers by product line:
Industrial sales increased $177$269 million primarily due to higher demand in global mining markets, especially in China, Eastern Europe and North AmericanAmerica, and in oil and gas markets andin North American rail markets.America.
Generator technologiesPower generation sales increased $17increased $141 million primarily due to higher demand in Western EuropeChina, North America and China.
These increases were partially offset by the following:
Power generation sales decreased $24 million primarily due to lower demand in the Middle East, Brazil and Other Asia/Australia, partially offset by higher demand in Western Europe.Australia.
Foreign currency fluctuations negativelyfavorably impacted sales primarily due toin the British pound.pound, Chinese renminbi and Euro.

Segment EBITEBITDA
Power Systems segment EBITEBITDA for the three months ended July 2, 2017, decreased $291, 2018, increased $96 million versus the comparable period in 2016,2017 primarily due to lowerhigher gross margin and higher selling, general and administrative expenses, partially offset by higher equity, royalty and interest income from investees, partially offset by increased research, development and favorable foreign currency fluctuations (primarily due to the British pound).
Power Systems segment EBIT for the six months ended July 2, 2017, decreased $18 million versus the comparable periodengineering expenses and higher selling, general and administrative expenses. The increase in 2016gross margin was primarily due to increased volumes, lower warranty and lower material costs, partially offset by higher compensation expenses driven by volume growth. The increase for both selling, general and administrative expenses and higher research, development and engineering expenses, partially offset by higher equity, royalty and interest income from investees. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows:
  Three months ended Six months ended
  July 2, 2017 vs. July 3, 2016 July 2, 2017 vs. July 3, 2016
  Favorable/(Unfavorable) Change Favorable/(Unfavorable) Change
In millions Amount Percent Percentage point
change as a percent
of total sales		 Amount Percent Percentage point
change as a percent
of total sales
Gross margin $(15) (7)% (3.7) $—
 — % (2.1)
Selling, general and administrative expenses (8) (8)% 0.3
 (11) (6)% 0.4
Research, development and engineering expenses (2) (4)% 0.3
 (3) (3)% 0.3
Equity, royalty and interest income from investees 3
 27 % 0.2
 5
 24 % 0.2
The decrease in gross margin for the three months ended July 2, 2017, versus the comparable period in 2016, was primarily due to higher warranty cost related to a campaign accrual, unfavorable mix and increased material costs, partially offset by increased volumes and favorable foreign currency fluctuations (primarily in the British pound). The increase in selling, general and administrative expenses was primarily due to higher variable compensation expenseexpenses, new product launches and higher consulting expenses. The increase in equity, royalty and interest income from investees was primarily due to higher earnings at Chongqing Cummins Engine Co.Company, Ltd.
Gross margin was flat
Power Systems segment EBITDA for the six months ended July 2, 2017,1, 2018, increased $153 million versus the comparable period in 2016,2017 primarily due to higher warranty cost related to a campaign accrual, unfavorable mixgross margin and higher material costs,equity, royalty and interest income from investees, partially offset by increased volumesresearch, development and favorable foreign currency fluctuations (primarily in the British pound).engineering expenses and higher selling, general and administrative expenses. The increase in gross margin was primarily due to increased volumes, lower warranty and lower material costs, partially offset by higher compensation expenses driven by volume growth. The increase for both selling, general and administrative expenses and research, development and engineering expenses was primarily due to higher variable compensation expenseexpenses, new product launches and higher consulting expenses. The increase in equity, royalty and interest income from investees was primarily due to higher earnings at Chongqing Cummins Engine Co.Company, Ltd.

