UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended ~~June 28, 2015~~July 3, 2016

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, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting 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

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 ~~June 28, 2015~~July 3, 2016, there were ~~178,650,099~~168,641,183 shares of common stock outstanding with a par value of $2.50 per share.

Website Access to Company’s Reports

Cummins maintains an internet website at www.cummins.com. Investors can obtain copies of our filings from this website free of charge as soon as reasonably practicable after they are electronically filed with, or furnished, to the Securities and Exchange Commission. Cummins is not including the information provided on the website as part of, or incorporating such information by reference into, this Quarterly Report on Form 10-Q.

~~Table of Contents~~

CUMMINS INC. AND SUBSIDIARIES

TABLE OF CONTENTS

QUARTERLY REPORT ON FORM 10-Q



		Page
	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 3, 2016 and June 28, 2015 ~~and June 29, 2014~~	3
	Condensed Consolidated Statements of Comprehensive Income for the three and six months ended July 3, 2016 and June 28, 2015 ~~and June 29, 2014~~	4
	Condensed Consolidated Balance Sheets at ~~June 28, 2015~~July 3, 2016 and December 31, ~~2014~~2015	5
	Condensed Consolidated Statements of Cash Flows for the six months ended July 3, 2016 and June 28, 2015 ~~and June 29, 2014~~	6
	Condensed Consolidated Statements of Changes in Equity for the six months ended July 3, 2016 and June 28, 2015 ~~and June 29, 2014~~	7
	Notes to Condensed Consolidated Financial Statements	8
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1922
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	4248
ITEM 4.	Controls and Procedures	4248
	PART II. OTHER INFORMATION
ITEM 1.	Legal Proceedings	4349
ITEM 1A.	Risk Factors	4349
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4349
ITEM 3.	Defaults Upon Senior Securities	4450
ITEM 4.	Mine Safety Disclosures	4450
ITEM 5.	Other Information	4450
ITEM 6.	Exhibits	4450
	Signatures	4551
	Cummins Inc. Exhibit Index	4652

~~Table of Contents~~

PART I. FINANCIAL INFORMATION

ITEM 1. Condensed Consolidated Financial Statements

CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three months ended						Six months ended						Three months ended						Six months ended
In millions, except per share amounts	June 28, 2015			June 29, 2014			June 28, 2015			June 29, 2014			July 3, 2016			June 28, 2015			July 3, 2016			June 28, 2015
NET SALES ^(a)	$	5,015		$	4,835		$	9,724		$	9,241		$	4,528		$	5,015		$	8,819		$	9,724
Cost of sales	3,683			3,630			7,197			6,937			3,331			3,683			6,566			7,197
GROSS MARGIN	1,332			1,205			2,527			2,304			1,197			1,332			2,253			2,527

OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses	537			513			1,054			998			524			537			1,014			1,054
Research, development and engineering expenses	166			179			361			369			155			166			321			361
Equity, royalty and interest income from investees (Note 4)	94			105			162			195			88			94			160			162
Other operating (expense) income, net	—			(6		)	(3		)	(7		)
Other operating expense, net													(39		)	—			(41		)	(3		)
OPERATING INCOME	723			612			1,271			1,125			567			723			1,037			1,271

Interest income	6			6			11			11			6			6			12			11
Interest expense	17			15			31			32
Interest expense (Note 8)													16			17			35			31
Other income (expense), net	(8		)	39			1			49			18			(8		)	26			1
INCOME BEFORE INCOME TAXES	704			642			1,252			1,153			575			704			1,040			1,252

Income tax expense (Note 5)	208			170			352			323			148			208			280			352
CONSOLIDATED NET INCOME	496			472			900			830			427			496			760			900

Less: Net income attributable to noncontrolling interests	25			26			42			46			21			25			33			42
NET INCOME ATTRIBUTABLE TO CUMMINS INC.	$	471		$	446		$	858		$	784		$	406		$	471		$	727		$	858

EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
Basic	$	2.63		$	2.44		$	4.77		$	4.27		$	2.41		$	2.63		$	4.27		$	4.77
Diluted	$	2.62		$	2.43		$	4.76		$	4.26		$	2.40		$	2.62		$	4.26		$	4.76

WEIGHTED AVERAGE SHARES OUTSTANDING
Basic	179.2			182.8			179.9			183.5			168.8			179.2			170.3			179.9
Dilutive effect of stock compensation awards	0.4			0.4			0.4			0.4			0.2			0.4			0.2			0.4
Diluted	179.6			183.2			180.3			183.9			169.0			179.6			170.5			180.3

CASH DIVIDENDS DECLARED PER COMMON SHARE	$	0.78		$	0.625		$	1.56		$	1.25		$	0.975		$	0.78		$	1.95		$	1.56

^(a)Includes sales to nonconsolidated equity investees of $276 million and $518 million and $357 million and $682 ~~million and $546 million and $1,138~~ million for the three and six ~~month periods~~months ended July 3, 2016 and June 28, 2015, ~~and June 29, 2014,~~ respectively.

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

~~Table of Contents~~

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	June 28, 2015		June 29, 2014			June 28, 2015			June 29, 2014			July 3, 2016			June 28, 2015		July 3, 2016			June 28, 2015
CONSOLIDATED NET INCOME	$	496	$	472		$	900		$	830		$	427		$	496	$	760		$	900
Other comprehensive income, net of tax (Note 11)
Other comprehensive (loss) income, net of tax (Note 11)
Foreign currency translation adjustments												(213		)	145		(270		)	(31		)
Unrealized (loss) gain on derivatives												(6		)	8		(27		)	8
Change in pension and other postretirement defined benefit plans	15		10			28			14			9			15		18			28
Foreign currency translation adjustments	145		79			(31		)	110
Unrealized gain (loss) on marketable securities	1		(9		)	—			(11		)
Unrealized gain on derivatives	8		3			8			5
Total other comprehensive income, net of tax	169		83			5			118
Unrealized gain on marketable securities												1			1		1			—
Total other comprehensive (loss) income, net of tax												(209		)	169		(278		)	5
COMPREHENSIVE INCOME	665		555			905			948			218			665		482			905
Less: Comprehensive income attributable to noncontrolling interests	20		23			40			49			15			20		27			40
COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC.	$	645	$	532		$	865		$	899		$	203		$	645	$	455		$	865

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

~~Table of Contents~~

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		June 28, 2015			December 31, 2014				July 3, 2016			December 31, 2015
ASSETS
Current assets
Cash and cash equivalents		$	1,760		$	2,301			$	1,045		$	1,711
Marketable securities (Note 6)		89			93				235			100
Total cash, cash equivalents and marketable securities		1,849			2,394				1,280			1,811
Accounts and notes receivable, net
Trade and other		3,118			2,744				2,811			2,640
Nonconsolidated equity investees		304			202				212			180
Inventories (Note 7)		2,986			2,866				2,778			2,707
Prepaid expenses and other current assets		746			849				549			609
Total current assets		9,003			9,055				7,630			7,947
Long-term assets
Property, plant and equipment		7,151			7,123				7,432			7,322
Accumulated depreciation		(3,498		)	(3,437		)		(3,729		)	(3,577		)
Property, plant and equipment, net		3,653			3,686				3,703			3,745
Investments and advances related to equity method investees		995			981				1,073			975
Goodwill		473			479				481			482
Other intangible assets, net		339			343				328			328
Prepaid pensions		784			637
Pension assets									764			735
Other assets		631			595				1,041			922
Total assets		$	15,878		$	15,776			$	15,020		$	15,134

LIABILITIES
Current liabilities
Accounts payable (principally trade)		$	1,974		$	1,881			$	1,825		$	1,706
Loans payable		70			86
Loans payable (Note 8)									19			24
Commercial paper (Note 8)									200			—
Accrued compensation, benefits and retirement costs									353			409
Current portion of accrued product warranty (Note 9)		405			363				335			359
Accrued compensation, benefits and retirement costs		432			508
Deferred revenue		402			401
Current portion of deferred revenue									433			403
Other accrued expenses		739			759				947			863
Current maturities of long-term debt (Note 8)		31			23				38			39
Total current liabilities		4,053			4,021				4,150			3,803
Long-term liabilities
Long-term debt (Note 8)		1,576			1,589				1,614			1,576
Postretirement benefits other than pensions		351			369				328			349
Pensions		291			289				299			298
Other liabilities and deferred revenue		1,393			1,415				1,434			1,358
Total liabilities		$	7,664		$	7,683			$	7,825		$	7,384

Commitments and contingencies (Note 10)

EQUITY
Cummins Inc. shareholders’ equity
Common stock, $2.50 par value, 500 shares authorized, 222.3 and 222.3 shares issued		$	2,164		$	2,139
Common stock, $2.50 par value, 500 shares authorized, 222.4 and 222.4 shares issued									$	2,196		$	2,178
Retained earnings		10,123			9,545				10,716			10,322
Treasury stock, at cost, 43.7 and 40.1 shares		(3,350		)	(2,844		)
Common stock held by employee benefits trust, at cost, 1.0 and 1.1 shares		(12		)	(13		)
Treasury stock, at cost, 53.7 and 47.2 shares									(4,422		)	(3,735		)
Common stock held by employee benefits trust, at cost, 0.7 and 0.9 shares									(9		)	(11		)
Accumulated other comprehensive loss (Note 11)		(1,071		)	(1,078		)		(1,620		)	(1,348		)
Total Cummins Inc. shareholders’ equity		7,854			7,749				6,861			7,406
Noncontrolling interests		360			344				334			344
Total equity		$	8,214		$	8,093			$	7,195		$	7,750
Total liabilities and equity		$	15,878		$	15,776			$	15,020		$	15,134

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

~~Table of Contents~~

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		June 28, 2015			June 29, 2014				July 3, 2016			June 28, 2015
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income		$	900		$	830			$	760		$	900
Adjustments to reconcile consolidated net income to net cash provided by operating activities
Restructuring payments (Note 12)									(42		)	—
Loss contingency (Note 10)									39			—
Depreciation and amortization		254			217				259			254
Deferred income taxes		(63		)	(88		)		2			(63		)
Equity in income of investees, net of dividends		(68		)	(108		)		(87		)	(68		)
Pension contributions in excess of expense		(122		)	(127		)
Other post-retirement benefits payments in excess of expense		(15		)	(14		)
Pension contributions in excess of expense (Note 3)									(82		)	(122		)
Other post-retirement benefits payments in excess of expense (Note 3)									(17		)	(15		)
Stock-based compensation expense		17			21				20			17
Translation and hedging activities		27			(9		)		(45		)	27
Changes in current assets and liabilities, net of acquisitions
Accounts and notes receivable		(426		)	(321		)		(252		)	(426		)
Inventories		(127		)	(223		)		(101		)	(127		)
Other current assets		18			4				189			18
Accounts payable		97			289				139			97
Accrued expenses		(21		)	120				(209		)	(21		)
Changes in other liabilities and deferred revenue		133			116				129			133
Other, net		(35		)	(6		)		32			(35		)
Net cash provided by operating activities		569			701				734			569

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(247		)	(245		)		(189		)	(247		)
Investments in internal use software		(22		)	(26		)		(27		)	(22		)
Investments in and advances to equity investees		(17		)	(11		)		(17		)	(17		)
Acquisitions of businesses, net of cash acquired		(15		)	(193		)		(1		)	(15		)
Investments in marketable securities—acquisitions (Note 6)		(173		)	(179		)		(379		)	(173		)
Investments in marketable securities—liquidations (Note 6)		155			179				237			155
Cash flows from derivatives not designated as hedges		5			4				(21		)	5
Other, net		14			8				6			14
Net cash used in investing activities		(300		)	(463		)		(391		)	(300		)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings		12			17				109			12
Net borrowings of commercial paper (Note 8)									200			—
Payments on borrowings and capital lease obligations		(31		)	(39		)		(133		)	(31		)
Net payments under short-term credit agreements		(10		)	(48		)
Distributions to noncontrolling interests		(14		)	(32		)		(24		)	(14		)
Dividend payments on common stock		(280		)	(229		)		(333		)	(280		)
Repurchases of common stock		(514		)	(430		)		(695		)	(514		)
Other, net		8			5				(16		)	(2		)
Net cash used in financing activities		(829		)	(756		)		(892		)	(829		)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		19			38				(117		)	19
Net decrease in cash and cash equivalents		(541		)	(480		)		(666		)	(541		)
Cash and cash equivalents at beginning of year		2,301			2,699				1,711			2,301
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	1,760		$	2,219			$	1,045		$	1,760

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

~~Table of Contents~~

CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)


In millions	Common Stock		Additional paid-in Capital			Retained Earnings			Treasury Stock			Common Stock Held in Trust			Accumulated Other Comprehensive Loss			Total Cummins Inc. Shareholders’ Equity			Noncontrolling Interests			Total Equity			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, 2013	$	556	$	1,543		$	8,406		$	(2,195	)	$	(16	)	$	(784	)	$	7,510		$	360		$	7,870
Net income						784												784			46			830
Other comprehensive income (loss)															115			115			3			118
Issuance of shares			4															4			—			4
Employee benefits trust activity			14									2						16			—			16
Acquisition of shares									(430		)							(430		)	—			(430		)
Cash dividends on common stock						(229		)										(229		)	—			(229		)
Distributions to noncontrolling interests																		—			(32		)	(32		)
Stock based awards			(5		)				21									16			—			16
Other shareholder transactions			1															1			(6		)	(5		)
BALANCE AT JUNE 29, 2014	$	556	$	1,557		$	8,961		$	(2,604	)	$	(14	)	$	(669	)	$	7,787		$	371		$	8,158

BALANCE AT DECEMBER 31, 2014	$	556	$	1,583		$	9,545		$	(2,844	)	$	(13	)	$	(1,078	)	$	7,749		$	344		$	8,093		$	556	$	1,583		$	9,545		$	(2,844	)	$	(13	)	$	(1,078	)	$	7,749		$	344		$	8,093
Net income						858												858			42			900								858												858			42			900
Other comprehensive income (loss)															7			7			(2		)	5
Other comprehensive (loss) income, net of tax (Note 11)																																									7			7			(2		)	5
Issuance of shares			3															3			—			3					3															3			—			3
Employee benefits trust activity			16									1						17			—			17					16									1						17			—			17
Acquisition of shares									(514		)							(514		)	—			(514		)									(514		)							(514		)	—			(514		)
Cash dividends on common stock						(280		)										(280		)	—			(280		)						(280		)										(280		)	—			(280		)
Distributions to noncontrolling interests																		—			(25		)	(25		)																		—			(25		)	(25		)
Stock based awards			(4		)				8									4			—			4					(4		)				8									4			—			4
Other shareholder transactions			10															10			1			11					10															10			1			11
BALANCE AT JUNE 28, 2015	$	556	$	1,608		$	10,123		$	(3,350	)	$	(12	)	$	(1,071	)	$	7,854		$	360		$	8,214		$	556	$	1,608		$	10,123		$	(3,350	)	$	(12	)	$	(1,071	)	$	7,854		$	360		$	8,214

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 (loss) income, net of tax (Note 11)																																									(272		)	(272		)	(6		)	(278		)
Issuance of shares																													4															4			—			4
Employee benefits trust activity																													14									2						16			—			16
Acquisition of shares (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

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

~~Table of Contents~~

CUMMINS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. NATURE OF OPERATIONS

Cummins Inc. (“Cummins,” “we,” “our” or “us”) was founded in 1919 as a corporation in Columbus, Indiana, ~~and~~ as one of the first diesel engine manufacturers. We are a global power leader that designs, manufactures, distributes and services diesel and natural gas engines and engine-related component products, including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems and electric power generation systems. We sell our products to original equipment manufacturers (OEMs), distributors and other customers worldwide. We serve our customers through a network of approximately 600 company-owned and independent distributor locations and ~~approximately~~over 7,200 dealer locations in more than 190 countries and territories.

NOTE 2. BASIS OF PRESENTATION

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 pursuant to the rules and regulations of the Securities and Exchange Commission and in accordance with accounting principles generally accepted in the United States of America (GAAP) 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. Certain reclassifications have been made to prior period amounts to conform to the presentation of the current period condensed financial statements.

Our reporting period usually ends on the Sunday closest to the last day of the quarterly calendar period. The second quarters of ~~2015~~2016 and ~~2014~~2015 ended on July 3 and June 28, ~~and~~ ~~June 29,~~ respectively. Our fiscal year ends on December 31, regardless of the day of the week on which December 31 falls.

~~The preparation~~Preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts presented and disclosed in ~~the~~our Condensed Consolidated Financial Statements. Significant estimates and assumptions in theseCondensed Consolidated Financial Statements require the exercise of judgment and are used for, but not limited to, allowance for doubtful accounts, useful lives for depreciation and amortization, 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 rates and other ~~rate~~ assumptions for pension and other postretirement benefit costs, warranty programs, income taxes and deferred tax valuation allowances, lease ~~classifications~~classification, contingencies and ~~contingencies.~~restructuring costs. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be different from these estimates.

The weighted-average diluted common shares outstanding exclude 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 for the three and six ~~month periods~~months ended July 3, 2016 and June 28, 2015, ~~and June 29, 2014~~, were as follows:

Three months ended Six months ended
June 28,
2015 June 29,
2014 June 28,
2015 June 29,
2014
Options excluded 490,085
104,262
414,982
52,846



	Three months ended		Six months ended
	July 3, 2016	June 28, 2015	July 3, 2016	June 28, 2015
Options excluded	1,262,469	490,085	1,475,068	414,982

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, ~~2014~~.2015. Our interim period financial results for the three and six month ~~interim~~ 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.

On February 9, 2016, we entered into an accelerated share repurchase (ASR) agreement with a third party financial institution to repurchase $500 million of our common stock under our previously announced share repurchase plans. Pursuant to the terms of the agreement, we paid the full $500 million purchase price and initially received approximately 4.1 million shares representing approximately 80 percent of the shares expected to be repurchased. The unsettled portion of the ASR met the criteria to be accounted for as a forward contract indexed to our stock and qualified as an equity transaction. This resulted in a $100 million reduction to additional paid-in capital during the first quarter of 2016. In the second quarter of 2016, the ASR was completed, and we received approximately 0.6 million additional shares, based on our volume-weighted average stock price

during the term of the transaction, less a discount, for a total of 4.7 million shares purchased under the ASR at an average purchase price of $105.50 per share. The settlement resulted in the reclassification of the $100 million reduction of additional paid-in capital recognized in the first quarter of 2016 to treasury stock.

8The delivery of shares resulted in a reduction to our common stock outstanding used to calculate earnings per share in the quarter the shares were received and subsequent quarters.

~~Table of Contents~~

NOTE 3. PENSION AND OTHER POSTRETIREMENT BENEFITS

We sponsor funded and unfunded domestic and foreign defined benefit pension and other postretirement plans. Contributions to these plans were as follows:



	Three months ended				Six months ended
In millions	July 3, 2016		June 28, 2015		July 3, 2016		June 28, 2015
Defined benefit pension plans
Voluntary contribution	$	37	$	36	$	85	$	72
Mandatory contribution	6		6		18		82
Defined benefit pension contributions	$	43	$	42	$	103	$	154

Other postretirement plans	$	15	$	12	$	28	$	25

Defined contribution pension plans	$	14	$	17	$	35	$	42

We anticipate making additional defined benefit pension contributions during the remainder of 2016 of $43 million. The estimated $146 million of pension contributions for the full year include voluntary contributions of approximately $102 million. 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 2016 net periodic pension cost to approximate $42 million.

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	June 28, 2015			June 29, 2014			June 28, 2015			June 29, 2014			June 28, 2015		June 29, 2014		July 3, 2016			June 28, 2015			July 3, 2016			June 28, 2015			July 3, 2016		June 28, 2015
Service cost	$	20		$	17		$	6		$	6		$	—	$	—	$	23		$	20		$	6		$	6		$	—	$	—
Interest cost	26			27			14			17			4		5		28			26			13			14			4		4
Expected return on plan assets	(48		)	(44		)	(22		)	(21		)	—		—		(51		)	(48		)	(19		)	(22		)	—		—
Recognized net actuarial loss	12			7			8			6			1		—		7			12			4			8			2		1
Net periodic benefit cost	$	10		$	7		$	6		$	8		$	5	$	5	$	7		$	10		$	4		$	6		$	6	$	5

Pension
U.S. Plans U.K. Plans Other Postretirement Benefits
Six months ended
In millions June 28,
2015 June 29,
2014 June 28,
2015 June 29,
2014 June 28,
2015 June 29,
2014
Service cost $ 40
$ 34
$ 13
$ 12
$ —
$ —
Interest cost 51
53
28
33
8
9
Expected return on plan assets (95 ) (88 ) (45 ) (43 ) —
—
Recognized net actuarial loss 23
15
17
13
2
—
Net periodic benefit cost $ 19
$ 14
$ 13
$ 15
$ 10
$ 9



	Pension
	U.S. Plans						U.K. Plans						Other Postretirement Benefits
	Six months ended
In millions	July 3, 2016			June 28, 2015			July 3, 2016			June 28, 2015			July 3, 2016		June 28, 2015
Service cost	$	46		$	40		$	11		$	13		$	—	$	—
Interest cost	56			51			26			28			8		8
Expected return on plan assets	(102		)	(95		)	(38		)	(45		)	—		—
Recognized net actuarial loss	14			23			8			17			3		2
Net periodic benefit cost	$	14		$	19		$	7		$	13		$	11	$	10

NOTE 4. EQUITY, ROYALTY AND INTEREST INCOME FROM INVESTEES

Equity, royalty and interest income from investees included in our Condensed Consolidated Statements of Income for the ~~interim~~ reporting periods was as follows:


	Three months ended				Six months ended				Three months ended				Six months ended
In millions	June 28, 2015		June 29, 2014		June 28, 2015		June 29, 2014		July 3, 2016		June 28, 2015		July 3, 2016		June 28, 2015
Distribution Entities
Komatsu Cummins Chile, Ltda.									$	8	$	8	$	18	$	15
North American distributors	$	8	$	30	$	18	$	62	6		8		11		18
Komatsu Cummins Chile, Ltda.	8		8		15		14
All other distributors	—		1		1		2		1		—		1		1
Manufacturing Entities
Beijing Foton Cummins Engine Co., Ltd	22		1		29		1
Beijing Foton Cummins Engine Co., Ltd.									22		22		40		29
Dongfeng Cummins Engine Company, Ltd.	15		22		29		36		15		15		22		29
Chongqing Cummins Engine Company, Ltd.	11		15		23		26		9		11		17		23
All other manufacturers	21		19		28		34		16		21		32		28
Cummins share of net income	85		96		143		175		77		85		141		143
Royalty and interest income	9		9		19		20		11		9		19		19
Equity, royalty and interest income from investees	$	94	$	105	$	162	$	195	$	88	$	94	$	160	$	162

~~Table of Contents~~

NOTE 5. INCOME TAXES

Our effective tax rate for the year is expected to approximate ~~29.5~~27.0 percent,, excluding any one-time items that may arise. The expected tax rate does not include the benefits of the research tax credit, which expired December 31, 2014 and has not yet been renewed by Congress. If the research credit is reinstated during 2015, we anticipate the 2015 effective tax rate will be reduced to 28.5 percent. Our tax rate is generally less than the 35 percent U.S. statutory income tax rate primarily due to lower tax rates on foreign ~~income.~~ income and the research tax credit.

~~The~~Our effective tax rate for the three and six ~~month periods~~months ended July 3, 2016, was 25.7 percent and 26.9 percent, respectively.

Our effective tax rate for the three and six months ended June 28, 2015,, was 29.5 percent and 28.1 percent, respectively. The tax rate for the six ~~month period~~months ended June 28, 2015, included an $18 million discrete tax benefit to reflect the release of reserves for uncertain tax positions related to a favorable federal audit settlement.

~~Our~~The decrease in the effective tax rate for the three and six ~~month periods ended June 29, 2014, was~~ ~~26.5 percent~~ ~~and 28 percent, respectively. The tax rate for the three~~ months ended June 29, 2014, included a $2 million discrete tax benefit for the release of reserves for uncertain tax positions related to multiple state audit settlements. Additionally, the tax rate for the six month period included a $12 million discrete tax expense attributable primarily to state deferred tax adjustments, as well as a $6 million discrete net tax benefit resulting from a $70 million dividend paid from China earnings generated prior to 2012.

~~The increase in the effective tax rate for the three months ended June 28, 2015,~~July 3, 2016, versus the comparable ~~period~~periods in ~~2014~~2015 was primarily due to ~~unfavorable~~favorable changes in the jurisdictional mix of pre-tax income.

It is reasonably possible that our existing liabilities for uncertain tax benefits may decrease in an amount ranging from $40 million to $90 million within the next 12 months for U.S. and non-U.S. audits that are in progress.

NOTE 6. MARKETABLE SECURITIES

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


	June 28, 2015						December 31, 2014						July 3, 2016							December 31, 2015
In millions	Cost		Gross unrealized gains/(losses)		Estimated fair value		Cost		Gross unrealized gains/(losses)		Estimated fair value		Cost		Gross unrealized gains/(losses)			Estimated fair value		Cost		Gross unrealized gains/(losses)			Estimated fair value
Available-for-sale
Level 2⁽¹⁾
Bank debentures													$	116	$	(7	)	$	109	$	—	$	—		$	—
Debt mutual funds	$	64	$	—	$	64	$	75	$	1	$	76	114		(1		)	113		88		—			88
Equity mutual funds	9		—		9		9		—		9		11		—			11		11		(1		)	10
Bank debentures	13		—		13		6		—		6
Government debt securities	3		—		3		2		—		2		2		—			2		2		—			2
Total marketable securities	$	89	$	—	$	89	$	92	$	1	$	93	$	243	$	(8	)	$	235	$	101	$	(1	)	$	100

⁽¹⁾The fair value of Level 2 securities is estimated ~~primarily~~ using actively quoted prices for similar instruments from brokers and observable inputs where available, including market transactions and third-party pricing ~~services.~~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 ~~2015 and 2014.~~2016 or for the year ended December 31, 2015.

A description of the valuation techniques and inputs used for our Level 2 fair value measures was as follows:

Bank debentures— These investments provide us with a contractual rate of return and generally range in maturity from three months to one year. The counter-parties 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.

Debt mutual funds— The fair value measure for 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.

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-non-U.S.— The fair value measure for these securities are 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				Three months ended				Six months ended
In millions	June 28, 2015		June 29, 2014		June 28, 2015		June 29, 2014		July 3, 2016		June 28, 2015		July 3, 2016		June 28, 2015
Proceeds from sales and maturities of marketable securities	$	84	$	71	$	155	$	179	$	202	$	84	$	237	$	155
Gross realized gains from the sale of available-for-sale securities	—		12		1		13
Gross realized gains from the sale of marketable securities⁽¹⁾									—		—		—		1

⁽¹⁾Gross realized losses from the sale of available-for-sale securities were immaterial.

At ~~June 28, 2015~~,July 3, 2016, the fair value of available-for-sale investments in debt securities that utilize a Level 2 fair value measure is shown by contractual maturity ~~was as follows:~~below:


Maturity date	Fair value (in millions)
Contractual Maturity			(in millions)
1 year or less	$	66	$	223
1 - 5 years	11		—
5 - 10 years	3		1
Total	$	80	$	224

~~Table of Contents~~

NOTE 7. INVENTORIES

Inventories are stated at the lower of cost or market. Inventories included the following:


In millions	June 28, 2015			December 31, 2014			July 3, 2016			December 31, 2015
Finished products	$	1,888		$	1,859		$	1,776		$	1,796
Work-in-process and raw materials	1,216			1,129			1,106			1,022
Inventories at FIFO cost	3,104			2,988			2,882			2,818
Excess of FIFO over LIFO	(118		)	(122		)	(104		)	(111		)
Total inventories	$	2,986		$	2,866		$	2,778		$	2,707

NOTE 8. DEBT

Loans Payable and Commercial Paper

Loans payable, commercial paper and the related weighted-average interest rates were as follows:



	July 3, 2016					December 31, 2015
Dollars in millions	Amount		Weighted Average Interest Rate			Amount		Weighted Average Interest Rate
Loans payable ⁽¹⁾	$	19				$	24
Commercial paper ⁽²⁾	200		0.45	%	⁽³⁾	—		—
Total loans payable and commercial paper	$	219				$	24

⁽¹⁾Loans payable consist primarily of notes payable to various domestic and international financial institutions. It is not practical to aggregate these notes and calculate a quarterly weighted-average interest rate.

⁽²⁾ In February 2016, the Board of Directors authorized the issuance of up to $1.75 billion of unsecured short-term promissory notes ("commercial paper") pursuant to a commercial paper program. The program will facilitate the private placement of unsecured short-term debt through third party brokers. We intend to use the net proceeds from the commercial paper program for general corporate purposes.

⁽³⁾ The weighted average interest rate is inclusive of all brokerage fees.

Long-term Debt

A summary of long-term debt was as follows:


In millions	June 28, 2015			December 31, 2014			July 3, 2016			December 31, 2015
Long-term debt
Senior notes, 3.65%, due 2023	$	500		$	500		$	500		$	500
Debentures, 6.75%, due 2027	58			58			58			58
Debentures, 7.125%, due 2028	250			250			250			250
Senior notes, 4.875%, due 2043	500			500			500			500
Debentures, 5.65%, due 2098 (effective interest rate 7.48%)	165			165			165			165
Credit facilities related to consolidated joint ventures	3			3
Other debt	47			31			64			55
Unamortized discount	(47		)	(47		)	(57		)	(57		)
Fair value adjustments due to hedge on indebtedness	53			65			86			63
Capital leases	78			87			86			81
Total long-term debt	1,607			1,612			1,652			1,615
Less: Current maturities of long-term debt	(31		)	(23		)	38			39
Long-term debt	$	1,576		$	1,589		$	1,614		$	1,576

Principal payments required on long-term debt during the next five years are as follows:


	Required Principal Payments										Required Principal Payments
In millions	2015		2016		2017		2018		2019		2016		2017		2018		2019		2020
Principal payments	$	16	$	39	$	15	$	16	$	11	$	18	$	27	$	38	$	24	$	7

Fair Value of Debt

Based on borrowing rates currently available to us for bank loans with similar terms and average maturities, considering our risk premium, the fair value and carrying value of total debt, including current maturities, was as follows:


In millions	June 28, 2015		December 31, 2014		July 3, 2016		December 31, 2015
Fair value of total debt⁽¹⁾	$	1,884	$	1,993	$	2,202	$	1,821
Carrying value of total debt	1,677		1,698		1,871		1,639

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

NOTE 9. 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:

~~Table of Contents~~


In millions	June 28, 2015			June 29, 2014			July 3, 2016			June 28, 2015
Balance, beginning of year	$	1,283		$	1,129		$	1,404		$	1,283
Provision for warranties issued	233			206			181			233
Deferred revenue on extended warranty contracts sold	131			118			116			131
Payments	(191		)	(211		)	(199		)	(191		)
Amortization of deferred revenue on extended warranty contracts	(88		)	(71		)	(98		)	(88		)
Changes in estimates for pre-existing warranties	19			12			12			19
Foreign currency translation	(3		)	2			(5		)	(3		)
Balance, end of period	$	1,384		$	1,185		$	1,411		$	1,384

Warranty related deferred revenue ~~supplier recovery receivables~~ and the long-term portion of the warranty liability on our ~~June 28, 2015,~~July 3, 2016, balance sheet were as follows:


In millions	June 28, 2015		Balance Sheet Location	July 3, 2016		Balance Sheet Location
Deferred revenue related to extended coverage programs
Current portion	$	177	Deferred revenue	$	203	Current portion of deferred revenue
Long-term portion	472		Other liabilities and deferred revenue	532		Other liabilities and deferred revenue
Total	$	649		$	735

Receivables related to estimated supplier recoveries
Current portion	$	6	Trade and other receivables
Long-term portion	4		Other assets
Total	$	10

Long-term portion of warranty liability	$	330	Other liabilities and deferred revenue	$	341	Other liabilities and deferred revenue

NOTE 10. 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; 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 for our expected future liability with respect to pending lawsuits, claims and proceedings, where the nature and extent of any such liability can be reasonably estimated based upon then presently available information, there can be no assurance that the final resolution of any existing or future lawsuits, claims or proceedings will not have a material adverse effect on our business, results of operations, financial condition or cash flows.

We conduct significant business operations in Brazil that are subject to the Brazilian federal, state and local labor, social security, tax and customs laws. While we believe we comply with such laws, they are complex, subject to varying interpretations and we are often engaged in litigation regarding the application of these laws to particular circumstances.

Loss Contingency

~~Table~~Engine systems sold in the U.S. must be certified to comply with the Environmental Protection Agency (EPA) and California Air Resources Board (CARB) emission standards. EPA and CARB regulations require that in-use testing be performed on vehicles by the emission certificate holder and reported to the EPA and CARB in order to ensure ongoing compliance with these emission standards. We are the holder of ~~Contents~~

~~U.S. Distributor Commitments~~

~~Our distribution agreements~~this emission certificate for our engines, including engines installed in certain vehicles with ~~partially-owned distributors generally have a renewablethree-year term and are restricted to specified territories. Our distributors develop and maintain a network of dealers with~~one customer on which we did not also manufacture or sell the emission aftertreatment system. During 2015, a

quality issue in certain of these third party aftertreatment systems caused some of our inter-related engines to fail in-use emission testing. In the fourth quarter of 2015, the vehicle manufacturer made a request that we assist in the design and bear the financial cost of a field campaign (Campaign) to address the technical issue purportedly causing some vehicles to fail the in-use testing.

While we are not responsible for the warranty issues related to a component that we did not manufacture or sell, as the emission compliance certificate holder, we are responsible for proposing a remedy to the EPA and CARB. As a result, we have ~~no direct relationship. Our distributors are permitted~~proposed actions to ~~sell~~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 for this Campaign in other ~~noncompetitive products only~~operating expenses of$60 million in 2015. The campaign design was finalized with our ~~consent. We license all of our distributors to use our name and logo in connection~~OEM customer, reviewed with the ~~sale~~EPA and ~~service~~submitted for final approval in the second quarter and we recorded an additional accrual of $39 million. We continue to work with the vehicle manufacturer on campaign execution plans and a cost sharing agreement. The Campaign is not expected to be completed for some time and our products, with no right to assign or sublicense the trademarks, except to authorized dealers, without our consent. Products are sold to the distributors at standard domestic or international distributor net prices, as applicable. Net prices are wholesale pricesfinal cost could differ from what we establish to permit our distributors an adequate margin on their sales. Subject to local laws, we can generally refuse to renew these agreements upon expiration or terminate them upon written notice for inadequate sales, change in principal ownership and certain other reasons. Distributors also have ~~the right to terminate the agreements upon~~60-day notice without cause, or 30-day notice for cause. Upon termination or failure to renew, we are required to purchase the distributor’s current inventory, signage and special tools and may, at our option purchase other assets of the distributor, but are under no obligation to do so.recorded.

We do not currently expect any fines or penalties from the EPA or CARB related to this matter.

~~Other~~ Guarantees and Commitments

~~In addition to the matters discussed above, from~~From time to time we enter into ~~other~~ 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. ~~As of June 28, 2015,~~At July 3, 2016, the maximum potential loss related to these ~~other~~ guarantees was ~~$5 million.~~ $40 million, of which $15 million was recorded as a liability on the balance sheet.

We have arrangements with certain suppliers that require us to purchase minimum volumes or be subject to monetary penalties. ~~The penalty amounts are less than our purchase commitments and essentially allow the supplier to recover their tooling costs in most instances. As of June 28, 2015,~~At July 3, 2016, if we were to stop purchasing from each of these suppliers, the aggregate amount of the penalty would be approximately ~~$67~~$124 million,, of which~~$31~~ $61 million relates to a contract with ~~an engine parts~~a components supplier that extends to ~~2016. These~~2018. Most of these arrangements enable us to secure critical components. We do not currently anticipate paying any penalties under these contracts.

~~During 2014, we began entering~~We enter into physical forward contracts with suppliers of platinum, palladium and ~~palladium~~copper to purchase minimum volumes of the commodities at contractually stated prices for various periods, not to exceed two years. ~~As of June 28, 2015,~~At July 3, 2016, the total commitments under these contracts were ~~$67~~$40 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~~$69~~ $78 million at ~~June 28, 2015and$76 million~~ at ~~December 31, 2014~~.

July 3, 2016.

Indemnifications

Periodically, we enter into various contractual arrangements where we agree to indemnify a third-party against certain types of losses. Common types of indemnities include:

product liability and license, patent or trademark indemnifications;

asset sale agreements where we agree to indemnify the purchaser against future environmental exposures related to the asset sold; and

any contractual agreement where we agree to indemnify the counter-party 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.

~~Table of Contents~~

NOTE 11. ACCUMULATED OTHER COMPREHENSIVE ~~INCOME (LOSS)~~LOSS

Following are the changes in accumulated other comprehensive (loss) income ~~(loss)~~ by component for the three and six 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			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 March 30, 2014	$	(607	)	$	(155	)	$	6		$	1		$	(755	)
Other comprehensive income before reclassifications
Before tax amount	—			83			—			7			90			$	—		$	90
Tax (expense) benefit	—			(4		)	—			(2		)	(6		)	—			(6		)
After tax amount	—			79			—			5			84			—			84
Amounts reclassified from accumulated other comprehensive income⁽¹⁾⁽²⁾	10			—			(6		)	(2		)	2			(3		)	(1		)
Net current period other comprehensive income (loss)	10			79			(6		)	3			86			$	(3	)	$	83
Balance at June 29, 2014	$	(597	)	$	(76	)	$	—		$	4		$	(669	)

Balance at March 29, 2015	$	(656	)	$	(587	)	$	(1	)	$	(1	)	$	(1,245	)							$	(656	)	$	(587	)	$	(1	)	$	(1	)	$	(1,245	)
Other comprehensive income before reclassifications
Before tax amount	—			153			—			9			162			$	(6	)	$	156		—			153			—			9			162			$	(6	)	$	156
Tax (expense) benefit	—			(1		)	—			(2		)	(3		)	—			(3		)
Tax expense																						—			(1		)	—			(2		)	(3		)	—			(3		)
After tax amount	—			152			—			7			159			(6		)	153			—			152			—			7			159			(6		)	153
Amounts reclassified from accumulated other comprehensive income⁽¹⁾⁽²⁾	15			—			—			—			15			1			16			15			—			—			—			15			1			16
Net current period other comprehensive income (loss)	15			152			—			7			174			$	(5	)	$	169
Net current period other comprehensive (loss) income																						15			152			—			7			174			$	(5	)	$	169
Balance at June 28, 2015	$	(641	)	$	(435	)	$	(1	)	$	6		$	(1,071	)							$	(641	)	$	(435	)	$	(1	)	$	6		$	(1,071	)

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																						—			—			—			2			2			—			2
After tax amount																						—			(207		)	1			(8		)	(214		)	(6		)	(220		)
Amounts reclassified from accumulated other comprehensive income⁽¹⁾⁽²⁾																						9			—			—			2			11			—			11
Net current period other comprehensive (loss) income																						9			(207		)	1			(6		)	(203		)	$	(6	)	$	(209	)
Balance at July 3, 2016																						$	(636	)	$	(960	)	$	(1	)	$	(23	)	$	(1,620	)

⁽¹⁾ Amounts are net of tax.

⁽²⁾ See reclassifications out of accumulated other comprehensive (loss) income ~~(loss)~~ disclosure below for further details.