Electrified Power Segment Results
We formed the Electrified Power segment during the first quarter of 2018. The primary focus of the segment is on research and development activities around fully electric and hybrid powertrain solutions. Our intellectual property is developed both in house as well as through acquisitions. As of July 1, 2018, we had completed two acquisitions, which provided us with battery systems intellectual property as well as start-up sales of $1 million and $3 million for the three and six months ended July 1, 2018, respectively. In June 2018, we entered into an agreement to purchase Efficient Drivetrains, Inc., which designs and produces hybrid and fully-electric power solutions for commercial markets, and expect the transaction to close in the third quarter of 2018. We invested $16 million and $23 million for the three and six months ended July 1, 2018, respectively, in research and development activities, which along with the gross margins generated by our acquisitions and selling, general and administrative expenses resulted in a segment EBITDA loss of $21 million and $31 million for three and six months ended July 1, 2018, respectively.
Reconciliation of Segment EBITEBITDA to Net Income Attributable to Cummins Inc.
The table below reconciles the segment information to the corresponding amounts in the Condensed Consolidated Statements of Income:
 Three months ended Six months ended Three months ended Six months ended
In millions July 2,
2017		 July 3,
2016		 July 2,
2017		 July 3,
2016		 July 1,
2018		 July 2,
2017		 July 1,
2018		 July 2,
2017
TOTAL SEGMENT EBIT $624
 $573
 $1,189
 $1,066
Non-segment EBIT (1)
 (4) 18
 (3) 9
TOTAL EBIT 620
 591
 1,186
 1,075
Less: Interest expense 21
 16
 39
 35
TOTAL SEGMENT EBITDA $909
 $768
 $1,677
 $1,472
Intersegment elimination (1)
 (12) (4) (80) (3)
TOTAL EBITDA 897
 764
 1,597
 1,469
Less:        
Interest expense 28
 21
 52
 39
Depreciation and amortization (2)
 154
 144
 307
 283
INCOME BEFORE INCOME TAXES 599
 575
 1,147
 1,040
 715
 599
 1,238
 1,147
Less: Income tax expense 158
 148
 301
 280
 161
 158
 359
 301
CONSOLIDATED NET INCOME 441
 427
 846
 760
 554
 441
 879
 846
Less: Net income attributable to noncontrolling interest 17
 21
 26
 33
 9
 17
 9
 26
NET INCOME ATTRIBUTABLE TO CUMMINS INC. $424
 $406
 $820
 $727
 $545
 $424
 $870
 $820

(1) Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three and six months ended July 1, 2018 and July 2, 2017.
(2) Depreciation and amortization, as shown on a segment basis, excludes the amortization of debt discount and deferred costs included in the Condensed Consolidated Statements of Income as interest expense. The amortization of debt discount and deferred costs was $1 million and $1 million for the six month periods ended July 1, 2018 and July 2, 2017, and July 3, 2016.respectively.

LIQUIDITY AND CAPITAL RESOURCES
Key Working Capital and Balance Sheet Data
We fund our working capital with cash from operations and short-term borrowings, including commercial paper, when necessary. Various assets and liabilities, including short-term debt, can fluctuate significantly from month to month depending on short-term liquidity needs. As a result, working capital is a prime focus of management attention. Working capital and balance sheet measures are provided in the following table:
Dollars in millions July 2,
2017		 December 31,
2016		 July 1,
2018		 December 31,
2017
Working capital (1)
 $3,708
 $3,382
 $3,731
 $3,251
Current ratio 1.76
 1.78
 1.61
 1.57
Accounts and notes receivable, net $3,553
 $3,025
 $4,095
 $3,618
Days’ sales in receivables 62
 61
 60
 59
Inventories $2,982
 $2,675
 $3,559
 $3,166
Inventory turnover 4.9
 4.7
 5.0
 5.0
Accounts payable (principally trade) $2,300
 $1,854
 $2,981
 $2,579
Days' payable outstanding 52
 51
 58
 53
Total debt $1,797
 $1,856
 $2,462
 $2,006
Total debt as a percent of total capital 18.7% 20.6% 23.1% 19.7%