~~Table of Contents~~


	Six months ended																					Six months ended
In millions	Change in pensions and other postretirement defined benefit plans			Foreign currency translation adjustment			Unrealized gain (loss) on marketable securities			Unrealized gain (loss) on derivatives			Total attributable to Cummins Inc.			Noncontrolling interests			Total			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, 2013	$	(611	)	$	(179	)	$	7		$	(1	)	$	(784	)
Other comprehensive income before reclassifications
Before tax amount	(7		)	107			(1		)	10			109			$	7		$	116
Tax (expense) benefit	1			(4		)	—			(3		)	(6		)	—			(6		)
After tax amount	(6		)	103			(1		)	7			103			7			110
Amounts reclassified from accumulated other comprehensive income⁽¹⁾⁽²⁾	20			—			(6		)	(2		)	12			(4		)	8
Net current period other comprehensive income (loss)	14			103			(7		)	5			115			$	3		$	118
Balance at June 29, 2014	$	(597	)	$	(76	)	$	—		$	4		$	(669	)

Balance at December 31, 2014	$	(669	)	$	(406	)	$	(1	)	$	(2	)	$	(1,078	)							$	(669	)	$	(406	)	$	(1	)	$	(2	)	$	(1,078	)
Other comprehensive income before reclassifications
Before tax amount	(3		)	(51		)	1			10			(43		)	$	(2	)	$	(45	)	(3		)	(51		)	1			10			(43		)	$	(2	)	$	(45	)
Tax (expense) benefit	1			22			—			(2		)	21			—			21
Tax benefit (expense)																						1			22			—			(2		)	21			—			21
After tax amount	(2		)	(29		)	1			8			(22		)	(2		)	(24		)	(2		)	(29		)	1			8			(22		)	(2		)	(24		)
Amounts reclassified from accumulated other comprehensive income⁽¹⁾⁽²⁾	30			—			(1		)	—			29			—			29			30			—			(1		)	—			29			—			29
Net current period other comprehensive income (loss)	28			(29		)	—			8			7			$	(2	)	$	5		28			(29		)	—			8			7			$	(2	)	$	5
Balance at June 28, 2015	$	(641	)	$	(435	)	$	(1	)	$	6		$	(1,071	)							$	(641	)	$	(435	)	$	(1	)	$	6		$	(1,071	)

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																						—			1			—			6			7			—			7
After tax amount																						—			(264		)	1			(30		)	(293		)	(6		)	(299		)
Amounts reclassified from accumulated other comprehensive income⁽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	)

⁽¹⁾ Amounts are net of tax.

⁽²⁾ See reclassifications out of accumulated other comprehensive (loss) income ~~(loss)~~ disclosure below for further details.

~~Table of Contents~~

Following are the items reclassified out of accumulated other comprehensive (loss) income ~~(loss)~~ and the related tax effects:


In millions	Three months ended						Six months ended							Three months ended						Six months ended
(Gain)/Loss Components	June 28, 2015			June 29, 2014			June 28, 2015			June 29, 2014			Statement of Income Location	July 3, 2016			June 28, 2015			July 3, 2016			June 28, 2015			Statement of Income Location

Change in pension and other postretirement defined benefit plans
Recognized actuarial loss	$	21		$	14		$	43		$	29		⁽¹⁾	$	13		$	21		$	26		$	43		⁽¹⁾
Tax effect	(6		)	(4		)	(13		)	(9		)	Income tax expense	(4		)	(6		)	(8		)	(13		)	Income tax expense
Net change in pensions and other postretirement defined benefit plans	$	15		$	10		$	30		$	20			9			15			18			30

Realized (gain) loss on marketable securities	$	—		$	(12	)	$	(1	)	$	(13	)	Other income (expense), net
Realized (gain) on marketable securities														—			—			—			(1		)	Other income (expense), net
Tax effect	1			3			—			3			Income tax expense	—			1			—			—			Income tax expense
Net realized (gain) loss on marketable securities	$	1		$	(9	)	$	(1	)	$	(10	)
Net realized loss (gain) on marketable securities														—			1			—			(1		)

Realized (gain) loss on derivatives
Foreign currency forward contracts	$	—		$	(3	)	$	—		$	(5	)	Net sales	4			—			5			—			Net sales
Commodity swap contracts	—			1			—			3			Cost of sales
Total before taxes	—			(2		)	—			(2		)
Tax effect	—			—			—			—			Income tax expense	(2		)	—			(2		)	—			Income tax expense
Net realized (gain) loss on derivatives	$	—		$	(2	)	$	—		$	(2	)
Net realized loss on derivatives														2			—			3			—

Total reclassifications for the period	$	16		$	(1	)	$	29		$	8			$	11		$	16		$	21		$	29

⁽¹⁾ These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 3, ''PENSION AND OTHER POSTRETIREMENT BENEFITS'').

NOTE 12. RESTRUCTURING ACTIONS AND OTHER CHARGES

We executed restructuring actions primarily in the form of professional voluntary and involuntary employee separation programs in the fourth quarter of 2015. These actions were in response to the continued deterioration in our global markets in the second half of 2015, as well as expected reductions in orders in most U.S. and global markets in 2016. We reduced our worldwide workforce by approximately 1,900 employees, including approximately 370 employees accepting voluntary retirement packages with the remainder of the reductions being involuntary. We incurred a charge of $90 million in the fourth quarter of 2015, of which $86 million related to severance costs for both voluntary and involuntary terminations and $4 million was for asset impairments and other charges.

Employee termination and severance costs were recorded based on approved plans developed by the businesses and corporate management which specified positions to be eliminated, benefits to be paid under existing severance plans or statutory requirements and the expected timetable for completion of the plan. Estimates of restructuring costs and benefits were made based on information available at the time charges were recorded. Due to the inherent uncertainty involved, actual amounts paid for such activities may differ from amounts initially recorded and we may need to revise previous estimates.

Restructuring actions and other charges were included in each segment in our operating results as follows:



In millions	Year ended December 31, 2015 ⁽¹⁾
Power Systems	26
Distribution	23
Engine	17
Components	13
Non-segment	11
Restructuring actions and other charges	$	90

⁽¹⁾ Restructuring actions and other charges by segment were re-allocated in conjunction with our segment realignment. See Note 13, "OPERATING SEGMENTS," for additional information.

At July 3, 2016, substantially all terminations have been completed.

The table below summarizes the activity and balance of accrued workforce reductions, which is included in "Other accrued expenses" in our Condensed Consolidated Balance Sheets:



In millions
Balance at December 31, 2015	$	60
Cash payments for 2015 actions	(42		)
Balance at July 3, 2016	$	18

NOTE ~~12.~~13. 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,~~Chief Operating Decision Maker (CODM), or decision-making group, in deciding how to allocate resources and in assessing performance. ~~Cummins' chief operating decision-maker (CODM)~~Our CODM is the Chief ~~Executive~~Operating Officer.

We use segment EBIT (defined as earnings before interest expense, income taxes and noncontrolling interests) as a primary basis for the CODM to evaluate the performance of each of our operating segments. Segment amounts exclude certain expenses not specifically identifiable to segments.

As previously announced, beginning with the second quarter of 2016, we realigned certain of our reportable segments to be consistent with changes to our organizational structure and how the CODM monitors the performance of our segments. We reorganized our business to combine our Power Generation segment and our high horsepower engine business to create the new Power Systems segment. Our reportable operating segments consist ~~of the following:~~of: Engine, Distribution, Components and Power ~~Generation. This~~Systems. We began to report results for our new reporting structure in the second quarter of 2016 and also reflected this change for historical periods.

We allocate certain common costs and expenses, primarily corporate functions, among segments. These include certain costs and expenses of shared services, such as information technology, human resources, legal, finance and supply chain management. In addition to the reorganization noted above, we reevaluated the allocation of these costs, considering the new segment structure created in April 2016 and adjusted our allocation methodology accordingly. The revised methodology, which is based on a combination of relative segment sales and relative service usage levels, is effective for the periods beginning after January 1, 2016 and resulted in the revision of our segment operating results, including segment EBIT, for all four segments for the first quarter of 2016 with a greater share of costs allocated to the Distribution and Components segments than in previous years. Prior periods were not revised for the new allocation methodology. These changes had no impact on our consolidated results.

Our new 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 ~~industrial~~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, ~~mining,~~ agriculture, ~~marine, oil~~power generation systems and ~~gas, rail and military equipment.~~other off-highway applications. The Distribution segment includes wholly-owned and partially-owned distributorships engaged in wholesaling engines, generator sets and service parts, as well as performing service and repair activities on our products and maintaining relationships with various OEMs throughout the world. The Components segment sells filtration products, aftertreatment systems, turbochargers and fuel systems. The Power ~~Generation~~Systems segment is an integrated power provider, ~~of power systems,~~ which designs, manufactures and sells engines (16 liters and larger) for industrial applications (including mining, oil and gas and marine), standby and prime power generator sets, alternators and ~~alternators.~~

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 have allocated~~As noted above, 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 and finance.segments. We ~~also~~ do not allocate debt-related items, actuarial gains or losses, prior service costs or credits, changes in cash surrender value of corporate owned life insurance or income taxes to individual segments. Segment EBIT may not be consistent with measures used by other companies.

~~Table of Contents~~

Summarized financial information regarding our reportable operating segments for the three and six month periods is shown in the table below:

In millions Engine Distribution Components Power Generation
Non-segment
Items ⁽¹⁾
Total
Three months ended June 28, 2015

External sales $ 2,058
$ 1,487
$ 1,017
$ 453
$ —
$ 5,015
Intersegment sales 739
8
380
294
(1,421 ) —
Total sales 2,797
1,495
1,397
747
(1,421 ) 5,015
Depreciation and amortization⁽²⁾
60
25
28
13
—
126
Research, development and engineering expenses 91
3
57
15
—
166
Equity, royalty and interest income from investees 57
21
8
8
—
94
Interest income 3
1
1
1
—
6
Segment EBIT 341
113
223
57
(13 ) 721

Three months ended June 29, 2014

External sales $ 2,178
$ 1,229
$ 953
$ 475
$ —
$ 4,835
Intersegment sales 566
9
327
268
(1,170 ) —
Total sales 2,744
1,238
1,280
743
(1,170 ) 4,835
Depreciation and amortization⁽²⁾
52
20
26
13
—
111
Research, development and engineering expenses 105
3
53
18
—
179
Equity, royalty and interest income from investees 45
42
9
9
—
105
Interest income 4
—
1
1
—
6
Segment EBIT 311
126
⁽³⁾
185
61
(26 ) 657

Six months ended June 28, 2015

External sales $ 3,947
$ 2,956
$ 1,948
$ 873
$ —
$ 9,724
Intersegment sales 1,446
15
748
554
(2,763 ) —
Total sales 5,393
2,971
2,696
1,427
(2,763 ) 9,724
Depreciation and amortization⁽²⁾
118
52
54
29
—
253
Research, development and engineering expenses 205
6
118
32
—
361
Equity, royalty and interest income from investees 87
41
17
17
—
162
Interest income 5
2
2
2
—
11
Segment EBIT 594
201
418
106
(36 ) 1,283

Six months ended June 29, 2014

External sales $ 4,268
$ 2,171
$ 1,875
$ 927
$ —
$ 9,241
Intersegment sales 1,039
17
635
455
(2,146 ) —
Total sales 5,307
2,188
2,510
1,382
(2,146 ) 9,241
Depreciation and amortization⁽²⁾
103
36
52
25
—
216
Research, development and engineering expenses 221
5
106
37
—
369
Equity, royalty and interest income from investees 77
83
18
17
—
195
Interest income 6
1
2
2
—
11
Segment EBIT 580
202
⁽³⁾
352
86
(35 ) 1,185



In millions	Engine			Distribution		Components		Power Systems		Non-segment Items ⁽¹⁾			Total
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
Depreciation and amortization⁽²⁾	41			29		32		29		—			131
Research, development and engineering expenses	53			3		51		48		—			155
Equity, royalty and interest income from investees	46			19		12		11		—			88
Interest income	3			1		1		1		—			6
Segment EBIT	206		⁽³⁾	87		190		90		18			591

Three months ended June 28, 2015
External sales	$	1,834		$	1,487	$	1,017	$	677	$	—		$	5,015
Intersegment sales	491			8		380		420		(1,299		)	—
Total sales	2,325			1,495		1,397		1,097		(1,299		)	5,015
Depreciation and amortization⁽²⁾	47			25		28		26		—			126
Research, development and engineering expenses	53			3		57		53		—			166
Equity, royalty and interest income from investees	51			21		8		14		—			94
Interest income	2			1		1		2		—			6
Segment EBIT	278			113		223		127		(20		)	721

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
Interest income	5			2		2		3		—			12
Segment EBIT	403		⁽³⁾	174		353		136		9			1,075

Six months ended June 28, 2015
External sales	$	3,523		$	2,956	$	1,948	$	1,297	$	—		$	9,724
Intersegment sales	947			15		748		802		(2,512		)	—
Total sales	4,470			2,971		2,696		2,099		(2,512		)	9,724
Depreciation and amortization⁽²⁾	93			52		54		54		—			253
Research, development and engineering expenses	122			6		118		115		—			361
Equity, royalty and interest income from investees	74			41		17		30		—			162
Interest income	4			2		2		3		—			11
Segment EBIT	478			201		418		228		(42		)	1,283

⁽¹⁾Includes ~~inter-segment~~intersegment sales, ~~and~~intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three and six months ended July 3, 2016 and June 28, ~~2015 and June 29, 2014.~~2015.

⁽²⁾Depreciation and amortization as shown on a segment basis excludes the amortization of debt discount and deferred costs included in the Condensed Consolidated Statements of Income as "Interest expense." The amortization of debt discount and deferred costs were $1 million and $1 million for the six months ended July 3, 2016 and June 28, 2015, ~~and June 29, 2014,~~ respectively.

⁽³⁾~~Distribution~~ Engine segment EBIT ~~included gains of $14 million and $20 million on the fair value adjustments resulting from the acquisition of the controlling interests in North American distributors~~ for the three and six ~~month periods~~months ended ~~June 29, 2014.~~July 3, 2016 included an accrual for a loss contingency of $39 million. See Note 10, "COMMITMENTS AND CONTINGENCIES," for additional information.

~~Table of Contents~~

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				Three months ended				Six months ended
In millions	June 28, 2015		June 29, 2014		June 28, 2015		June 29, 2014		July 3, 2016		June 28, 2015		July 3, 2016		June 28, 2015
Total EBIT	$	721	$	657	$	1,283	$	1,185
Total segment EBIT									$	591	$	721	$	1,075	$	1,283
Less: Interest expense	17		15		31		32		16		17		35		31
Income before income taxes	$	704	$	642	$	1,252	$	1,153	$	575	$	704	$	1,040	$	1,252

NOTE ~~13.~~14. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 2016, the Financial Accounting Standards Board (FASB) amended its standards related to the accounting for credit losses on financial instruments. This amendment introduces new guidance for the accounting for credit losses on instruments including trade receivables and available for sale debt securities. The new rules will become 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 process of evaluating the impact the amendment will have on our Consolidated Financial Statements.

In March 2016, the FASB amended its standards related to the accounting for stock compensation. This amendment addresses several aspects of the accounting for share-based payment transactions that could change for us including, but not limited to, recognition of excess tax benefits or deficiencies in the income statement each period and classification of the excess tax benefits or deficiencies as operating activities in the cash flow statement. The new standard is effective for annual periods beginning after December 15, 2016, with early adoption permitted. We are in the process of evaluating the impact the amendment will have on our Consolidated Financial Statements.

In February 2016, the FASB amended its standards related to the accounting for leases. Under the new standard, lessees will now be required to recognize substantially all leases on the balance sheet as both a right-of-use-asset and a liability. The standard will continue to have two types of leases for income statement recognition purposes: operating leases and finance leases. Operating leases will result in the recognition of a single lease expense on a straight-line basis over the lease term similar to the treatment for operating leases under today's standards. Finance leases will result in an accelerated expense similar to the accounting for capital leases under today's standards. The determination of a lease classification as operating or finance will be done in a manner very 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 in an arrangement. The new standard is effective for us on January 1, 2019, with early adoption permitted. We are still evaluating the impact the standard could have on our Consolidated Financial Statements; however, while we have not yet quantified the amount, we do expect the standard will have a material impact on our Consolidated Balance Sheets due to the recognition of additional assets and liabilities for operating leases.

In January 2016, the FASB amended its standards related to the accounting for certain financial instruments. This amendment addresses certain aspects of recognition, measurement, presentation and disclosure. The new rules will become effective for annual and interim periods beginning after December 15, 2017. Early adoption is not permitted. We are in the process of evaluating the impact the amendment will have on our Consolidated Financial Statements.

In May 2014, the FASB amended its standards related to revenue recognition. This amendment replaces all existing revenue recognition guidance and provides a single, comprehensive revenue recognition model for all contracts with customers. The standard contains principles that we will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that we will recognize revenue in a manner that depicts the transfer of goods or services to customers at an amount that we expect to be entitled to in exchange for those goods or services. The ~~standard allows either full or modified retrospective adoption. 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 ~~new rules would have become~~standard allows either full or modified retrospective adoption effective for annual and interim periods beginning January 1, 2017. In July 2015, the FASB approved a one year delay of the effective date of the standard to January 1, 2018, to provide adequate time for implementation, although the final amendment has not yet been published.2018. We are in the process of evaluating the impact the amendment will have on our Consolidated Financial ~~Statements~~Statements. ~~, and~~We expect to adopt the standard using the modified retrospective approach. While we ~~are further considering~~have not yet completed our evaluation process, we have 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 ~~each method of adoption.~~this change to be material, but we are still quantifying the impact.

~~NOTE 14. SUBSEQUENT EVENTS~~

~~Acquisition of Cummins Central Power, LLC~~

On June 29, 2015, we acquired the remaining 20.01 percent interest in Cummins Central Power LLC from the former distributor principal. The purchase consideration was $41 million, which included $7 million in cash and an additional $31 million paid to eliminate outstanding debt. The remaining $3 million will be paid in future periods.

~~Table of Contents~~

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;

a downturn in the North American truck industry;

a major customer experiencing financial distress;

changes in the engine outsourcing practices of significant customers;

any significant problems in our new engine platforms;

a further slowdown in infrastructure development;

unpredictability in the adoption, implementation and enforcement of emission standards around the world;

foreign currency exchange rate changes;

the actions of, and income from, joint ventures and other investees that we do not directly control;

the integration of our previously partially-owned United States and Canadian distributors;

~~changes in the engine outsourcing practices~~our plan to grow through strategic acquisitions and related uncertainties of ~~significant customers;~~entering into such transactions;

~~a downturn~~challenges or unexpected costs in ~~the North American truck industry or financial distress of a major truck customer;~~completing restructuring and cost reduction initiatives;

~~a major customer experiencing financial distress;~~

~~any significant problems in our new engine platforms;~~

supply shortages and supplier financial risk, particularly from any of our single-sourced suppliers;

•variability in material and commodity costs;

product recalls;

the development of new technologies;

competitor pricing activity;

increasing competition, including increased global competition among our customers in emerging markets;

exposure to potential security breaches or other disruptions to our information technology ~~security threats~~systems and ~~sophisticated "cyber attacks;"~~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;

~~the development of new technologies;~~

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~~obtaining additional customers for our new light-duty diesel engine platform and avoiding any related write-down in our investments in such platform;~~

increasingly stringent environmental laws and regulations;

~~foreign currency exchange rate changes;~~

the price and availability of energy;

the performance of our pension plan ~~assets;~~assets and volatility of discount rates;

labor relations;

changes in actuarial and 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 cyclical nature of some of our markets;

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;

~~the consummation and integration of the planned acquisitions of our partially-owned United States and Canadian distributors;~~ and

other risk factors described in our Form 10-K, Part I, Item 1A under the caption “Risk Factors.”

Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are made only as of the date of this quarterly report and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

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ORGANIZATION OF INFORMATION

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) was prepared to provide the reader with a view and perspective of our business through the eyes of management and should be read in conjunction with our Management's Discussion and Analysis of Financial Condition and Results of Operations section of our ~~2014~~2015 Form ~~10-K.~~10-K and our July 26, 2016, 8-K addressing the segment reorganization. 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 Issued Accounting Pronouncements

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EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS

We are a global power leader that designs, manufactures, distributes and services diesel and natural gas engines and engine-related component products, including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems and electric power generation systems. We sell our products to original equipment manufacturers (OEMs), distributors and other customers worldwide.We have long-standing relationships with many of the leading manufacturers in the markets we serve, including PACCAR Inc, Daimler Trucks North America, Navistar International Corporation, Fiat Chrysler ~~Group, LLC (Chrysler)~~Automobiles (Fiat Chrysler), Volvo AB, Komatsu ~~Navistar International Corporation, Aggreko plc, Ford Motor Company~~ and MAN Nutzfahrzeuge AG. We serve our customers through a network of approximately 600 company-owned and independent distributor locations and ~~approximately~~over 7,200 dealer locations in more than 190 countries and territories.

Our reportable operating segments consist of ~~the following:~~ Engine, Distribution, Components and Power ~~Generation.~~Systems. This reporting structure is organized according to the products and markets each segment serves. The Engine segment produces engines (15 liters and less in size) and associated parts for sale to customers in on-highway and various ~~industrial~~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, ~~mining,~~ agriculture, ~~marine, oil~~power generation systems and ~~gas, rail and military equipment.~~other off-highway applications. The Distribution segment includes wholly-owned and partially-owned distributorships engaged in wholesaling engines, generator sets and service parts, as well as performing service and repair activities on our products and maintaining relationships with various OEMs throughout the world. The Components segment sells filtration products, aftertreatment systems, turbochargers and fuel systems. The Power ~~Generation~~Systems segment is an integrated power provider, ~~of power systems,~~ which designs, manufactures and sells engines (16 liters and larger) for industrial applications (including mining, oil and gas and marine), standby and prime power generator sets, alternators and ~~alternators.~~other power components.

Our financial performance depends, in large part, on varying conditions in the markets we serve, particularly the on-highway, construction and general industrial markets. Demand in these markets tends to fluctuate in response to overall economic conditions. Our sales may also be impacted by OEM inventory levels, ~~and~~ production schedules and stoppages. Economic downturns in markets we serve generally result in reduced sales of our products and can result in price reductions in certain products and/or markets. As a worldwide business, our operations are also affected by currency, political, economic and regulatory matters, including adoption and enforcement of environmental and emission standards, in the countries we serve. As part of our growth strategy, we invest in businesses in certain countries that carry high levels of these risks such as China, Brazil, India, Mexico, Russia and countries in the Middle East and Africa. At the same time, our geographic diversity and broad product and service offerings have helped limit the impact from a drop in demand in any one industry or customer or the economy of any single country on our consolidated results.

Worldwide revenues ~~increased~~ 4decreased 10 percent in the three months ended ~~June 28, 2015,~~July 3, 2016, as compared to the same period in ~~2014~~,2015, primarily due to lower demand in most global on-highway markets, unfavorable foreign currency fluctuations and decreased demand in most global power generation markets, partially offset by sales increases related to the consolidation of partially-owned North American distributors since December 31, ~~2013 and higher demand in North American on-highway markets, partially offset by unfavorable foreign currency fluctuations.~~2014. Revenue in the U.S. and Canada ~~improved~~declined by 1213 percent primarily due to decreased demand in the North American on-highway markets and lower demand in the industrial oil and gas markets, partially offset by increased Distribution segment sales related to the consolidation of North American distributors. Continued global economic weakness in the second quarter of 2016 negatively impacted our international revenues (excludes the U.S. and Canada), which declined by 4 percent, with sales down in many of our markets, especially in the U.K., Mexico and Brazil. The decline in international sales was primarily due to unfavorable foreign currency impacts of 1 percent (primarily in the Chinese renminbi, Brazilian real, Indian rupee, Australian dollar and British pound) and lower demand in the on-highway markets, especially in Mexico.

Worldwide revenues declined 9 percent in the first six months of 2016 as compared to the same period in 2015, primarily due to lower demand in most global on-highway markets, decreased demand in most global power generation markets, unfavorable foreign currency fluctuations and lower demand in most global industrial markets, partially offset by sales increases related to the acquisition of North American distributors since December 31, 2014. Revenue in the U.S. and ~~higher~~Canada declined by 12 percent primarily due to decreased demand in the North American on-highway markets ~~partially offset by~~and lower demand in the ~~Power Generation segment.~~industrial oil and gas and construction markets, partially offset by increased Distribution segment sales related to the acquisition of North American distributors. Continued ~~international~~global economic ~~uncertainty~~weakness in ~~the second quarter of 2015~~2016 negatively impacted our international revenues ~~(excluding~~(excludes the U.S. and Canada), which declined by 6 percent, with sales down ~~or relatively flat~~ in ~~many~~most of our markets, especially in ~~Brazil, Europe~~South America, the U.K. and ~~Australia.~~Mexico. The decline in international ~~revenue~~sales was ~~led by~~primarily due to unfavorable foreign currency impacts of 42 percent (primarily in ~~Europe, Brazil, Australia,~~ the ~~U.K.~~Brazilian real, Chinese renminbi, Indian rupee, Australian dollar, British pound and ~~Canada)~~South African rand), lower demand in the ~~Engine segment, especially the~~ on-highway ~~market~~markets in Brazil and Mexico and decreased demand in international industrial markets led by declines in ~~international construction~~marine and ~~commercial marine demand. These decreases were partially offset by increased international demand for power generation products.~~mining markets.

Worldwide revenues increased 5 percent in the first six months of 2015 as compared to the same period in 2014, primarily due to the consolidation of partially-owned North American distributors since December 31, 2013 and higher demand in North American on-highway markets, partially offset by unfavorable foreign currency fluctuations. Revenue in the U.S. and Canada improved by 14 percent primarily due to increased Distribution segment sales related to the consolidation of North American distributors and higher demand in North American on-highway markets, partially offset by lower demand in the Power Generation segment and off-highway mining and construction markets. Continued international economic uncertainty in the first half of 2015 negatively impacted our international revenues, which declined by 6 percent with sales down or relatively flat in many of our markets, especially Europe, Brazil, Australia and Korea. The decline in international revenue was led by unfavorable foreign currency impacts of 3 percent (primarily in Europe, Brazil, Australia, Canada and the U.K.), lower demand in the Engine segment, especially the on-highway market in Brazil, and declines in international construction and commercial marine demand. These decreases were partially offset by increased international demand for power generation products.

The following tables contain sales and earnings before interest expense, income ~~taxes~~tax expense and noncontrolling interests (EBIT) results by operating segment for the three and six ~~month periods~~months ended July 3, 2016 and June 28, ~~2015 and June 29, 2014.~~2015. Refer to the section titled “Operating Segment Results” for a more detailed discussion of net sales and EBIT by operating segment, including the reconciliation of segment EBIT to income before income taxes.

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	Three months ended																				Three months ended
Operating Segments	June 28, 2015								June 29, 2014								Percent change				July 3, 2016							June 28, 2015								Percent change
				Percent								Percent					2015 vs. 2014							Percent							Percent					2016 vs. 2015
In millions	Sales			of Total		EBIT			Sales			of Total		EBIT			Sales		EBIT		Sales			of Total		EBIT		Sales ⁽¹⁾			of Total		EBIT ⁽¹⁾			Sales		EBIT
Engine	$	2,797		55	%	$	341		$	2,744		57	%	$	311		2	%	10	%	$	2,002		44	%	$	206	$	2,325		46	%	$	278		(14	)%	(26	)%
Distribution	1,495			30	%	113			1,238			26	%	126			21	%	(10	)%	1,544			34	%	87		1,495			30	%	113			3	%	(23	)%
Components	1,397			28	%	223			1,280			26	%	185			9	%	21	%	1,279			28	%	190		1,397			28	%	223			(8	)%	(15	)%
Power Generation	747			15	%	57			743			15	%	61			1	%	(7	)%
Power Systems																					921			21	%	90		1,097			22	%	127			(16	)%	(29	)%
Intersegment eliminations	(1,421		)	(28	)%	—			(1,170		)	(24	)%	—			21	%	—		(1,218		)	(27	)%	—		(1,299		)	(26	)%	—			(6	)%	—
Non-segment	—			—		(13		)	—			—		(26		)	—		(50	)%	—			—		18		—			—		(20		)	—		NM
Total	$	5,015		100	%	$	721		$	4,835		100	%	$	657		4	%	10	%	$	4,528		100	%	$	591	$	5,015		100	%	$	721		(10	)%	(18	)%

⁽¹⁾Sales and EBIT numbers were adjusted for the segment reorganization. See Note 13, "OPERATING SEGMENTS," to the Condensed Consolidated Financial Statements for additional information.

Net income attributable to Cummins was ~~$471~~$406 million,, or ~~$2.62~~$2.40 per diluted share,, on sales of ~~$5.0~~$4.5 billion for the three months ended ~~June 28, 2015~~,July 3, 2016, versus the comparable prior year period ~~with~~ net income attributable to Cummins of ~~$446~~$471 million,, or ~~$2.43~~$2.62 per diluted share, on sales of ~~$4.8 billion~~.$5.0 billion. The ~~increase~~decrease in net income and earnings per diluted share was driven by ~~improved~~lower gross margin and ~~lower research, development and engineering expenses,~~an accrual for a loss contingency, partially offset by ~~higher~~a lower effective tax rate, lower selling, general and administrative expenses and ~~lower equity, royalty~~decreased research, development and ~~interest income from investees.~~engineering expenses. The ~~increase~~decrease in gross margin was primarily due to ~~improved~~lower volumes and unfavorable mix, partially offset by lower material and commodity costs, lower warranty expense and increased Distribution ~~segment sales~~margins related to the ~~consolidation~~acquisition of ~~partially-owned~~ North American distributors since December 31, ~~2013, higher volumes and lower material and commodity costs, partially offset by unfavorable foreign currency fluctuations.~~2014. Diluted earnings per share for the three months ended ~~June 28, 2015,~~July 3, 2016, benefited ~~$0.02~~$0.01 from ~~lower~~fewer weighted average shares outstanding due to ~~2015~~ purchases under the stock repurchase programs.


	Six months ended																				Six months ended
Operating Segments	June 28, 2015								June 29, 2014								Percent change				July 3, 2016							June 28, 2015								Percent change
				Percent								Percent					2015 vs. 2014							Percent							Percent					2016 vs. 2015
In millions	Sales			of Total		EBIT			Sales			of Total		EBIT			Sales		EBIT		Sales			of Total		EBIT		Sales ⁽¹⁾			of Total		EBIT ⁽¹⁾			Sales		EBIT
Engine	$	5,393		55	%	$	594		$	5,307		57	%	$	580		2	%	2	%	$	3,978		45	%	$	403	$	4,470		46	%	$	478		(11	)%	(16	)%
Distribution	2,971			30	%	201			2,188			24	%	202			36	%	—	%	3,007			34	%	174		2,971			30	%	201			1	%	(13	)%
Components	2,696			28	%	418			2,510			27	%	352			7	%	19	%	2,516			28	%	353		2,696			28	%	418			(7	)%	(16	)%
Power Generation	1,427			15	%	106			1,382			15	%	86			3	%	23	%
Power Systems																					1,729			20	%	136		2,099			22	%	228			(18	)%	(40	)%
Intersegment eliminations	(2,763		)	(28	)%	—			(2,146		)	(23	)%	—			29	%	—		(2,411		)	(27	)%	—		(2,512		)	(26	)%	—			(4	)%	—
Non-segment	—			—		(36		)	—			—		(35		)	—		3	%	—			—		9		—			—		(42		)	—		NM
Total	$	9,724		100	%	$	1,283		$	9,241		100	%	$	1,185		5	%	8	%	$	8,819		100	%	$	1,075	$	9,724		100	%	$	1,283		(9	)%	(16	)%

⁽¹⁾Sales and EBIT numbers were adjusted for the segment reorganization. See Note 13, "OPERATING SEGMENTS," to the Condensed Consolidated Financial Statements for additional information.

Net income attributable to Cummins was $727 million, or $4.26 per diluted share, on sales of $8.8 billion for the six months ended July 3, 2016, versus the comparable prior year period net income attributable to Cummins of $858 million, or $4.76 per diluted share, on sales of $9.7 ~~billion for the six months ended June 28, 2015, versus the comparable prior year period with net income attributable to Cummins of $784 million, or $4.26 per diluted share, on sales of $9.2~~ billion. The ~~increase~~decrease in net income and earnings per diluted share was driven by ~~improved~~lower gross margin and an accrual for a loss contingency, partially offset by lower selling, general and administrative expenses, decreased research, development and engineering expenses ~~partially offset by higher selling, general~~ and ~~administrative expenses,~~a lower other income (expense) as a result of gains recognized in 2014 from the acquisition of the remaining interest in North American distributors and lower equity, royalty and interest income from investees.effective tax rate. The ~~increase~~decrease in gross margin was primarily due to lower volumes, unfavorable mix and unfavorable foreign currency fluctuations (primarily in the Brazilian real, Australian dollar and Canadian dollar), partially offset by lower material and commodity costs, lower warranty expense and improved Distribution segment ~~sales~~margins related to the ~~consolidation~~acquisition of ~~partially-owned~~ North American distributors since December 31, ~~2013, higher volumes and lower material and commodity costs, partially offset by unfavorable foreign currency fluctuations.~~2014. Diluted earnings per share for the six months ended ~~June 28, 2015,~~July 3, 2016, benefited ~~$0.04~~$0.10 from ~~lower~~fewer weighted average shares outstanding, primarily due to purchases under the stock repurchase programs.

We generated ~~$569~~$734 million of operating cash flows for the six months ended ~~June 28, 2015,~~July 3, 2016, compared to ~~$701~~$569 million for the same period in ~~2014.~~2015. Refer to the section titled ~~“Cash Flows”~~"Cash Flows" in the ~~“Liquidity~~"Liquidity and Capital ~~Resources”~~Resources" section for a discussion of items impacting cash flows.

~~In September 2013, we announced our intention to acquire the equity that we do not already own in most of our partially-owned U.S. and Canadian distributors over a~~ ~~three to five year period. We plan to spend $150 million to $190 million on North American distributor acquisitions and the related debt retirements in the third quarter of 2015.~~

During the first ~~six months~~half of ~~2015,~~2016, we repurchased ~~$174~~$695 million, or 6.7 million shares of common stock, ~~under~~including completion of the ~~2012 Board of Directors Authorized Plan, completing this program~~accelerated share repurchase agreement finalized in the second quarter of ~~2015. In July 2014, our Board of Directors authorized~~2016. See Note 2, "BASIS OF PRESENTATION" to the

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~~acquisition of up~~Notes to ~~$1 billion of~~Condensed Consolidated Financial Statements for additional ~~common stock upon the completion of the 2012 Plan. We repurchased $340 million under the new authorization in the second quarter of 2015.~~information.

Our debt to capital ratio (total capital defined as debt plus equity) at ~~June 28, 2015,~~July 3, 2016, was ~~17.0~~20.6 percent, compared to ~~17.3~~17.5 percent at December 31, ~~2014.~~2015. The increase was due to the repurchases of common stock and higher total debt, primarily due to the commercial paper program. At ~~June 28, 2015,~~July 3, 2016, we had ~~$1.8~~$1.3 billion in cash and marketable securities on hand and access to our credit facilities, if necessary, to meet currently anticipated investment and funding needs. ~~As of the date of filing this Quarterly Report on Form 10-Q, our credit ratings were as follows:~~

~~Credit Rating Agency~~

~~Senior L-T~~
~~Debt Rating~~

~~Outlook~~

~~Last Updated~~

~~Standard & Poor’s Rating Services~~

A+

~~Stable~~

~~August 2014~~

~~Fitch Ratings~~

~~Stable~~

~~October 2014~~

~~Moody’s Investors Service, Inc.~~

~~Stable~~

~~December 2014~~

In July ~~2015, the~~2016, our Board of Directors authorized aan increase to our quarterly dividend ~~increase~~ of 255.1 percent from ~~$0.78~~$0.975 per share to ~~$0.975~~$1.025 per ~~share on a quarterly basis.~~share.

Our global pension plans, including our unfunded and non-qualified plans, were ~~108~~111 percent funded at December 31, ~~2014.~~2015. Our U.S. qualified plan, which represents approximately 5657 percent of the worldwide pension obligation, was 119 percent funded and our U.K. plan was ~~113~~123 percent funded. We expect to contribute ~~$175~~$146 million to our global pension plans in ~~2015. We anticipate~~2016. In addition, we expect our 2016 net periodic pension ~~and other postretirement benefit costs in 2015~~cost to increase by approximately $8 million pre-tax, or approximately $0.03 per diluted share, when compared to 2014 due to lower discount rates and unfavorable demographics mostly offset by favorable expected return on asset performance. Refer toapproximate $42 million. See Note 3, "PENSION AND OTHER POSTRETIREMENT BENEFITS" to the Notes to Condensed Consolidated Financial Statements for additional ~~information regarding our pension plans.~~information.

We expect our effective tax rate for the full year of ~~2015~~2016 to approximate ~~29.5~~27.0 percent,, excluding any one-time tax items.

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OUTLOOK

Near-Term

Our outlook reflects the following ~~positive~~ trends for the remainder of ~~2015:~~2016:

We expect ~~continued growth~~demand for pick-up trucks in ~~the~~ North ~~American heavy-duty and medium-duty on-highway markets compared to 2014.~~

~~We expect North American light-duty demand~~America to remain strong.

We expect the new ISG engine, which began production in the second quarter of 2014 with our Beijing Foton Cummins Engine Co., Ltd. joint venture, to continue to gain market share in China in its first full year of production.

~~We plan to acquire two more unconsolidated North American distributors in the third quarter, which we expect to increase our Distribution segment sales.~~

We expect demand in India to improve in ~~some end markets~~most end-markets as its economy continues to improve.

We expect to realize annualized savings from the ~~economy improves throughout the year.~~ 2015 restructuring actions of approximately $160 million.

Our outlook reflects the following challenges to our business that may reduce our revenue and earnings potential for the remainder of ~~2015:~~2016:

We expect industry production of heavy-duty trucks in North America to decline.

~~Power~~We expect power generation markets ~~are expected~~ to remain weak.

~~Weak~~We believe weak economic conditions in Brazil will continue to negatively impact demand across our businesses.

~~We anticipate end markets in China to remain weak.~~

~~Demand in certain European markets could remain weak due to continued political and economic uncertainty.~~

Foreign currency volatility could continue to put pressure on ~~sales~~our revenues and earnings.

We expect market demand to remain weak in the oil and gas markets as the result of low crude oil prices.

~~Domestic and international~~We expect demand for equipment in global mining markets ~~could continue~~ to ~~deteriorate if commodity prices continue to weaken.~~

~~Long-Term~~remain weak.

We ~~believe that, over~~may close or restructure additional manufacturing facilities as we evaluate the ~~longer term, there will be economic improvements in most~~appropriate size and structure of our ~~current markets and that our opportunities for long-term profitable growth will continue as the~~manufacturing capacity, which could result ~~of the following four macroeconomic trends that should benefit our businesses:~~in additional charges.