(1) Working capital includes cash and cash equivalents.
Cash Flows
Cash and cash equivalents were impacted as follows:
 Six months ended   Six months ended  
In millions July 2,
2017		 July 3,
2016		 Change July 1,
2018		 July 2,
2017		 Change
Net cash provided by operating activities $826
 $738
 $88
 $473
 $826
 $(353)
Net cash used in investing activities (160) (391) 231
 (236) (160) (76)
Net cash used in financing activities (544) (896) 352
 (253) (544) 291
Effect of exchange rate changes on cash and cash equivalents 51
 (117) 168
 (35) 51
 (86)
Net increase (decrease) in cash and cash equivalents $173
 $(666) $839
Net (decrease) increase in cash and cash equivalents $(51) $173
 $(224)
Net cash provided by operating activities increased $88decreased $353 million for the six months ended July 2, 2017,1, 2018, versus the comparable period in 2016,2017, primarily due to higher consolidated net income, the absence of restructuring payments and lower working capital levels, partially offset by lower net pension contributions of $69 million and higher equity in incomeearnings of investees and the absence of loss contingency charges.$33 million. During the first six months of 2017,2018, the lowerhigher working capital requirements resulted in a cash outflow of $196$536 million compared to a cash outflow of $230$196 million in the comparable period in 2016. 2017, primarily due to the payment of higher accrued variable compensation expense in the first quarter of 2018 and business growth.
Net cash used in investing activities decreased $231increased $76 million for the six months ended July 2, 2017,1, 2018, versus the comparable period in 2016,2017, primarily due to lowerhigher net investments in marketable securities of $235$120 million, partially offset by lower investments in and advances to equity investees of $49 million.
Net cash used in financing activities decreased $352$291 million for the six months ended July 2, 2017,1, 2018, versus the comparable period in 2016,2017, primarily due to lowerhigher borrowings of commercial paper of $582 million, partially offset by higher repurchases of common stock of $575 million and lower payments on borrowings and capital lease obligations of $104 million, partially offset by lower net borrowings of commercial paper of $278 million and lower proceeds from borrowings of $107$259 million.
The effect of exchange rate changes on cash and cash equivalents for the six months ended July 2, 2017,1, 2018, versus the comparable period in 2016, increased $1682017, decreased $86 million primarily due to unfavorable fluctuations in the British pound which increased cash and cash equivalents by $150of $68 million.
Sources of Liquidity 
We generate significant ongoing cash flow. Cashflow and cash provided by operations is our principal source of liquidity with $826$473 million provided in the six months ended July 2, 2017.1, 2018.

At July 2, 2017,1, 2018, our other sources of liquidity included:
 July 2, 2017 July 1, 2018
In millions Total U.S. International Primary location of international balances Total U.S. International Primary location of international balances
Cash and cash equivalents $1,293
 $245
 $1,048
 
U.K., Singapore, China, Canada,
Australia
 $1,318
 $306
 $1,012
 U.K., China, Singapore, Mexico, Belgium, Australia, Canada
Marketable securities (1)
 174
 41
 133
 India 214
 54
 160
 India
Total $1,467
 $286
 $1,181
  $1,532
 $360
 $1,172
 
Available credit capacity 
      
     
Revolving credit facility (2)
 $1,616
     
Revolving credit facilities (2)
 $1,948
     
International and other uncommitted domestic credit facilities (3)
 $170
      $194
     