~~tightening emissions controls across the world;~~

~~infrastructure needs in emerging markets;~~

~~energy availability and cost issues; and~~

~~globalization of industries like ours.~~

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RESULTS OF OPERATIONS


		Three months ended							Favorable/							Six months ended							Favorable/						Three months ended								Favorable/						Six months ended								Favorable/
		June 28, 2015			June 29, 2014				(Unfavorable)							June 28, 2015				June 29, 2014			(Unfavorable)						July 3, 2016				June 28, 2015				(Unfavorable)						July 3, 2016				June 28, 2015				(Unfavorable)
In millions (except per share amounts)	In millions (except per share amounts)	June 28, 2015						Amount				Percent							Amount				Percent		In millions (except per share amounts)		Amount						June 28, 2015			Percent				Amount			July 3, 2016				June 28, 2015			Percent
NET SALES	NET SALES	$	5,015		June 29, 2014	$	4,835			$	180			4	%	June 28, 2015		$	9,724	June 29, 2014			$	9,241		$	483		July 3, 2016		5	%	NET SALES	$	4,528			$	5,015		$	(487	)		(10	)%		$	8,819			$	9,724		$	(905	)	(9	)%
Cost of sales	Cost of sales	3,683			3,630				(53		)		(1	)%		7,197				6,937			(260		)	(4	)%	Cost of sales	3,331				3,683				352			10	%		6,566				7,197				631			9	%
GROSS MARGIN	GROSS MARGIN	1,332			1,205				127				11	%		2,527				2,304			223			10	%	GROSS MARGIN	1,197				1,332				(135		)	(10	)%		2,253				2,527				(274		)	(11	)%
OPERATING EXPENSES AND INCOME	OPERATING EXPENSES AND INCOME																											OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses	Selling, general and administrative expenses	537			513				(24		)		(5	)%		1,054				998			(56		)	(6	)%	Selling, general and administrative expenses	524				537				13			2	%		1,014				1,054				40			4	%
Research, development and engineering expenses	Research, development and engineering expenses	166			179				13				7	%		361				369			8			2	%	Research, development and engineering expenses	155				166				11			7	%		321				361				40			11	%
Equity, royalty and interest income from investees	Equity, royalty and interest income from investees	94			105				(11		)		(10	)%		162				195			(33		)	(17	)%	Equity, royalty and interest income from investees	88				94				(6		)	(6	)%		160				162				(2		)	(1	)%
Other operating (expense) income, net		—			(6		)		6				(100	)%		(3		)		(7		)	4			(57	)%
Other operating expense, net																												Other operating expense, net	(39		)		—				(39		)	NM			(41		)		(3		)		(38		)	NM
OPERATING INCOME	OPERATING INCOME	723			612				111				18	%		1,271				1,125			146			13	%	OPERATING INCOME	567				723				(156		)	(22	)%		1,037				1,271				(234		)	(18	)%
Interest income	Interest income	6			6				—				—	%		11				11			—			—	%	Interest income	6				6				—			—	%		12				11				1			9	%
Interest expense	Interest expense	17			15				(2		)		(13	)%		31				32			1			3	%	Interest expense	16				17				1			6	%		35				31				(4		)	(13	)%
Other income (expense), net	Other income (expense), net	(8		)	39				(47		)		NM			1				49			(48		)	(98	)%	Other income (expense), net	18				(8		)		26			NM			26				1				25			NM
INCOME BEFORE INCOME TAXES	INCOME BEFORE INCOME TAXES	704			642				62				10	%		1,252				1,153			99			9	%	INCOME BEFORE INCOME TAXES	575				704				(129		)	(18	)%		1,040				1,252				(212		)	(17	)%
Income tax expense	Income tax expense	208			170				(38		)		(22	)%		352				323			(29		)	(9	)%	Income tax expense	148				208				60			29	%		280				352				72			20	%
CONSOLIDATED NET INCOME	CONSOLIDATED NET INCOME	496			472				24				5	%		900				830			70			8	%	CONSOLIDATED NET INCOME	427				496				(69		)	(14	)%		760				900				(140		)	(16	)%
Less: Net income attributable to noncontrolling interests	Less: Net income attributable to noncontrolling interests	25			26				1				4	%		42				46			4			9	%	Less: Net income attributable to noncontrolling interests	21				25				4			16	%		33				42				9			21	%
NET INCOME ATTRIBUTABLE TO CUMMINS INC.	NET INCOME ATTRIBUTABLE TO CUMMINS INC.	$	471		$	446			$	25			6	%		$	858			$	784		$	74		9	%	NET INCOME ATTRIBUTABLE TO CUMMINS INC.	$	406			$	471			$	(65	)	(14	)%		$	727			$	858			$	(131	)	(15	)%
Diluted earnings per common share attributable to Cummins Inc.		$	2.62		$	2.43			$	0.19			8	%		$	4.76			$	4.26		$	0.50		12	%
"NM" - not meaningful information
Diluted Earnings Per Common Share Attributable to Cummins Inc.																												Diluted Earnings Per Common Share Attributable to Cummins Inc.	$	2.40			$	2.62			$	(0.22	)	(8	)%		$	4.26			$	4.76			$	(0.50	)	(11	)%

"NM" - not meaningful information


	Three months ended					Favorable/ (Unfavorable)			Six months ended						Favorable/ (Unfavorable)		Three months ended						Favorable/ (Unfavorable)			Six months ended					Favorable/ (Unfavorable)
	June 28, 2015			June 29, 2014				June 28, 2015			June 29, 2014				Favorable/ (Unfavorable)	July 3, 2016			June 28, 2015				Favorable/ (Unfavorable)		July 3, 2016			June 28, 2015			Favorable/ (Unfavorable)
Percent of sales			Percentage Points					June 28, 2015		Percentage Points	June 29, 2014					July 3, 2016		Percentage Points						Percentage Points				June 28, 2015
Gross margin	June 28, 2015		26.6	June 29, 2014	%	Favorable/ (Unfavorable)	24.9	%		1.7			26.0	%		24.9	%		June 28, 2015	1.1		26.4	%		July 3, 2016	26.6	%		(0.2	)	25.5	%	26.0	%	(0.5	)
Selling, general and administrative expenses	10.7	%		10.6	%	(0.1	)		10.8	%		10.8	%		—		11.6	%		10.7	%		(0.9	)		11.5	%		10.8	%	(0.7	)
Research, development and engineering expenses	3.3	%		3.7	%	0.4			3.7	%		4.0	%		0.3		3.4	%		3.3	%		(0.1	)		3.6	%		3.7	%	0.1

Net Sales

Net sales for the three months ended July 3, 2016, decreased by $487 million~~June 28, 2015~~, ~~increased~~versus the comparable period in 2015. The primary drivers were as follows:~~2014~~

Engine segment sales decreased 14 percent primarily due to ~~increase~~dlower demand in North American on-highway markets and lower demand in all North American off-highway markets, partially offset by increased sales in the light-duty automotive markets.

Power Systems segment sales decreased 16 percent primarily due to lower demand in all product lines and decreased sales in most regions with the largest declines in China, North America, Asia (excluding China) and the Middle East.

Components segment sales decreased 8 percent primarily due to lower demand in all lines of businesses, mostly in North American on-highway markets, partially offset by higher demand in China.

Foreign currency fluctuations unfavorably impacted sales by approximately 2 percent primarily in the Chinese renminbi, Brazilian real, Indian rupee, Australian dollar and British pound.

The decreases above were partially offset by increased Distribution segment sales of 213 percent, ~~principally~~primarily due to higher sales related to the ~~acquisitions~~acquisition of North American distributors since December 31, ~~2013, and strength~~2014, partially offset by a decline in organic sales in North American ~~on-highway markets improving sales in both the Engine~~oil and Components segments. These increases were partially offset by unfavorable foreign currency fluctuations which impacted sales by approximately 4 percent (primarily in Europe, Brazil, Australia, Canada and the U.K.).gas markets.

Net sales for the six months ended ~~June 28, 2015, increased~~ July 3, 2016, decreased by $905 millionversus the comparable period in ~~2014~~2015. The primary drivers were as follows:

Engine segment sales decreased 11 percent primarily due to lower demand in North American on-highway markets and lower demand in most global off-highway markets, partially offset by increased sales in the light-duty automotive markets.

Power Systems segment sales decreased 18 percent primarily due to lower demand in all product lines and decreased sales in most regions with the largest declines in China, North America, Asia (excluding China), Latin America and the Middle East, partially offset by increased sales in Western Europe.

Foreign currency fluctuations unfavorably impacted sales by approximately 2 percent primarily in the Brazilian real, Chinese renminbi, Indian rupee, Australian dollar, Canadian dollar, British pound and South African rand.

Components segment sales decreased 7 percent primarily due to lower demand in all lines of business, mostly in North American on-highway products, partially offset by higher demand in China.

The decreases above were partially offset by increased Distribution segment sales of 361 percent, ~~principally~~primarily due to higher sales related to the ~~acquisitions~~acquisition of North American distributors since December 31, ~~2013, and strength in North American on-highway markets improving sales in both the Engine and Components segments. Theses increase were~~2014, partially offset by ~~unfavorable foreign currency fluctuations which impacted~~a decline in organic sales, ~~by approximately 3 percent (primarily~~primarily in ~~Europe, Brazil, Australia, Canada and the U.K.).~~engine markets.

Sales to international markets, based on location of customers, for the three and six months ended ~~June 28, 2015,~~July 3, 2016, were 4042 percent and 3941 percent, respectively, of total net sales compared ~~to 44~~with 40 percent and 39 percent of total net sales, respectively, for ~~both of~~ the comparable periods in ~~2014.~~

2015. A more detailed discussion of sales by segment is presented in the “OPERATING SEGMENT RESULTS” section.

Gross Margin

Gross margin ~~increased~~decreased $135 million for the three months ended ~~June 28, 2015,~~July 3, 2016, versus the comparable period in ~~2014,~~2015 and ~~increased~~decreased 0.2 points as a percentage of ~~sales by 1.7 percentage points.~~sales. The ~~increase~~decrease in gross margin dollars was primarily due to ~~improved~~lower volumes and unfavorable mix, partially offset by lower material and commodity costs, lower warranty expense and increased Distribution ~~segment~~

~~Table of Contents~~

~~sales~~margins related to the ~~consolidation~~acquisition of ~~partially-owned~~ North American distributors since December 31, ~~2013, higher~~2014.

Gross margin decreased $274 million for the six months ended July 3, 2016, versus the comparable period in 2015, and decreased 0.5 points as a percentage of sales. The decrease in gross margin dollars was primarily due to lower volumes, unfavorable mix and ~~lower material and commodity costs, partially offset by~~ unfavorable foreign currency fluctuations (primarily in ~~Australia, Brazil~~the Brazilian real, Australian dollar and ~~Canada).~~

~~Gross margin increased for the six months ended June 28, 2015, versus the comparable period in 2014,~~Canadian dollar), partially offset by lower material and ~~increased as a percentage of sales by 1.1 percentage points. The increase in gross margin was primarily due to~~commodity costs, lower warranty expense and improved Distribution segment ~~sales~~margins related to the ~~consolidation~~acquisition of ~~partially-owned~~ North American distributors since December 31, ~~2013, higher volumes and lower material and commodity costs, partially offset by unfavorable foreign currency fluctuations (primarily in Australia, Canada and Brazil).~~2014.

The provision for base warranties issued, excluding campaigns, as a percent of sales for the three and six months ended ~~June 28, 2015,~~July 3, 2016, was ~~2.1~~1.8 percent ~~in both periods,~~and 1.9 percent, respectively, compared to ~~2.3~~2.1 percent and 2.1 percent ~~respectively,~~ for the comparable periods in ~~2014.~~2015. A more detailed discussion of margin by segment is presented in the “OPERATING SEGMENT RESULTS” section.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $13 million for the three months ended ~~June 28, 2015, increased~~July 3, 2016, versus the comparable period in ~~2014,~~2015, primarily due to ~~higher~~lower compensation expenses as a result of restructuring actions in 2015 and lower consulting expenses. Compensation and related expenses ~~of $22 million, partially offset by lower consulting expenses of $7 million.~~include salaries, fringe benefits and variable compensation. Overall, selling, general and administrative expenses, as a percentage of sales, increased to ~~10.7~~11.6 percent in the three months ended ~~June 28, 2015,~~July 3, 2016, from ~~10.6~~10.7 percent in the comparable period in 2015 largely due to the acquisition of North American distributors since December 31, 2014.

Selling, general and administrative expenses decreased $40 million for the six months ended ~~June 28, 2015, increased~~July 3, 2016, versus the comparable period in ~~2014,~~2015, primarily due to ~~higher~~lower compensation ~~and related~~ expenses as a result of ~~$57 million, partially offset by~~restructuring actions in 2015 and lower consulting ~~expenses of $18 million.~~expenses. Overall, selling, general and administrative expenses, as a percentage of sales, ~~was~~increased to 11.5 percent in the six months ended July 3, 2016, from 10.8 percent in the ~~first six months~~comparable period in 2015 largely due to the acquisition of ~~both 2015 and~~North American distributors since December 31, 2014. ~~Compensation and related expenses include salaries, fringe benefits and variable compensation.~~

Research, Development and Engineering Expenses

Research, development and engineering expenses decreased $11 million for the three months ended ~~June 28, 2015, decreased~~July 3, 2016, versus the comparable period in ~~2014,~~2015, primarily due to ~~higher~~lower compensation expenses as a result of restructuring actions in 2015, lower consulting expenses and increased expense recovery from customers and external parties. Compensation and related expenses include salaries, fringe benefits and variable compensation. Overall, research, development and engineering expenses, as a percentage of $9sales, increased to 3.4 percent in the three months ended July 3, 2016, from 3.3 percent in the comparable period in 2015.

Research, development and engineering expenses decreased $40 million for the six months ended July 3, 2016, versus the comparable period in 2015, primarily due to lower compensation expenses as a result of restructuring actions in 2015 and lower ~~variable compensation expenses of $3 million.~~consulting expenses. Overall, research, development and engineering expenses, as a percentage of sales, decreased to ~~3.3~~3.6 percent in the ~~three~~six months ended ~~June 28, 2015,~~July 3, 2016, from 3.7 percent in the comparable period in ~~2014.~~2015.

Research, development and engineering expenses for the six months ended June 28, 2015, decreased versus the comparable period in 2014, primarily due to higher expense recovery of $11 million and lower variable compensation expenses of $5 million. Overall, research, development and engineering expenses, as a percentage of sales, decreased to 3.7 percent in the first six months of 2015, from 4.0 percent in the comparable period in 2014. Research activities continue to focus on development of new products to meet future emission standards around the world and improvements in fuel economy performance.

Equity, Royalty and Interest Income From Investees

Equity, royalty and interest income from investees decreased $6 million for the three ~~and six~~ months ended ~~June 28, 2015,~~July 3, 2016, versus the comparable period in ~~2014,~~2015, primarily due to ~~the consolidation of the partially-owned~~lower earnings from North American distributors ($222 million) and Chongqing Cummins Engine Company, Ltd. ($2 million).

Equity, royalty and interest income from investees decreased $2 million ~~and $44 million, respectively) since December 31, 2013 and~~for the six months ended July 3, 2016, versus the comparable period in 2015, primarily due to lower earnings atfrom North American distributors ($7 million), Dongfeng Cummins Engine Company, Ltd. ($7 ~~million each period)~~million) and Chongqing Cummins Engine Company, Ltd. ($6 million). These decreases were partially offset by higher ~~equity~~ earnings at Beijing Foton Cummins Engine Co., Ltd. ($~~21 million~~11 million) and $28 million, respectively) as the joint venture continues to increase market share with the new heavy-duty engine platform introduced in 2014. As we continue executing our plan to acquire partially-owned distributors, we expect equity earnings for our North American distributors to continue to decrease as the earnings will be included in our consolidated results.Komatsu Cummins Chile, Ltda. ($3 million).

Other Operating ~~(Expense) Income, net~~Expense, Net

Other operating ~~income (expense)~~expense, net was as follows:


	Three months ended						Six months ended						Three months ended						Six months ended
In millions	June 28, 2015			June 29, 2014			June 28, 2015			June 29, 2014			July 3, 2016			June 28, 2015			July 3, 2016			June 28, 2015
Loss contingency													$	(39	)	$	—		$	(39	)	$	—
Loss on write off of assets													(4		)	—			(9		)	—
Amortization of intangible assets	$	(5	)	$	(4	)	$	(11	)	$	(7	)	(2		)	(5		)	(5		)	(11		)
Royalty income, net	5			6			10			8			6			5			13			10
Other, net	—			(8		)	(2		)	(8		)	—			—			(1		)	(2		)
Total other operating income (expense), net	$	—		$	(6	)	$	(3	)	$	(7	)
Total other operating expense, net													$	(39	)	$	—		$	(41	)	$	(3	)

~~Table of Contents~~

Interest Income

Interest income for the three and six months ended ~~June 28, 2015,~~July 3, 2016, remained relatively flat versus the comparable ~~period~~periods in ~~2014.~~2015.

Interest Expense

Interest expense for the three months ended ~~June 28, 2015, increased versus the comparable period in 2014, primarily due to higher short term borrowings. Interest expense for the six months ended June 28, 2015,~~July 3, 2016, remained relatively flat versus the comparable period in ~~2014.~~2015. Interest expense for the six months ended July 3, 2016, increased $4 million versus the comparable period in 2015, primarily due to an increase in total weighted average debt outstanding.

Other Income (Expense), ~~net~~Net

Other income (expense), net was as follows:


	Three months ended						Six months ended						Three months ended						Six months ended
In millions	June 28, 2015			June 29, 2014			June 28, 2015			June 29, 2014			July 3, 2016			June 28, 2015			July 3, 2016			June 28, 2015
Change in cash surrender value of corporate owned life insurance	$	(8	)	$	11		$	2		$	18		$	15		$	(8	)	$	23		$	2
Foreign currency (losses) gains, net	(3		)	2			(5		)	(3		)
Dividend income													1			1			2			2
Bank charges	(2		)	(3		)	(4		)	(5		)	(1		)	(2		)	(4		)	(4		)
Gain on fair value adjustment for consolidated investees	—			14			—			20
Gain on marketable securities, net	—			12			1			13
Dividend income	1			—			2			1
Foreign currency loss, net													(8		)	(3		)	(11		)	(5		)
Other, net	4			3			5			5			11			4			16			6
Total other income (expense), net	$	(8	)	$	39		$	1		$	49		$	18		$	(8	)	$	26		$	1

Income Tax Expense

Our effective tax rate for the year is expected to approximate ~~29.5~~27.0 percent, excluding any one-time items that may arise. The expected tax rate does not include the benefits of the research tax credit, which expired December 31, 2014 and has not yet been renewed by Congress. If the research credit is reinstated during 2015, we anticipate the 2015 effective tax rate will be reduced to 28.5 percent. Our tax rate is generally less than the 35 percent U.S. statutory income tax rate primarily due to lower tax rates on foreign ~~income.~~income and the research tax credit.

~~The~~Our effective tax rate for the three and six ~~month periods~~months ended July 3, 2016, was 25.7 percent and 26.9 percent, respectively.

Our effective tax rate for the three and six months ended June 28, 2015, was 29.5 percent and 28.1 percent, respectively. The ~~six month~~ tax rate for the six months ended June 28, 2015, included an $18 million discrete tax benefit to reflect the release of reserves for uncertain tax positions related to a favorable federal audit settlement.

~~Our~~The decrease in the effective tax rate for the three and six ~~month periods ended June 29, 2014, was 26.5 percent and 28 percent, respectively. The tax rate for the three~~ months ended June 29, 2014, included a $2 million discrete tax benefit for the release of reserves for uncertain tax positions related to multiple state audit settlements. Additionally, the tax rate for the six month period included a $12 million discrete tax expense attributable primarily to state deferred tax adjustments, as well as a $6 million discrete net tax benefit resulting from a $70 million dividend paid from China earnings generated prior to 2012.

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 ~~June 28, 2015,~~July 3, 2016, decreased $4 million primarily due to lower earnings at ~~Wuxi~~ Cummins ~~Turbo Technologies Co.~~India Ltd.

Noncontrolling interests in income of consolidated subsidiaries for the six months ended ~~June 28, 2015,~~July 3, 2016, decreased $9 million primarily due to lower earnings ~~at Wuxi Cummins Turbo Technologies Co. Ltd. and~~as a ~~decline from~~result of the acquisition of the remaining interest in ~~previously consolidated~~ North American distributors since December 31, ~~2013, partially offset by higher~~2014 and lower earnings at Cummins India Ltd.

~~Table of Contents~~

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 ~~June 28, 2015~~, ~~increase~~dJuly 3, 2016, decreased $65 million and $0.22 per share, respectively versus the comparable period in ~~2014~~,2015, primarily due to ~~higher~~lower gross margin and ~~lower research, development and engineering expenses,~~an accrual for a loss contingency, partially offset by a lower ~~other income (expense) as a result from gains recognized in 2014 from the acquisition of the remaining interest in North American distributors, higher~~effective tax rate, lower selling, general and administrative expenses ~~lower equity, royalty~~ and ~~interest income from investees~~decreased research, development and ~~a higher effective tax rate.~~engineering expenses. Diluted earnings per share for the three months ended ~~June 28, 2015,~~July 3, 2016, benefited ~~$0.02~~$0.01 from ~~lower~~fewer weighted average shares outstanding due to ~~2015~~ purchases under the stock repurchase programs.

Net income and diluted earnings per share attributable to Cummins Inc. for the six months ended ~~June 28, 2015, increased~~July 3, 2016, decreased $131 million and $0.50 per share, respectively versus the comparable period in ~~2014,~~2015, primarily due to ~~higher~~lower gross margin and an accrual for a loss contingency, partially offset by lower selling, general and administrative expenses, decreased research, development and engineering expenses ~~partially offset by higher selling, general~~ and ~~administrative expenses,~~a lower other income (expense) as a result from gains recognized in 2014 from the acquisition of the remaining interest in North American distributors and lower equity, royalty and interest income from investees.effective tax rate. Diluted earnings per share for the six months ended ~~June 28, 2015,~~July 3, 2016, benefited ~~$0.04~~$0.10 from ~~lower~~fewer weighted average shares outstanding, primarily due to purchases under the stock repurchase programs.