(1) The majority of marketable securities could be liquidated into cash within a few days.
(2) The revolvingfive-year credit facility isfor $1.75 billion and the 364-day credit facility for $1.0 billion, maturing November 2020 and September 2018, respectively, are maintained primarily to provide backup liquidity for our commercial paper borrowings and general corporate purposes. At July 2, 2017,1, 2018, we had $134$802 million of commercial paper outstanding, which effectively reduced the available capacity under our revolving credit facilityfacilities to $1.62$1.95 billion.
(3) The available capacity is net of letters of credit.
Cash, Cash Equivalents and Marketable Securities
A significant portion of our cash flowsflow is generated outside the U.S. We manage our worldwide cash requirements considering available funds among the many subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. As a result, we do not anticipate any local liquidity restrictions to preclude us from funding our operating needs with local resources.
Debt Facilities and Other Sources of Liquidity
We have access to committed credit facilities that total $2.75 billion, including a $1.0 billion, 364-day facility that expires September 14, 2018 and a $1.75 billion, 5-year facility that expires on November 13, 2020. We intend to maintain credit facilities of a similar aggregate amount by renewing or replacing these facilities before expiration. Revolving credit facilities are maintained primarily to provide backup liquidity for our commercial paper borrowings, letters of credit and general corporate purposes.
We can issue up to $1.75$2.75 billion of unsecured, short-term promissory notes ("commercial paper") pursuant to aour board authorized commercial paper program.programs. The program facilitatesprograms facilitate the private placement of unsecured short-term debt through third party brokers. We intend to use the net proceeds from the commercial paper programborrowings for general corporate purposes and acquisitions.
We have a $1.75 billion revolving credit facility, the proceeds of which can be used for general corporate purposes. This facility expires on November 13, 2020. The revolving credit facility is maintained primarily to provide backup liquidity for our commercial paper borrowings, letters of credit and general corporate purposes. The total combined borrowing capacity under the revolving credit facility and commercial paper program should not exceed $1.75 billion.
As a well-known seasoned issuer, we filed an automatic shelf registration for an undetermined amount of debt and equity securities with the Securities and Exchange Commission on February 16, 2016. Under this shelf registration we may offer, from time to time, debt securities, common stock, preferred and preference stock, depositary shares, warrants, stock purchase contracts and stock purchase units.
Uses of Cash
ShareStock Repurchases
In December 2016, our Board of Directors authorized the acquisition of up to $1 billion of additional common stock upon completion of the 2015 repurchase plan. In the first six months of 2017,2018, we made the following purchases under the 2015 and 2016 stock repurchase program:programs:

In millions, except per share amounts Shares
Purchased		 Average Cost
Per Share		 Total Cost of
Repurchases		 
Remaining
Authorized
Capacity (1)
 Shares
Purchased		 Average Cost
Per Share		 Total Cost of
Repurchases		 
Remaining
Authorized
Capacity (1)
April 2 0.3
 $151.32
 $51
 $445
July 2 0.5
 153.95
 69
 376
November 2015, $1 billion repurchase program  
  
  
  
April 1 0.3
 $166.79
 $46
 $—
        
December 2016, $1 billion repurchase program        
April 1 0.7
 164.48
 $117
 $883
July 1 1.5
 143.69
 216
 667
Subtotal 2.2
 150.38
 333
  
        
Total 0.8
 $152.82
 $120
   2.5
 $152.20
 $379
  

(1)The remaining authorized capacity under the 2015 Plan2016 plan was calculated based on the cost to purchase the shares but excludes commission expenses in accordance with the authorized Plan.plan.

We may continueintend to repurchase outstanding shares from time to time during 2017 to enhance shareholder value and to offset the dilutive impact of employee stock based compensation plans. These repurchases may be done in the open market or through accelerated share repurchase programs as appropriate based on market conditions.
Dividends
In July 2017,2018, our Board of Directors authorized an increase to our quarterly dividend of 5.45.6 percent from $1.025$1.08 per share to $1.08$1.14 per share. We paid dividends of $343$355 million during the six months ended July 2, 2017.
Agreement to Form a Joint Venture
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, which we funded with a combination of cash and short-term debt. We are still in the process of finalizing the purchase accounting and we do not expect this new venture to have a significant impact on our consolidated results in 2017.1, 2018.
Capital Expenditures
Capital expenditures, including spending on internal use software, for the six months ended July 2, 2017,1, 2018, were $222$221 million compared to $216$222 million in the comparable period in 2016.2017. We continue to invest in new product lines and targeted capacity expansions. We plan to spend between $500$730 million and $530$760 million in 20172018 on capital expenditures as we continue with product launches and facility improvements. Approximately 50 percent of our capital expenditures are expected to be invested outside of the U.S. in 2017.2018.
Pensions
Our global pension plans, including our unfunded and non-qualified plans, were 110116 percent funded at December 31, 2016.2017. Our U.S. qualified plans, which represent approximately 5655 percent of the worldwide pension obligation, were 118131 percent funded and our U.K. plans were 121118 percent funded. The funded status of our pension plans is dependent upon a variety of variables and assumptions including return on invested assets, market interest rates and levels of voluntary contributions to the plans. In the first six months of 2017,2018, the investment returnloss on our U.S. pension trust was 7.11.2 percent while our U.K. pension trust returnloss was 0.80.7 percent. Approximately 76 percent of our pension plan assets are held in highly liquid investments such as fixed income and equity securities. The remaining 24 percent of our plan assets are held in less liquid, but market valued investments, including real estate, private equity, venture capital, opportunistic credit and insurance contracts. We anticipate making additional defined benefit pension contributions during the remainder of 20172018 of $50$20 million for our U.S. and U.K. pension plans. Approximately $133$14 million of the estimated $134$38 million of U.S. and U.K. pension contributions for the full year are voluntary. These contributions may be made from trusts or company funds either to increase pension assets or to make direct benefit payments to plan participants. We expect our 20172018 net periodic pension cost to approximate $83$86 million.
Current Maturities of Short and Long-Term Debt
We had $134$802 million of commercial paper outstanding at July 2, 2017,1, 2018, that matures in less than one year. The maturity schedule of our existing long-term debt does not require significant cash outflows in the intermediate term. Required annual principal payments range from $4$8 million to $45$50 million over the next five years (including the remainder of 2017)2018). See Note 79, "DEBT," to the Condensed Consolidated Financial Statements for additional information.