Comprehensive Income - Foreign Currency Translation Adjustment

The foreign currency translation adjustment was a net loss of $213 million and $270 million, respectively, for the three and six months ended July 3, 2016, compared to a net gain of $145 million and a net loss of $31 million for the three and six months ended June 28, 2015, respectively, and was driven by the following:



	Three months ended
	July 3, 2016				June 28, 2015
In millions	Translation adjustment			Primary currency driver vs. U.S. dollar	Translation adjustment			Primary currency driver vs. U.S. dollar
Wholly owned subsidiaries	$	(193	)	British pound, Chinese renminbi offset by Brazilian real	$	152		British pound
Equity method investments	(14		)	Chinese renminbi, Indian rupee offset by Japanese yen	—
Consolidated subsidiaries with a non-controlling interest	(6		)	Indian rupee, Chinese renminbi	(7		)	Indian rupee
Total	$	(213	)		$	145



	Six months ended
	July 3, 2016				June 28, 2015
In millions	Translation adjustment			Primary currency driver vs. U.S. dollar	Translation adjustment			Primary currency driver vs. U.S. dollar
Wholly owned subsidiaries	$	(255	)	British pound, Chinese renminbi offset by Brazilian real	$	(29	)	Brazilian real offset by British pound
Equity method investments	(9		)	Chinese renminbi, Indian rupee offset by Japanese yen, Mexican peso⁽¹⁾	—
Consolidated subsidiaries with a non-controlling interest	(6		)	Indian rupee, Chinese renminbi	(2		)	Indian rupee
Total	$	(270	)		$	(31	)

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

OPERATING SEGMENT RESULTS

Our ~~reportable operating segments consist of the following: Engine, Distribution, Components and Power Generation. This~~ reporting structure is organized according to the products and markets each segment ~~serves~~.serves. We use segment EBIT as the primary basis for the ~~chief operating decision-maker~~Chief Operating Decision Maker (CODM) to evaluate the performance of each of our operating segments.

As previously announced, beginning with the second quarter of 2016, we realigned certain of our reportable segments to be consistent with changes to our organizational structure and how the CODM monitors the performance of our segments. We reorganized our business to combine our Power Generation segment and our high horsepower engine business to create the new Power Systems segment. Our reportable operating segments consist of: Engine, Distribution, Components and Power Systems. We began to report results for our new reporting structure in the second quarter of 2016 and also reflected this change for historical periods. The formation of the Power Systems segment combined two businesses that are already strongly interdependent, which will allow us to streamline business and technical processes to accelerate innovation, grow market share and more efficiently manage our supply chain and manufacturing operations.

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/
	June 28,			June 29,			(Unfavorable)					June 28,			June 29,			(Unfavorable)					July 3,			June 28,			(Unfavorable)					July 3,			June 28,			(Unfavorable)
In millions	2015			2014			Amount			Percent		2015			2014			Amount			Percent		2016			2015			Amount			Percent		2016			2015			Amount			Percent
External sales ⁽¹⁾	$	2,058		$	2,178		$	(120	)	(6	)%	$	3,947		$	4,268		$	(321	)	(8	)%	$	1,504		$	1,834		$	(330	)	(18	)%	$	2,993		$	3,523		$	(530	)	(15	)%
Intersegment sales ⁽¹⁾	739			566			173			31	%	1,446			1,039			407			39	%	498			491			7			1	%	985			947			38			4	%
Total sales	2,797			2,744			53			2	%	5,393			5,307			86			2	%	2,002			2,325			(323		)	(14	)%	3,978			4,470			(492		)	(11	)%
Depreciation and amortization	60			52			(8		)	(15	)%	118			103			(15		)	(15	)%	41			47			6			13	%	80			93			13			14	%
Research, development and engineering expenses	91			105			14			13	%	205			221			16			7	%	53			53			—			—	%	110			122			12			10	%
Equity, royalty and interest income from investees	57			45			12			27	%	87			77			10			13	%	46			51			(5		)	(10	)%	82			74			8			11	%
Interest income	3			4			(1		)	(25	)%	5			6			(1		)	(17	)%	3			2			1			50	%	5			4			1			25	%
Segment EBIT	341			311			30			10	%	594			580			14			2	%	206			278			(72		)	(26	)%	403			478			(75		)	(16	)%

							Percentage Points											Percentage Points											Percentage Points											Percentage Points
Segment EBIT as a percentage of total sales	12.2		%	11.3		%				0.9		11.0		%	10.9		%				0.1		10.3		%	12.0		%				(1.7	)	10.1		%	10.7		%				(0.6	)

⁽¹⁾ Due to the acquisitions of North American distributors, sales previously recognized as external sales are now included in intersegment sales.

In the ~~first~~second quarter of ~~2015,~~2016, in conjunction with the reorganization of our segments, our Engine segment reorganized its reporting structure ~~to include the following markets:~~as follows:

Heavy-duty truck - We manufacture diesel engines that range from 310 to 600 horsepower serving global heavy-duty truck customers worldwide, ~~and fire trucks,~~ primarily in North America.

Medium-duty truck and bus - We manufacture ~~medium-duty~~ diesel engines ranging from 200 to 450 horsepower serving medium-duty truck and bus customers worldwide, with key markets including North America, Latin America, Europe and Mexico. We also provide diesel orand natural gas engines for school buses, transit buses and shuttle buses worldwide, with key markets including North America, Europe, Latin America and ~~Asia. We also provide~~Asia, and diesel engines for Class A motor homes (RVs), primarily in North America.

Light-duty automotive~~(Pickup~~ (Pickup and Light Commercial Vehicle (LCV)) - We manufacture ~~320~~105 to 385 horsepower diesel engines, ~~for Chrysler's heavy-duty chassis cab and pickup trucks. We also manufacture 105 to 300 horsepower diesel~~including engines for ~~LCV's worldwide, with key~~the pickup truck market for Chrysler and Nissan in North America, and LCV markets in Europe, Latin America and Asia.

~~Table of Contents~~

~~Industrial~~Off-highway - We provide mid-range, heavy-duty and high-horsepower engines that range from 49 to 5,100 horsepower for a wide variety of equipment in the construction, agricultural, mining, rail, government, oil and gas, and commercial and recreational marine applications throughout the world. Across these markets we have major customers in North America, Europe, Middle East, Africa, China, Korea, Japan, Latin America, India, Russia, Southeast Asia, South Pacific and Mexico.

~~Stationary power -~~ ~~We provide mid-range, heavy-duty and high-horsepower~~diesel engines that range from 60 to ~~4,300~~755 horsepower to ~~our~~key global markets including construction, mining, rail, defense, agriculture, marine, and oil and gas equipment and also to the power generation business for standby, mobile and distributed power generation solutions throughout the world.

Engine segment net sales by market ~~(including 2014 reorganized balances)~~ were as follows:


	Three months ended				Favorable/					Six months ended				Favorable/					Three months ended				Favorable/					Six months ended				Favorable/
	June 28,		June 29,		(Unfavorable)					June 28,		June 29,		(Unfavorable)					July 3,		June 28,		(Unfavorable)					July 3,		June 28,		(Unfavorable)
In millions	2015		2014		Amount			Percent		2015		2014		Amount			Percent		2016		2015		Amount			Percent		2016		2015		Amount			Percent
Heavy-duty truck	$	875	$	769	$	106		14	%	$	1,632	$	1,487	$	145		10	%	$	622	$	875	$	(253	)	(29	)%	$	1,253	$	1,632	$	(379	)	(23	)%
Medium-duty truck and bus	674		605		69			11	%	1,282		1,180		102			9	%	600		674		(74		)	(11	)%	1,149		1,282		(133		)	(10	)%
Light-duty automotive	354		392		(38		)	(10	)%	735		783		(48		)	(6	)%	394		354		40			11	%	827		735		92			13	%
Total on-highway	1,903		1,766		137			8	%	3,649		3,450		199			6	%	1,616		1,903		(287		)	(15	)%	3,229		3,649		(420		)	(12	)%
Industrial	624		739		(115		)	(16	)%	1,240		1,408		(168		)	(12	)%
Stationary power	270		239		31			13	%	504		449		55			12	%
Off-highway																			386		422		(36		)	(9	)%	749		821		(72		)	(9	)%
Total sales	$	2,797	$	2,744	$	53		2	%	$	5,393	$	5,307	$	86		2	%	$	2,002	$	2,325	$	(323	)	(14	)%	$	3,978	$	4,470	$	(492	)	(11	)%

Unit shipments by engine classification (including unit shipments to Power ~~Generation)~~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/
	June 28,	June 29,	(Unfavorable)				June 28,	June 29,	(Unfavorable)				July 3,	June 28,	(Unfavorable)				July 3,	June 28,	(Unfavorable)
	2015	2014	Amount		Percent		2015	2014	Amount		Percent		2016	2015	Amount		Percent		2016	2015	Amount		Percent
Heavy-duty													20,700	32,800	(12,100	)	(37	)%	40,400	61,500	(21,100	)	(34	)%
Mid-range	120,000	118,700	1,300		1	%	232,400	237,600	(5,200	)	(2	)%	62,300	66,600	(4,300	)	(6	)%	117,700	127,800	(10,100	)	(8	)%
Heavy-duty	32,800	30,300	2,500		8	%	61,500	59,100	2,400		4	%
High-horsepower	3,700	3,900	(200	)	(5	)%	7,200	7,300	(100	)	(1	)%
Light-duty													57,100	53,400	3,700		7	%	118,800	104,600	14,200		14	%
Total unit shipments	156,500	152,900	3,600		2	%	301,100	304,000	(2,900	)	(1	)%	140,100	152,800	(12,700	)	(8	)%	276,900	293,900	(17,000	)	(6	)%

Sales

Engine segment sales for the three months ended ~~June 28, 2015, increased~~July 3, 2016, decreased $323 million versus the comparable period in ~~2014.~~2015. The following were the primary ~~drivers by market:~~drivers:

Heavy-duty truck engine sales ~~increased~~decreased $253 million primarily due to ~~improved~~lower demand in ~~the~~ North American heavy-duty truck ~~market~~markets with ~~increased~~decreased engine shipments of ~~17 percent, partially offset by weaker demand in China.~~46 percent.

Medium-duty truck and bus sales increased due to higher demand in the North American medium-duty truck market with increased engine shipments of 18 percent, primarily due to market share gains and higher global bus demand with improved engine shipments of 24 percent. These increases were partially offset by weaker medium-duty truck demand in Brazil.

~~The increases above were partially offset by the following:~~

~~Industrial engine sales~~ decreased $74 million primarily due to lower ~~international~~ demand in ~~construction~~global medium-duty truck markets with decreased engine shipments of 2519 percent, primarily in ~~Europe, as well as reduced demand in international commercial marine markets with~~North America, Mexico and Brazil.

Off-highway sales decreased $36 million primarily due to decreased engine shipments to all industrial markets in North America, partially offset by increased unit shipments of 1137 percent ~~and reduced demand~~ in international ~~mining markets with decreased engine shipments~~construction markets.

The decreases above were partially offset by an increase in light-duty automotive sales of ~~9 percent.~~

~~Foreign currency fluctuations unfavorably impacted~~$40 million primarily due to new sales ~~results (primarily~~to Nissan for the pick-up truck platform they launched in ~~Brazil and Europe).~~the second half of 2015.

Total on-highway-related sales for the three months ended ~~June 28, 2015,~~July 3, 2016, were 6881 percent of total engine segment sales, compared to 6482 percent for the comparable period in ~~2014.~~2015.

Engine segment sales for the six months ended ~~June 28, 2015, increased~~July 3, 2016, decreased $492 million versus the comparable period in ~~2014.~~2015. The following were the primary ~~drivers by market:~~drivers:

~~Table of Contents~~

Heavy-duty truck engine sales ~~increased~~decreased $379 million primarily due to ~~improved~~lower demand in ~~the~~ North American heavy-duty truck ~~market~~markets with ~~increased~~decreased engine shipments of ~~13 percent, partially offset by weaker demand in China and Korea.~~40 percent.

Medium-duty truck and bus sales ~~increased due to higher demand in the North American medium-duty truck market with increased engine shipments of 16 percent,~~decreased $133 million primarily due to ~~market share gains and higher global bus demand with improved engine shipments of 16 percent. These increases were partially offset by weaker medium-duty truck~~lower demand in ~~Brazil.~~

~~The increases above were partially offset by the following:~~

~~Industrial engine sales decreased due to lower international demand in construction~~global medium-duty truck markets with decreased engine shipments of 2818 percent, primarily in ~~Europe, China~~North America and ~~Korea, as well as reduced demand in international commercial marine markets with~~Brazil.

Off-highway sales decreased $72 million primarily due to decreased engine shipments in most global industrial markets, partially offset by increased unit shipments of ~~10 percent.~~20 percent in international construction markets.

~~Foreign currency fluctuations unfavorably impacted~~

The decreases above were partially offset by an increase in light-duty automotive sales ~~results (primarily~~of $92 million primarily due to new sales to Nissan for the pick-up truck platform they launched in ~~Brazil and Europe).~~the second half of 2015.

Total on-highway-related sales for the six months ended ~~June 28, 2015,~~July 3, 2016, were 6881 percent of total engine segment sales, compared to 6582 percent for the comparable period in ~~2014.~~2015.

Segment EBIT

Engine segment EBIT for the three months ended ~~June 28, 2015, increased~~July 3, 2016, decreased $72 million versus the comparable period in ~~2014~~2015 primarily due to ~~favorable foreign currency fluctuations (primarily in the U.K.~~lower gross margin and ~~Europe), lower research, development and engineering expenses, higher equity, royalty and interest income from investees and higher gross margin,~~an additional accrual for a loss contingency, partially offset by ~~higher~~lower selling, general and administrative expenses.

Engine segment EBIT for the six months ended ~~June 28, 2015, increased~~July 3, 2016, decreased $75 million versus the comparable period in ~~2014~~2015 primarily due to ~~favorable foreign currency fluctuations (primarily in Europe~~lower gross margin and ~~the U.K.),~~an additional accrual for a loss contingency, partially offset by lower selling, general and administrative expenses, lower research, development and engineering expenses and higher equity, royalty and interest income from ~~investees, partially offset by higher selling, general and administrative expenses.~~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							Three months ended							Six months ended
	June 28, 2015 vs. June 29, 2014							June 28, 2015 vs. June 29, 2014							July 3, 2016 vs. June 28, 2015							July 3, 2016 vs. June 28, 2015
	Favorable/(Unfavorable) Change							Favorable/(Unfavorable) Change							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		Amount			Percent		Percentage point change as a percent of total sales		Amount			Percent		Percentage point change as a percent of total sales
Gross margin	$	7		1	%	(0.1	)	$	—		—	%	(0.3	)	$	(56	)	(13	)%	0.3		$	(108	)	(13	)%	(0.3	)
Selling, general and administrative expenses	(2		)	(1	)%	0.1		(5		)	(1	)%	—		24			14	%	—		50			15	%	0.4
Research, development and engineering expenses	14			13	%	0.5		16			7	%	0.4		—			—	%	(0.3	)	12			10	%	(0.1	)
Equity, royalty and interest income from investees	12			27	%	0.4		10			13	%	0.1		(5		)	(10	)%	0.1		8			11	%	0.4
Loss contingency ⁽¹⁾															(39		)	NM		NM		(39		)	NM		NM

"NM" - not meaningful information

⁽¹⁾See Note 10, "COMMITMENTS AND CONTINGENCIES," to the Condensed Consolidated Financial Statements for additional information.

The ~~increase~~decrease in gross margin dollars for the three months ended ~~June 28, 2015,~~July 3, 2016, versus the comparable period in ~~2014,~~2015, was primarily due to lower ~~commodity costs, higher~~ volumes and ~~favorable foreign currency fluctuations,~~unfavorable mix, partially offset by ~~increased manufacturing costs in preparation for our light-duty diesel production starting in the second half of 2015~~favorable product coverage and ~~unfavorable mix.~~lower material and commodity costs. The ~~increase~~decrease in selling, general and administrative expenses was primarily due to ~~higher~~lower compensation expenses as the result of restructuring actions taken in December 2015.

The decrease in gross margin for the six months ended July 3, 2016, versus the comparable period in 2015, was primarily due to lower volumes and unfavorable mix, partially offset by favorable product coverage and lower ~~consulting expenses.~~material and commodity costs. The decrease in selling, general and administrative expenses was primarily due to lower compensation expenses as the result of restructuring actions taken in December 2015. The decrease in research, development and engineering expenses was primarily due to lower compensation expenses and higher expense recovery ~~lower consulting expenses~~from customers and ~~lower variable compensation accruals.~~external parties. The increase in equity, royalty and interest income from investees was primarily due to increased earnings at Beijing Foton Cummins Engine Co., Ltd., partially offset by decreased earnings at ~~Dongfeng~~ Cummins ~~Engine Co., Ltd.~~

Gross margin remained flat for the six months ended June 28, 2015, versus the comparable period in 2014. Higher warranty costs and increased manufacturing costs in preparation for our light-duty diesel production starting in the second half of 2015 were offset by higher volumes, lower material and commodity costs and favorable foreign currency fluctuations. The increase in selling, general and administrative expenses was primarily due to higher compensation expenses, partially offset by lower consulting expenses. The decrease in research, development and engineering expenses was primarily due to higher expense recovery, lower consulting expenses and lower variable compensation expenses. The increase in equity, royalty and interest income from investees was primarily due to increased earnings at Beijing Foton Cummins Engine Co., Ltd., partially offset by a charge of approximately $12 million recorded by an equity investee in the first quarter of 2015. The charge wrote down the investee's underlying assets to estimated fair value as the result of an impairment review triggered by the start-up investee's volumes not growing as anticipated from the inception of the venture.Westport, Inc.

~~Table of Contents~~

Distribution Segment Results

Financial data for the Distribution segment was as follows:

Three months ended Favorable/ Six months ended Favorable/
June 28, June 29, (Unfavorable) June 28, June 29, (Unfavorable)
In millions 2015 2014 Amount Percent 2015 2014 Amount Percent
External sales $ 1,487
$ 1,229
$ 258
21 % $ 2,956
$ 2,171
$ 785
36 %
Intersegment sales 8
9
(1 ) (11 )% 15
17
(2 ) (12 )%
Total sales 1,495
1,238
257
21 % 2,971
2,188
783
36 %
Depreciation and amortization 25
20
(5 ) (25 )% 52
36
(16 ) (44 )%
Research, development and engineering expenses 3
3
—
— % 6
5
(1 ) (20 )%
Equity, royalty and interest income from investees 21
42
(21 ) (50 )% 41
83
(42 ) (51 )%
Interest income 1
—
1
NM
2
1
1
100 %
Segment EBIT ⁽¹⁾
113
126
(13 ) (10 )% 201
202
(1 ) — %

Percentage Points Percentage Points
Segment EBIT as a percentage of total sales ⁽²⁾
7.6 % 10.2 %
(2.6 ) 6.8 % 9.2 %
(2.4 )
"NM" - not meaningful information

⁽¹⁾Segment EBIT for the three and six months ended June 29, 2014, included $14 million and $20 million gains on the fair value adjustments resulting from the acquisitions of the remaining interests in North American distributors, respectively.

⁽²⁾~~Prior North American distributor acquisitions increased Distribution segment EBIT, however it is dilutive to segment EBIT as a percentage of sales.~~



	Three months ended						Favorable/					Six months ended						Favorable/
	July 3,			June 28,			(Unfavorable)					July 3,			June 28,			(Unfavorable)
In millions	2016			2015			Amount			Percent		2016			2015			Amount			Percent
External sales	$	1,538		$	1,487		$	51		3	%	$	2,996		$	2,956		$	40		1	%
Intersegment sales	6			8			(2		)	(25	)%	11			15			(4		)	(27	)%
Total sales	1,544			1,495			49			3	%	3,007			2,971			36			1	%
Depreciation and amortization	29			25			(4		)	(16	)%	57			52			(5		)	(10	)%
Research, development and engineering expenses	3			3			—			—	%	7			6			(1		)	(17	)%
Equity, royalty and interest income from investees	19			21			(2		)	(10	)%	37			41			(4		)	(10	)%
Interest income	1			1			—			—	%	2			2			—			—	%
Segment EBIT	87			113			(26		)	(23	)%	174			201			(27		)	(13	)%

							Percentage Points											Percentage Points
Segment EBIT as a percentage of total sales	5.6		%	7.6		%				(2.0	)	5.8		%	6.8		%				(1.0	)

Sales for our Distribution segment by region were as follows:


	Three months ended				Favorable/					Six months ended				Favorable/					Three months ended				Favorable/					Six months ended				Favorable/
	June 28,		June 29,		(Unfavorable)					June 28,		June 29,		(Unfavorable)					July 3,		June 28,		(Unfavorable)					July 3,		June 28,		(Unfavorable)
In millions	2015		2014		Amount			Percent		2015		2014		Amount			Percent		2016		2015		Amount			Percent		2016		2015		Amount			Percent
North & Central America	$	930	$	641	$	289		45	%	$	1,909	$	1,085	$	824		76	%	$	985	$	930	$	55		6	%	$	1,940	$	1,909	$	31		2	%
Europe, CIS and China	197		220		(23		)	(10	)%	353		414		(61		)	(15	)%	198		197		1			1	%	384		353		31			9	%
Asia Pacific	187		201		(14		)	(7	)%	364		363		1			—	%	187		187		—			—	%	356		364		(8		)	(2	)%
Africa	55		46		9			20	%	105		87		18			21	%	59		55		4			7	%	107		105		2			2	%
India																			46		42		4			10	%	87		79		8			10	%
Middle East	53		50		3			6	%	97		91		6			7	%	41		53		(12		)	(23	)%	82		97		(15		)	(15	)%
India	42		40		2			5	%	79		74		5			7	%
South America	31		40		(9		)	(23	)%	64		74		(10		)	(14	)%	28		31		(3		)	(10	)%	51		64		(13		)	(20	)%
Total sales	$	1,495	$	1,238	$	257		21	%	$	2,971	$	2,188	$	783		36	%	$	1,544	$	1,495	$	49		3	%	$	3,007	$	2,971	$	36		1	%

Sales for our Distribution segment by product line were as follows:


	Three months ended				Favorable/					Six months ended				Favorable/				Three months ended				Favorable/					Six months ended				Favorable/
	June 28,		June 29,		(Unfavorable)					June 28,		June 29,		(Unfavorable)				July 3,		June 28,		(Unfavorable)					July 3,		June 28,		(Unfavorable)
In millions	2015		2014		Amount			Percent		2015		2014		Amount		Percent		2016		2015		Amount			Percent		2016		2015		Amount			Percent
Parts and filtration	$	598	$	461	$	137		30	%	$	1,171	$	843	$	328	39	%
Engines	318		249		69			28	%	639		423		216		51	%
Parts ⁽¹⁾																		$	642	$	598	$	44		7	%	$	1,290	$	1,171	$	119		10	%
Power generation	272		278		(6		)	(2	)%	570		471		99		21	%	326		272		54			20	%	601		570		31			5	%
Service	307		250		57			23	%	591		451		140		31	%	297		307		(10		)	(3	)%	596		591		5			1	%
Engines																		279		318		(39		)	(12	)%	520		639		(119		)	(19	)%
Total sales	$	1,495	$	1,238	$	257		21	%	$	2,971	$	2,188	$	783	36	%	$	1,544	$	1,495	$	49		3	%	$	3,007	$	2,971	$	36		1	%

^{(1 )} In conjunction with our segment realignment, we also changed "Parts and filtration" to "Parts."

Sales

Distribution segment sales for the three months ended ~~June 28, 2015,~~July 3, 2016, increased $49 million versus the comparable period in ~~2014,~~2015, primarily due to ~~$315 million of segment sales related to the consolidation of partially-owned North American distributors since December 31, 2013, $11~~$114 million of segment sales related to the acquisition of ~~international~~North American distributors ~~and $36 million of~~since December 31, 2014, partially offset by a decline in organic sales ~~growth primarily in Africa~~of $41 million (primarily due to North American oil and ~~Eastern Europe, partially offset by~~gas markets) and unfavorable foreign currency fluctuations (primarily in ~~Australia, Canada~~the Australian dollar, Canadian dollar and ~~Europe) and decreased sales in Asia Pacific, China, Western Europe and Russia.~~South African rand).

~~Table of Contents~~

Distribution segment sales for the six months ended ~~June 28, 2015,~~July 3, 2016, increased $36 million versus the comparable period in ~~2014,~~2015, primarily due to ~~$853 million of segment sales related to the consolidation of partially-owned North American distributors since December 31, 2013, $21~~$223 million of segment sales related to the acquisition of ~~international~~North American distributors ~~and $86 million of~~since December 31,

2014, partially offset by a decline in organic sales ~~growth primarily~~of $113 million (primarily in ~~Africa~~engine markets) and ~~Asia Pacific, partially offset by~~ unfavorable foreign currency fluctuations (primarily in ~~Australia, Canada~~the Australian dollar, Canadian dollar, South African rand, Indian rupee and ~~Europe) and decreased sales in China, Europe, Russia and South America.~~

Brazilian real).

Segment EBIT

Distribution segment EBIT for the three months ended ~~June 28, 2015,~~ ~~decrease~~dJuly 3, 2016, decreased $26 million versus the comparable period in ~~2014,~~2015, primarily due to higher selling, general and administrative expenses ~~mostly~~(mainly related to the ~~consolidation~~acquisition of ~~partially-owned~~ North American distributors since December 31, 2014) and unfavorable foreign currency fluctuations (primarily in ~~Australia~~the Nigerian naira and ~~Canada) and lower equity, royalty and interest income from investees,~~Australian dollar), partially offset by the acquisitions of North American distributors. We expect a reduction in equity, royalty and interest income from investees to continue as a result of these acquisitions. EBIT as a percentage of sales for the three months ended June 28, 2015, was 7.6 percent compared to 10.2 percent for the comparable period in 2014. The decrease was due to the dilutive effect of the 2014 acquisitions and unfavorable foreign currency fluctuations.

higher gross margin.

Distribution segment EBIT for the six months ended ~~June 28, 2015,~~July 3, 2016, decreased $27 million versus the comparable period in ~~2014,~~2015, primarily due to higher selling, general and administrative expenses (mainly related to the acquisition of North American distributors since December 31, 2014) and unfavorable foreign currency fluctuations (primarily in ~~Australia~~the Australian dollar, Nigerian naira and ~~Canada)~~Canadian dollar), higher selling, general and administrative expenses mostly related to the consolidation of partially-owned North American distributors, lower equity, royalty and interest income from investees and increased amortization of intangible assets related to the acquisitions of North American distributors. The decreases were partially offset by the acquisitions of North American distributors. We expect a reduction in equity, royalty and interest income from investees to continue as a result of these acquisitions. EBIT as a percentage of sales for the six months ended June 28, 2015, was 6.8 percent compared to 9.2 percent for the comparable period in 2014. The decrease was due to the dilutive effect of the 2014 acquisitions and unfavorable foreign currency flucutations.higher gross margin. 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							Three months ended							Six months ended
	June 28, 2015 vs. June 29, 2014							June 28, 2015 vs. June 29, 2014							July 3, 2016 vs. June 28, 2015							July 3, 2016 vs. June 28, 2015
	Favorable/(Unfavorable) Change							Favorable/(Unfavorable) Change							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		Amount			Percent		Percentage point change as a percent of total sales		Amount			Percent		Percentage point change as a percent of total sales
Gross margin	$	47		22	%	0.2		$	114		30	%	(0.7	)	$	7		3	%	(0.1	)	$	21		4	%	0.5
Selling, general and administrative expenses	(24		)	(17	)%	0.4		(52		)	(19	)%	1.6		(23		)	(14	)%	(1.1	)	(41		)	(13	)%	(1.3	)
Equity, royalty and interest income from investees	(21		)	(50	)%	(2.0	)	(42		)	(51	)%	(2.4	)	(2		)	(10	)%	(0.2	)	(4		)	(10	)%	(0.2	)
Other income, net															(7		)	NM		(0.1	)	(2		)	NM		—
"NM" - not meaningful information

The increase in gross margin dollars for the three months ended July 3, 2016, versus the comparable period in 2015, was primarily due to the acquisition of North American distributors since December 31, 2014 and improved pricing, partially offset by unfavorable foreign currency fluctuations (primarily in the Australian dollar, Canadian dollar and South African rand). The increase in selling, general and administrative expenses was primarily due to higher compensation expenses related to the acquisition of North American distributors and higher consulting expenses. The unfavorable change in other income, net was primarily due to an unfavorable foreign currency remeasurement in the Nigerian naira.

The increase in gross margin for the six months ended July 3, 2016, versus the comparable period in 2015, was primarily due to the acquisition of North American distributors since December 31, 2014 and improved pricing, partially offset by unfavorable foreign currency fluctuations (primarily in the Australian dollar, Canadian dollar and South African rand). The increase in selling, general and administrative expenses was primarily due to higher compensation expenses related to the acquisition of North American distributors and higher consulting expenses.

Components Segment Results

Financial data for the Components segment was as follows:


	Three months ended						Favorable/					Six months ended						Favorable/					Three months ended						Favorable/					Six months ended						Favorable/
	June 28,			June 29,			(Unfavorable)					June 28,			June 29,			(Unfavorable)					July 3,			June 28,			(Unfavorable)					July 3,			June 28,			(Unfavorable)
In millions	2015			2014			Amount			Percent		2015			2014			Amount			Percent		2016			2015			Amount			Percent		2016			2015			Amount			Percent
External sales ⁽¹⁾	$	1,017		$	953		$	64		7	%	$	1,948		$	1,875		$	73		4	%	$	933		$	1,017		$	(84	)	(8	)%	$	1,830		$	1,948		$	(118	)	(6	)%
Intersegment sales ⁽¹⁾	380			327			53			16	%	748			635			113			18	%	346			380			(34		)	(9	)%	686			748			(62		)	(8	)%
Total sales	1,397			1,280			117			9	%	2,696			2,510			186			7	%	1,279			1,397			(118		)	(8	)%	2,516			2,696			(180		)	(7	)%
Depreciation and amortization	28			26			(2		)	(8	)%	54			52			(2		)	(4	)%	32			28			(4		)	(14	)%	63			54			(9		)	(17	)%
Research, development and engineering expenses	57			53			(4		)	(8	)%	118			106			(12		)	(11	)%	51			57			6			11	%	107			118			11			9	%
Equity, royalty and interest income from investees	8			9			(1		)	(11	)%	17			18			(1		)	(6	)%	12			8			4			50	%	20			17			3			18	%
Interest income	1			1			—			—	%	2			2			—			—	%	1			1			—			—	%	2			2			—			—	%
Segment EBIT	223			185			38			21	%	418			352			66			19	%	190			223			(33		)	(15	)%	353			418			(65		)	(16	)%

							Percentage Points											Percentage Points											Percentage Points											Percentage Points
Segment EBIT as a percentage of total sales	16.0		%	14.5		%				1.5		15.5		%	14.0		%				1.5		14.9		%	16.0		%				(1.1	)	14.0		%	15.5		%				(1.5	)

⁽¹⁾ Due to the acquisitions of North American distributors, sales previously recognized as external sales are now included in intersegment sales.

Sales for our Components segment by business were as follows:

~~Table of Contents~~


	Three months ended				Favorable/					Six months ended				Favorable/					Three months ended				Favorable/					Six months ended				Favorable/
	June 28,		June 29,		(Unfavorable)					June 28,		June 29,		(Unfavorable)					July 3,		June 28,		(Unfavorable)					July 3,		June 28,		(Unfavorable)
In millions	2015		2014		Amount			Percent		2015		2014		Amount			Percent		2016		2015		Amount			Percent		2016		2015		Amount			Percent
Emission solutions	$	679	$	582	$	97		17	%	$	1,292	$	1,125	$	167		15	%	$	624	$	679	$	(55	)	(8	)%	$	1,231	$	1,292	$	(61	)	(5	)%
Turbo technologies	307		307		—			—	%	608		620		(12		)	(2	)%	276		307		(31		)	(10	)%	541		608		(67		)	(11	)%
Filtration	266		275		(9		)	(3	)%	521		540		(19		)	(4	)%	262		266		(4		)	(2	)%	514		521		(7		)	(1	)%
Fuel systems	145		116		29			25	%	275		225		50			22	%	117		145		(28		)	(19	)%	230		275		(45		)	(16	)%
Total sales	$	1,397	$	1,280	$	117		9	%	$	2,696	$	2,510	$	186		7	%	$	1,279	$	1,397	$	(118	)	(8	)%	$	2,516	$	2,696	$	(180	)	(7	)%

Sales

Components segment sales for the three months ended ~~June 28, 2015, increased~~July 3, 2016, decreased $118 million across all lines of business versus the comparable period in ~~2014.~~2015. The following were the primary ~~drivers by business:~~drivers:

Emission solutions sales ~~increased~~decreased $55 million primarily due to ~~improved~~lower demand in North American on-highway markets, partially offset by higher demand in Western Europe and China.

Turbo technologies sales decreased $31 million primarily due to lower demand in North American on-highway markets.

Fuel systems sales decreased $28 million primarily due to lower demand in the North American on-highway markets.

Foreign currency fluctuations unfavorably impacted sales results primarily in the Chinese renminbi, Brazilian real and British pound.

Components segment sales for the six months ended July 3, 2016, decreased $180 million across all lines of business versus the comparable period in 2015. The following were the primary drivers:

Turbo technologies sales decreased $67 million primarily due to lower demand in North American on-highway markets.

Emission solutions sales decreased $61 million primarily due to lower demand in North American on-highway markets, partially offset by higher demand in China and Western Europe.

Fuel systems sales decreased $45 million primarily due to lower demand in the North American on-highway markets, partially offset by ~~unfavorable foreign~~higher demand in China.

Foreign currency fluctuations ~~(primarily in Europe and Brazil).~~

~~Fuel systems~~unfavorably impacted sales ~~increased~~results primarily ~~due to the new Beijing Foton ISG engine that entered production~~ in the ~~second quarter of 2014 in China~~Chinese renminbi, Brazilian real and ~~improved demand in North American on-highway markets.~~

~~Components segment sales for the six months ended June 28, 2015, increased versus the comparable period in 2014. The following were the primary drivers by business:~~

Emission solutions sales increased primarily due to improved demand in the North American on-highway markets, partially offset by unfavorable foreign currency fluctuations (primarily in Europe and Brazil) and lower demand in Brazil.

Fuel systems sales increased due to the new Beijing Foton ISG engine that entered production in the second quarter of 2014 in China, improved demand in North American on-highway markets and increased aftermarket demand.British pound.

Segment EBIT

Components segment EBIT for the three ~~and six~~ months ended June 28, 2015, increased versus the comparable periods in 2014, primarily due to higher gross margin, partially offset by unfavorable foreign currency fluctuations (primarily in Europe and Brazil) and higher research, development and engineering 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
June 28, 2015 vs. June 29, 2014 June 28, 2015 vs. June 29, 2014
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 $ 48
16 % 1.5
$ 84
14 % 1.5
Selling, general and administrative expenses (2 ) (3 )% 0.4
(4 ) (3 )% 0.3
Research, development and engineering expenses (4 ) (8 )% —
(12 ) (11 )% (0.2 )
Equity, royalty and interest income from investees (1 ) (11 )% (0.1 ) (1 ) (6 )% (0.1 )

~~The~~ ~~increase~~ ~~in gross margin for the three and six months ended June 28, 2015, versus the comparable periods in~~ ~~2014~~, was primarily due to higher volumes, mainly in the emission solutions business, and lower material costs, partially offset by unfavorable foreign currency fluctuations (primarily in Europe and Brazil). The ~~increase~~ in selling, general and administrative expenses was primarily due to higher compensation expenses, partially offset by lower consulting expenses. The increase in research, development and engineering expenses was primarily due to higher consulting and compensation expenses and lower expense recovery.

~~Table of Contents~~

~~Power Generation Segment Results~~

~~Financial data for the Power Generation segment was as follows:~~

Three months ended Favorable/ Six months ended Favorable/
June 28, June 29, (Unfavorable) June 28, June 29, (Unfavorable)
In millions 2015 2014 Amount Percent 2015 2014 Amount Percent
External sales ⁽¹⁾
$ 453
$ 475
$ (22 ) (5 )% $ 873
$ 927
$ (54 ) (6 )%
Intersegment sales ⁽¹⁾
294
268
26
10 % 554
455
99
22 %
Total sales 747
743
4
1 % 1,427
1,382
45
3 %
Depreciation and amortization 13
13
—
— % 29
25
(4 ) (16 )%
Research, development and engineering expenses 15
18
3
17 % 32
37
5
14 %
Equity, royalty and interest income from investees 8
9
(1 ) (11 )% 17
17
—
— %
Interest income 1
1
—
— % 2
2
—
— %
Segment EBIT 57
61
(4 ) (7 )% 106
86
20
23 %

Percentage Points Percentage Points
Segment EBIT as a percentage of total sales 7.6 % 8.2 %
(0.6 ) 7.4 % 6.2 %
1.2

⁽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 2015, our Power Generation segment reorganized its reporting structure to include the following businesses:~~

~~Power systems -~~ We manufacture generators for commercial and consumer applications ranging from 2 kilowatts to 3.5 megawatts, as well as paralleling systems and transfer switches for applications such as data centers, health care facilities and waste water treatment plants.

~~Alternators -~~ We design, manufacture, sell and service A/C generator/alternator products internally as well as to other generator set assemblers. Our products are sold under the Stamford, AVK and Markon brands and range in output fromJuly 3, ~~kilovolt-amperes (kVA) to 12,000 kVA.~~

~~Power solutions -~~ We provide natural gas fuel-based turnkey solutions for distributed generation and energy management applications using natural or biogas as a fuel. The business also serves a global rental account for diesel and gas generator sets.

~~Sales for our Power Generation segment by business (including 2014 reorganized balances) were as follows:~~

Three months ended Favorable/ Six months ended Favorable/
June 28, June 29, (Unfavorable) June 28, June 29, (Unfavorable)
In millions 2015 2014 Amount Percent 2015 2014 Amount Percent
Power systems 611
586
25
4 % 1,154
1,096
58
5 %
Alternators 92
126
(34 ) (27 )% 190
231
(41 ) (18 )%
Power solutions 44
31
13
42 % 83
55
28
51 %
Total sales $ 747
$ 743
$ 4
1 % $ 1,427
$ 1,382
$ 45
3 %

~~Sales~~

~~Power Generation segment sales for the~~ ~~three months ended June 28, 2015~~, ~~increase~~d2016, decreased $33 million versus the comparable period in ~~2014. The following were the primary drivers by business:~~

~~Power systems sales increased primarily due to higher demand in the Middle East, Africa and Asia, partially offset by lower demand in North America.~~

~~Power solutions sales increased primarily due to higher demand in the U.K., partially offset by lower demand in North America, Russia, China and Africa.~~

~~The increases above were partially offset by the following:~~

~~Alternator sales decreased primarily due to lower demand in Western Europe and China.~~

~~Foreign currency fluctuations unfavorably impacted sales results (primarily in Europe and Brazil).~~

~~Table of Contents~~

~~Power Generation segment sales for the six months ended June 28,~~ 2015, ~~increased versus the comparable period in 2014. The following were the primary drivers by business:~~

~~Power systems sales increased primarily due to higher demand in China, the Middle East and Asia, partially offset by lower demand in North America and Russia.~~

~~Power solutions sales increased primarily due to higher demand in the U.K., partially offset by lower demand in North America, Russia and Latin America.~~

~~The increases above were partially offset by the following:~~

~~Alternator sales decreased primarily due to lower demand in Western Europe and China.~~

~~Foreign currency fluctuations unfavorably impacted sales results (primarily in Europe and Brazil).~~

~~Segment EBIT~~

~~Power Generation segment EBIT for the three months ended June 28, 2015, decreased versus the comparable period in 2014,~~ primarily due to lower gross margin and ~~unfavorable foreign currency fluctuations (primarily in Europe), partially offset by lower~~higher selling, general and administrative expenses, ~~and~~partially offset by lower research, development and engineering expenses.

~~Power Generation~~ Components segment EBIT for the six months ended ~~June 28, 2015, increased~~July 3, 2016, decreased $65 million versus the comparable period in ~~2014,~~2015 primarily due to ~~higher~~lower gross margin ~~lower~~and higher selling, general and administrative expenses and unfavorable foreign currency fluctuations (primarily in the Brazilian real and Chinese renminbi), partially offset by lower research, development and engineering 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					Three months ended							Six months ended
	June 28, 2015 vs. June 29, 2014							June 28, 2015 vs. June 29, 2014					July 3, 2016 vs. June 28, 2015							July 3, 2016 vs. June 28, 2015
	Favorable/(Unfavorable) Change							Favorable/(Unfavorable) Change					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	Amount			Percent		Percentage point change as a percent of total sales		Amount			Percent		Percentage point change as a percent of total sales
Gross margin	$	(8	)	(6	)%	(1.1	)	$	9	4	%	—	$	(31	)	(9	)%	(0.2	)	$	(59	)	(9	)%	(0.6	)
Selling, general and administrative expenses	4			5	%	0.6		5		3	%	0.7	(10		)	(12	)%	(1.3	)	(15		)	(9	)%	(1.0	)
Research, development and engineering expenses	3			17	%	0.4		5		14	%	0.5	6			11	%	0.1		11			9	%	0.1
Equity, royalty and interest income from investees	(1		)	(11	)%	(0.1	)	—		—	%	—	4			50	%	0.3		3			18	%	0.2

The decrease in gross margin for the three months ended ~~June 28, 2015,~~July 3, 2016, versus the comparable period in ~~2014,~~2015, was primarily due to lower volumes and unfavorable pricing, partially offset by lower material costs. The increase in selling, general and administrative expenses was primarily due to higher compensation and consulting expenses as a result of absorbing a greater share of corporate costs under our new methodology, partially offset by savings from restructuring actions taken in December of 2015. The decrease in research, development and engineering expenses was primarily due to higher expense recovery from customers and external parties and lower consulting expenses.