Credit Ratings
Our ratings and outlook from each of the credit rating agencies as of the date of filing are shown in the table below.
  Long-Term Short-Term  
Credit Rating Agency (1)
 Senior Debt Rating Debt Rating Outlook
Standard & Poor’s Rating Services A+ A1 Stable
Moody’s Investors Service, Inc. A2 P1 Stable

(1) Credit ratings are not recommendations to buy, are subject to change and each rating should be evaluated independently of any other rating. In addition, we undertake no obligation to update disclosures concerning our credit ratings, whether as a result of new information, future events or otherwise.

Management's Assessment of Liquidity


Our financial condition and liquidity remain strong. Our solid balance sheet and credit ratings enable us to have ready access to credit and the capital markets. We assess our liquidity in terms of our ability to generate adequate cash to fund our operating, investing and financing activities. We believe our operating cash flow and liquidity providesprovide us with the financial flexibility needed to fund working capital, common stock repurchases, acquisitions, capital expenditures, dividend payments, projected pension obligations and debt service obligations. WeWhile we expect more efficient access to overseas earnings as a result of Tax Legislation, we will continue to generate cash from operations in the U.S. and maintain access to our revolving credit facility as noted above.



APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
A summary of our significant accounting policies is included in Note 1, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,” of the Notes to the Consolidated Financial Statements of our 20162017 Form 10-K, which discusses accounting policies that we have selected from acceptable alternatives.
Our Condensed Consolidated Financial Statements are prepared in accordance with generally accepted accounting principles that often require management to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts presented and disclosed in the financial statements. Management reviews these estimates and assumptions based on historical experience, changes in business conditions and other relevant factors they believe to be reasonable under the circumstances. In any given reporting period, our actual results may differ from the estimates and assumptions used in preparing our Condensed Consolidated Financial Statements.
Critical accounting estimates are defined as follows: the estimate requires management to make assumptions about matters that were highly uncertain at the time the estimate was made; different estimates reasonably could have been used; or if changes in the estimate are reasonably likely to occur from period to period and the change would have a material impact on our financial condition or results of operations. Our senior management has discussed the development and selection of our accounting policies, related accounting estimates and the disclosures set forth below with the Audit Committee of our Board of Directors. Our critical accounting estimates disclosed in the Form 10-K address the estimation of liabilities for warranty programs, accounting for income taxes and pension benefits.
A discussion of our critical accounting estimates may be found in the “Management’s Discussion and Analysis” section of our 20162017 Form 10-K under the caption “APPLICATION OF CRITICAL ACCOUNTING ESTIMATES.” Within the context of these critical accounting estimates, we are not currently aware of any reasonably likely events or circumstances that would result in different policies or estimates being reported in the first six months of 2017.2018.
RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 13,15, "RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS," in the Notes to Condensed Consolidated Financial Statements for additional information.
ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk
A discussion of quantitative and qualitative disclosures about market risk may be found in Item 7A of our 20162017 Form 10-K. There have been no material changes in this information since the filing of our 20162017 Form 10-K. 
ITEM 4.  Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, our Chief Executive OfficerCEO and our Chief Financial OfficerCFO concluded that our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to management, including our Chief Executive OfficerCEO and Chief Financial Officer,CFO, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter ended July 2, 2017,1, 2018, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 

PART II.  OTHER INFORMATION
ITEM 1.  Legal Proceedings
We are subject to numerous lawsuits and claims arising out of the ordinary course of our business, including actions related to product liability; personal injury; the use and performance of our products; warranty matters; product recalls; patent, trademark or other intellectual property infringement; contractual liability; the conduct of our business; tax reporting in foreign jurisdictions; distributor termination; workplace safety; and environmental matters. We also have been identified as a potentially responsible party at multiple waste disposal sites under U.S. federal and related state environmental statutes and regulations and may have joint and several liability for any investigation and remediation costs incurred with respect to such sites. We have denied liability with respect to many of these lawsuits, claims and proceedings and are vigorously defending such lawsuits, claims and proceedings. We carry various forms of commercial, property and casualty, product liability and other forms of insurance; however, such insurance may not be applicable or adequate to cover the costs associated with a judgment against us with respect to these lawsuits, claims and proceedings. We do not believe that these lawsuits are material individually or in the aggregate. While we believe we have also established adequate accruals pursuant to U.S. generally accepted accounting principles for our expected future liability with respect to pending lawsuits, claims and proceedings, where the nature and extent of any such liability can be reasonably estimated based upon then presently available information, there can be no assurance that the final resolution of any existing or future lawsuits, claims or proceedings will not have a material adverse effect on our business, results of operations, financial condition or cash flows.
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.
The disclosure set forth under "Loss Contingency" in Note 9, "COMMITMENTS AND CONTINGENCIES," to the Condensed Consolidated Financial Statements is incorporated herein by reference.
ITEM 1A.  Risk Factors
In addition to other information set forth in this report, you should consider other risk factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2016,2017, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K or the "CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION" in this Quarterly report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently judge to be immaterial also may materially adversely affect our business, financial condition or operating results.
ITEM 2.  Unregistered Sales of Equity Securities and Use of Proceeds
The following information is provided pursuant to Item 703 of Regulation S-K:
  Issuer Purchases of Equity Securities
Period 
Total
Number of
Shares
Purchased(1)
 Average
Price Paid
per Share		 Total Number of
Shares Purchased
as Part of Publicly
Announced
Plans or Programs		 
Maximum
Number of Shares
that May Yet Be
Purchased Under the
Plans or Programs(2)
April 3 - May 7 71,242
 $145.27
 69,028
 35,513
May 8 - June 4 349,431
 155.49
 346,899
 35,681
June 5 - July 2 38,124
 157.82
 33,283
 33,273
Total 458,797
 154.09
 449,210
  
  Issuer Purchases of Equity Securities
Period 
Total
Number of
Shares
Purchased(1)
 Average
Price Paid
per Share		 Total Number of
Shares Purchased
as Part of Publicly
Announced
Plans or Programs		 
Maximum
Number of Shares
that May Yet Be
Purchased Under the
Plans or Programs(2)
April 2 - May 6 —
 $—
 —
 59,353
May 7 - June 3 1,021,676
 146.01
 1,021,100
 64,828
June 4 - July 1 483,114
 138.85
 482,530
 70,427
Total 1,504,790
 143.71
 1,503,630
  

(1)  Shares purchased represent shares under our Key Employee Stock Investment Plan established in 1969 (there is no maximum repurchase limitation in this plan) and our Board of Directors authorized share repurchase programs.program.
(2)  These values reflect the sum of shares held in loan status under our Key Employee Stock Investment Plan. The repurchase programsprogram authorized by the Board of Directors dodoes not limit the number of shares that may be purchased and were excluded from this column. The dollar value remaining available for future purchases under such programsthis program as of July 2, 2017,1, 2018, was $1.4 billion.$667 million.
In December 2016, our Board of Directors authorized the acquisition of up to $1 billion of additional common stock upon completion of the 2015 repurchase plan. In November 2015, our Board of Directors authorized the acquisition of up to $1 billion of additional common stock upon the completion of the 2014 repurchase plan. During the three months ended July 2, 2017,1, 2018, we repurchased $69$216 million of common stock under the 2015 Board of Directors authorized plan.

this authorization.
During the three months ended July 2, 2017,1, 2018, we repurchased 9,5871,160 shares from employees in connection with the Key Employee Stock Investment Plan which allows certain employees, other than officers, to purchase shares of common stock on an installment basis up to an established credit limit. Loans are issued for five-year terms at a fixed interest rate established at

the date of purchase and may be refinanced after their initial five-year period for an additional five-year period. Participants must hold shares for a minimum of six months from date of purchase. If the shares are sold before the loan is paid off, the employee must wait six months before another share purchase may be made. We hold participants’ shares as security for the loans and would, in effect repurchase shares if the participant defaulted in repayment of the loan. There is no maximum amount of shares that we may purchase under this plan.  
ITEM 3.  Defaults Upon Senior Securities
Not applicable. 
ITEM 4.  Mine Safety Disclosures
Not applicable. 
ITEM 5.  Other Information
Not applicable. 
ITEM 6. Exhibits
SeeThe exhibits listed in the following Exhibit Index at the endare filed as part of this Quarterly Report on Form 10-Q.
CUMMINS INC.
EXHIBIT INDEX
Exhibit No.Description of Exhibit
3(a)
Restated Articles of Incorporation, as amended and restated, effective as of May 8, 2018 (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed by Cummins Inc. with the Securities and Exchange Commission on May 9, 2018 (File No. 001-04949)).
3(b)
By-Laws, as amended and restated, effective as of July 10, 2018 (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed by Cummins Inc. with the Securities and Exchange Commission on July 11, 2018 (File No. 001-04949)).
10
2012 Omnibus Incentive Plan, as amended and restated.
12
Calculation of Ratio of Earnings to Fixed Charges.
31(a)
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31(b)
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INSXBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. 
101.SCHXBRL Taxonomy Extension Schema Document.
101.CALXBRL Taxonomy Extension Calculation Linkbase Document.
101.DEFXBRL Taxonomy Extension Definition Linkbase Document.
101.LABXBRL Taxonomy Extension Label Linkbase Document.
101.PREXBRL Taxonomy Extension Presentation Linkbase Document.


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Cummins Inc.   
Date:August 1, 2017July 31, 2018   
      
 By:/s/ PATRICK J. WARD By:/s/ CHRISTOPHER C. CLULOW
  Patrick J. Ward  Christopher C. Clulow
  Vice President and Chief Financial Officer  Vice President-Corporate Controller
  (Principal Financial Officer)  (Principal Accounting Officer)

CUMMINS INC.
EXHIBIT INDEX

56
Exhibit No.Description of Exhibit
3.1
By-Laws, as amended and restated effective as of May 9, 2017 (incorporated by reference to Annex B to the Company’s definitive proxy statement filed with the Securities and Exchange Commission on Schedule 14A on March 27, 2017 (File No. 001-04949))

10.1Cummins Inc. 2012 Omnibus Incentive Plan, as amended and restated (incorporated by reference to Annex A to the Company’s definitive proxy statement filed with the Securities and Exchange Commission on Schedule 14A on March 27, 2017 (File No. 001-04949))
12
Calculation of Ratio of Earnings to Fixed Charges.
31(a)
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31(b)
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INSXBRL Instance Document.
101.SCHXBRL Taxonomy Extension Schema Document.
101.CALXBRL Taxonomy Extension Calculation Linkbase Document.
101.DEFXBRL Taxonomy Extension Definition Linkbase Document.
101.LABXBRL Taxonomy Extension Label Linkbase Document.
101.PREXBRL Taxonomy Extension Presentation Linkbase Document.

50