The decrease in gross margin for the six months ended July 3, 2016, versus the comparable period in 2015, was primarily due to lower volumes, unfavorable pricing, unfavorable mix and unfavorable foreign currency fluctuations (primarily in the Brazilian real), partially offset by lower material costs. The increase in selling, general and administrative expenses was primarily due to higher compensation and consulting expenses as a result of absorbing a greater share of corporate costs under our new methodology, partially offset by savings from restructuring actions taken in December of 2015. The decrease in research, development and engineering expenses was primarily due to higher expense recovery from customers and external parties and lower ~~pricing,~~consulting expenses.

Power Systems Segment Results

Financial data for the Power Systems segment was as follows:



	Three months ended						Favorable/					Six months ended						Favorable/
	July 3,			June 28,			(Unfavorable)					July 3,			June 28,			(Unfavorable)
In millions	2016			2015			Amount			Percent		2016			2015			Amount			Percent
External sales ⁽¹⁾	$	553		$	677		$	(124	)	(18	)%	$	1,000		$	1,297		$	(297	)	(23	)%
Intersegment sales ⁽¹⁾	368			420			(52		)	(12	)%	729			802			(73		)	(9	)%
Total sales	921			1,097			(176		)	(16	)%	1,729			2,099			(370		)	(18	)%
Depreciation and amortization	29			26			(3		)	(12	)%	58			54			(4		)	(7	)%
Research, development and engineering expenses	48			53			5			9	%	97			115			18			16	%
Equity, royalty and interest income from investees	11			14			(3		)	(21	)%	21			30			(9		)	(30	)%
Interest income	1			2			(1		)	(50	)%	3			3			—			—	%
Segment EBIT	90			127			(37		)	(29	)%	136			228			(92		)	(40	)%

							Percentage Points											Percentage Points
Segment EBIT as a percentage of total sales	9.8		%	11.6		%				(1.8	)	7.9		%	10.9		%				(3.0	)

⁽¹⁾Due to the acquisitions of North American distributors, sales previously recognized as external sales are now included in intersegment sales.

In the second quarter of 2016, in conjunction with the reorganization of our segments, our Power Systems segment reorganized its reporting structure as follows:

Power generation - We design, manufacture, sell and support generators ranging from 2 kilowatts to 3.5 megawatts, as well as paralleling systems and transfer switches, for applications such as residential, commercial, industrial, data centers, health care, telecommunications and waste water treatment plants. We also provide turnkey solutions for distributed generation and energy management applications using natural gas or biogas as a fuel. We also serves global rental accounts for diesel and gas generator sets.

Industrial - We design, manufacture, sell and support diesel and natural gas high-horsepower engines up to 5,500 horsepower for a wide variety of equipment in the mining, rail, defense, oil and gas, and commercial marine applications throughout the world. Across these markets, we have major customers in North America, Europe, Middle East, Africa, China, Korea, Japan, Latin America, India, Russia, Southeast Asia, South Pacific and Mexico.

Generator technologies - We design, manufacture, sell and support A/C generator/alternator products for internal consumption and for external generator set assemblers. Our products are sold under the Stamford, AVK and Markon brands and range in output from 3 kilovolt-amperes (kVA) to 12,000 kVA.

Sales for our Power Systems segment by product line (including 2015 reorganized balances) were as follows:



	Three months ended				Favorable/					Six months ended				Favorable/
	July 3,		June 28,		(Unfavorable)					July 3,		June 28,		(Unfavorable)
In millions	2016		2015		Amount			Percent		2016		2015		Amount			Percent
Power generation	$	597	$	710	$	(113	)	(16	)%	$	1,117	$	1,334	$	(217	)	(16	)%
Industrial	240		295		(55		)	(19	)%	455		575		(120		)	(21	)%
Generator technologies	84		92		(8		)	(9	)%	157		190		(33		)	(17	)%
Total sales	$	921	$	1,097	$	(176	)	(16	)%	$	1,729	$	2,099	$	(370	)	(18	)%

High-horsepower unit shipments by engine classification (including 2015 reorganized units) were as follows:



	Three months ended		Favorable/				Six months ended		Favorable/
	July 3,	June 28,	(Unfavorable)				July 3,	June 28,	(Unfavorable)
Units	2016	2015	Amount		Percent		2016	2015	Amount		Percent
Power generation	2,200	2,500	(300	)	(12	)%	4,000	4,700	(700	)	(15	)%
Industrial	1,100	1,200	(100	)	(8	)%	2,100	2,500	(400	)	(16	)%
Total engine shipments	3,300	3,700	(400	)	(11	)%	6,100	7,200	(1,100	)	(15	)%

Sales

Power Systems segment sales for the three months ended July 3, 2016, decreased $176 million versus the comparable period in 2015. The following were the primary drivers:

Power generation sales decreased $113 million in most regions with the largest declines in demand primarily in the Middle East, China and Africa, partially offset by higher ~~volumes.~~demand in Western Europe.

Industrial sales decreased $55 million primarily due to lower demand in North America (mainly oil and gas markets) and China (mainly marine markets).

Foreign currency fluctuations unfavorably impacted sales results primarily in the Indian rupee, British pound and Chinese renminbi.

Power Systems segment sales for the six months ended July 3, 2016, decreased $370 million versus the comparable period in 2015. The following were the primary drivers:

Power generation sales decreased $217 million in most regions with the largest declines in demand primarily in China, Middle East, Latin America, Africa and Asia (excluding China), partially offset by higher demand in Western Europe.

Industrial sales decreased $120 million primarily due to lower demand in North America (mainly oil and gas markets) and China (mainly marine and mining markets).

Foreign currency fluctuations unfavorably impacted sales results primarily in the Indian rupee, Brazilian real and British pound.

Segment EBIT

Power Systems segment EBIT for the three months ended July 3, 2016, decreased $37 million versus the comparable period in 2015, primarily due to lower gross margin, partially offset by lower selling, general and administrative expenses and favorable foreign currency fluctuations (primarily in the British pound). Power Systems segment EBIT for the six months ended July 3, 2016, decreased $92 million versus the comparable period in 2015 primarily due to lower gross margin, partially offset by lower selling, general and administrative expenses and lower research, development and engineering expenses and favorable foreign currency fluctuations (primarily in the British pound). 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 3, 2016 vs. June 28, 2015							July 3, 2016 vs. June 28, 2015
	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	$	(70	)	(24	)%	(2.6	)	$	(157	)	(28	)%	(3.4	)
Selling, general and administrative expenses	22			18	%	0.2		46			19	%	0.2
Research, development and engineering expenses	5			9	%	(0.4	)	18			16	%	(0.1	)
Equity, royalty and interest income from investees	(3		)	(21	)%	(0.1	)	(9		)	(30	)%	(0.2	)

The decrease in gross margin for the three months ended July 3, 2016, versus the comparable period in 2015, was primarily due to lower volumes and unfavorable pricing.The decrease in selling, general and administrative expenses was primarily due to lower compensation expenses as the result of restructuring actions taken in December 2015 and lower consulting expenses. The decrease in research, development and engineering expenses was primarily due to lower consulting expenses and lower compensation expenses as the result of ~~operating~~restructuring actions taken in December ~~of 2014.~~ 2015.

The decrease in ~~research, development~~gross margin for the six months ended July 3, 2016, versus the comparable period in 2015, was primarily due to lower volumes. The decrease in selling, general and ~~engineering~~administrative expenses was primarily due to lower compensation expenses as the result of ~~operating~~restructuring actions taken in December ~~of 2014.~~

~~The increase in gross margin for the six months ended June 28,~~ 2015 ~~versus the comparable period in 2014, was primarily due to higher volumes~~ and ~~as the result of operating actions taken in December of 2014.~~lower consulting expenses. The decrease in ~~selling, general~~research, development and ~~administrative~~engineering expenses was primarily due to lower consulting expenses and lower compensation expenses as the result of ~~operating~~restructuring actions taken in December of 2014, partially offset by lower expense recovery. The decrease in research, development and engineering expenses was primarily due to lower compensation expenses as the result of operating actions taken in December of 2014.2015.

~~Table of Contents~~

Reconciliation of Segment EBIT to Income Before Income Taxes

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	June 28, 2015			June 29, 2014			June 28, 2015			June 29, 2014			July 3, 2016		June 28, 2015			July 3, 2016		June 28, 2015
Total EBIT													$	573	$	741		$	1,066	$	1,325
Non-segment EBIT ⁽¹⁾													18		(20		)	9		(42		)
Total segment EBIT	$	734		$	683		$	1,319		$	1,220		591		721			1,075		1,283
Non-segment EBIT ⁽¹⁾	(13		)	(26		)	(36		)	(35		)
Total EBIT	721			657			1,283			1,185
Less: Interest expense	17			15			31			32			16		17			35		31
Income before income taxes	$	704		$	642		$	1,252		$	1,153		$	575	$	704		$	1,040	$	1,252

⁽¹⁾Includes intersegment sales, ~~and~~intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three and six months ended July 3, 2016 and June 28, ~~2015 and June 29, 2014.~~2015.

~~Table of Contents~~

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:


In millions	June 28, 2015			December 31, 2014
Dollars in millions							July 3, 2016			December 31, 2015
Working capital ⁽¹⁾	$	4,950		$	5,034		$	3,480		$	4,144
Current ratio	2.22			2.25			1.84			2.09
Accounts and notes receivable, net	$	3,422		$	2,946		$	3,023		$	2,820
Days’ sales in receivables	60			53			60			55
Inventories	$	2,986		$	2,866		$	2,778		$	2,707
Inventory turnover	4.8			5.3			4.7			4.9
Accounts payable (principally trade)	$	1,974		$	1,881		$	1,825		$	1,706
Days' payable outstanding	50			44			50			48
Total debt	$	1,677		$	1,698		$	1,871		$	1,639
Total debt as a percent of total capital ⁽²⁾	17.0		%	17.3		%	20.6		%	17.5		%

⁽¹⁾Working capital includes cash and cash equivalents.

⁽²⁾~~Total~~The increase in our debt to capital ~~is defined as~~ratio was due to the repurchases of common stock and higher total debt, ~~plus equity.~~primarily due to the commercial paper program.

Cash Flows

~~Cash and cash equivalents~~ ~~decrease~~d ~~$541 million~~ ~~during the six months ended June 28, 2015, compared to a~~ ~~$480 milliondecrease~~ ~~in cash and cash equivalents during the comparable period in~~ ~~2014~~. Cash and cash equivalents were impacted as follows:



	Six months ended
In millions	July 3, 2016			June 28, 2015			Change
Net cash provided by operating activities	$	734		$	569		$	165
Net cash used in investing activities	(391		)	(300		)	(91		)
Net cash used in financing activities	(892		)	(829		)	(63		)
Effect of exchange rate changes on cash and cash equivalents	(117		)	19			(136		)
Net decrease in cash and cash equivalents	$	(666	)	$	(541	)	$	(125	)

Six months ended
In millions June 28,
2015 June 29,
2014 Change
Net cash provided by operating activities $ 569
$ 701
$ (132 )
Net cash used in investing activities (300 ) (463 ) 163
Net cash used in financing activities (829 ) (756 ) (73 )
Effect of exchange rate changes on cash and cash equivalents 19
38
(19 )
Net decrease in cash and cash equivalents $ (541 ) $ (480 ) $ (61 )

Net cash provided by operating activities ~~decrease~~dincreased $165 million for the six months ended ~~June 28, 2015,~~July 3, 2016, versus the comparable period in ~~2014~~,2015, primarily due to ~~unfavorable~~favorable working capital fluctuations and an increase in deferred income taxes, partially offset by ~~higher~~lower consolidated net ~~income.~~income, decreases from translation and hedging activities and restructuring payments. During the first six months of ~~2015~~,2016, the ~~higher~~lower working capital requirements resulted in a cash outflow of ~~$459~~$234 million compared to a cash outflow of ~~$131~~$459 million in the ~~prior~~comparable period in ~~2014~~. 2015.

Net cash used in investing activities ~~decrease~~dincreased $91 million for the six months ended ~~June 28, 2015,~~July 3, 2016, versus the comparable period in ~~2014~~,2015, primarily due to higher net investments in marketable securities of $124 million and decreases in cash flows from derivatives not designated as hedges of $26 million, partially offset by lower ~~cash investment for the acquisitions~~capital expenditures of ~~businesses of $178~~$58 million.

Net cash used in financing activities increased $63 million for the six months ended ~~June 28, 2015,~~July 3, 2016, versus the comparable period in ~~2014,~~2015, primarily due to higher common stock repurchases of ~~common stock~~$181 million, higher payments on borrowings and capital lease obligations of ~~$84~~$102 million and higher dividend payments of ~~$51~~$53 million, partially offset by ~~lower payments under short-term credit agreements~~net borrowings of ~~$38~~commercial paper of $200 million and ~~lower distributions~~increased proceeds from borrowings of $97 million.

The effect of exchange rate changes on cash and cash equivalents for the six months ended July 3, 2016, versus the comparable period in 2015, decreased $136 million primarily due to ~~noncontrolling interests of $18~~the British pound which decreased cash and cash equivalents by $122 million.

Sources of Liquidity

We generate significant ongoing cash flow, which has been used, in part, to fund working capital, common stock repurchases, capital expenditures, dividends on our common stock, acquisitions, projected pension obligations and debt service. Cash provided by operations is our principal source of liquidity with ~~$569~~$734 million provided ~~by operations for~~in the six months ended ~~June 28, 2015.~~ July 3, 2016.

~~Table of Contents~~

~~As of June 28, 2015,~~At July 3, 2016, our other sources of liquidity included:

~~cash and cash equivalents of~~ ~~$1.8 billion, of which approximately~~ ~~48 percent~~ ~~is located in the U.S. and~~ ~~52 percent~~ ~~is located outside the U.S., primarily in the U.K., China and Singapore,~~

~~a revolving credit facility with $1.7 billion available, net of letters of credit,~~



	July 3, 2016
In millions	Total		U.S.		International		Primary location of international balances
Cash and cash equivalents	$	1,045	$	296	$	749	U.K., China, Singapore
Marketable securities ⁽¹⁾	235		34		201		China, India
Total	$	1,280	$	330	$	950
Available credit capacity
Revolving credit facility ⁽²⁾	$	1,750
International and other uncommitted domestic credit facilities ⁽³⁾	171

~~international and other domestic credit facilities with $277 million available and~~

~~marketable securities of $89 million, of which 54 percent is located in India, 31 percent is located in the U.S. and 15 percent is located in Brazil, the~~⁽¹⁾The majority of ~~which~~marketable securities could be liquidated into cash within a few days.

⁽²⁾The revolving credit facility is maintained primarily to provide backup liquidity for our commercial paper borrowings and general corporate purposes. At July 3, 2016, we had $200 million of commercial paper outstanding, which effectively reduced the available capacity under our revolving credit facility to $1.55 billion.

⁽³⁾ The available capacity is net of letters of credit.

Cash, Cash Equivalents and Marketable Securities

A significant portion of our cash flows is generated outside the U.S. ~~As of~~ ~~June 28, 2015, the total of cash, cash equivalents and marketable securities held by foreign subsidiaries was~~ ~~$1.0 billion, the majority of which was located in the U.K., China, Singapore and India.~~ The geographic location of our cash and marketable securities aligns well with our ~~business growth strategy.~~ongoing investments. We manage our worldwide cash requirements considering available funds among the many subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. As a result, we do not anticipate any local liquidity restrictions to preclude us from funding our ~~targeted expansion or~~ operating needs with local resources.

If we distribute our foreign cash balances to the U.S. or to other foreign subsidiaries, we could be required to accrue and pay U.S. ~~taxes. For~~taxes, for example, ~~we would be required to accrue and pay additional U.S. taxes~~ if we repatriated cash from certain foreign subsidiaries whose earnings we have asserted are permanently reinvested outside of the U.S. Foreign earnings for which we assert permanent reinvestment outside the U.S. consist primarily of earnings of our China and U.K. domiciled subsidiaries. At present, we do not foresee a need to repatriate any earnings from these subsidiaries for which we have asserted permanent reinvestment. However, to help fund cash needs of the U.S. or other international subsidiaries as they arise, we repatriate available cash from certain foreign subsidiaries whose earnings are not permanently reinvested when it is cost effective to do so. Earnings generated after 2011 from our China operations are considered permanently reinvested, while earnings generated prior to 2012, for which U.S. deferred tax liabilities have been recorded, are expected to be repatriated in future ~~years~~.years.

Debt Facilities and Other Sources of Liquidity

In February 2016, the Board of Directors authorized the issuance of up to $1.75 billion of unsecured short-term promissory notes ("commercial paper") pursuant to a commercial paper program. The program will facilitate the private placement of unsecured short-term debt through third party brokers. We intend to use the net proceeds from the commercial paper program for general corporate purposes.

We have a ~~$1.7~~$1.75 billion revolving credit facility, the proceeds of which can be used for general corporate purposes. This facility expires on November ~~9, 2018.~~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.

~~We have~~As a ~~current~~well-known seasoned issuer, we filed an automatic shelf registration ~~filed~~for an undetermined amount of debt and equity securities with the Securities and Exchange Commission ~~under which~~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.

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 $11 million to $39 million over the next five years.

Uses of Cash

Share Repurchases

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. In the first six months of 2016, we made the following purchases under the respective stock repurchase programs:



In millions (except per share amounts) For each quarter ended	Shares Purchased	Average Cost Per Share		Total Cost of Repurchases		Cash Paid for Shares Not Received			Remaining Authorized Capacity ⁽¹⁾
July 2014, $1 billion repurchase program
April 3 ⁽²⁾	2.7	$	100.12	$	274	$	—		$	—

November 2015, $1 billion repurchase program
April 3 ⁽²⁾	2.2	$	105.50	$	229	$	100		$	671
July 3	1.8	109.79		192		(100		)	579
Subtotal	4.0	107.41		421		—

Total	6.7	$	104.41	$	695	$	—

⁽¹⁾The remaining authorized capacities under the 2014 and 2015 Plans were calculated based on the cost to purchase the shares but exclude commission expenses in accordance with the authorized Plans.

⁽²⁾ Upon completion of the ASR in the second quarter of 2016, the shares purchased and average cost per share were updated based on the final valuation.

We may continue to repurchase outstanding shares from time to time during 2016 to enhance shareholder value and to offset the dilutive impact of employee stock based compensation plans.

Dividends

In July 2016, our Board of Directors authorized an increase to our quarterly dividend of 5.1 percent from $0.975 per share to $1.025 per share. We paid dividends of $333 million during the six months ended July 3, 2016.

Capital Expenditures

Capital expenditures and spending on internal use software for the six months ended ~~June 28, 2015,~~July 3, 2016, were ~~$247~~$216 million compared to ~~$245~~$269 million in the comparable period in ~~2014~~. 2015. Despite the challenging ~~international economies,~~conditions in many of our markets, we continue to invest in new product lines and targeted capacity expansions. We plan to spend between ~~$700~~$600 million and ~~$800~~$650 million in ~~2015~~2016 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 ~~2015.~~2016.

~~Table of Contents~~

~~Share Repurchases~~Pensions

~~In July 2014,~~Our global pension plans, including our ~~Board of Directors authorized the acquisition of up to $1 billion of additional common stock upon the completion~~unfunded and non-qualified plans, were 111 percent funded at December 31, 2015. Our U.S. qualified plan, which represents approximately 57 percent of the ~~2012 Plan. In 2015, we made the following purchases under the respective purchase programs:~~

In millions (except per share amounts)
For each quarter ended Shares
Purchased Average Cost
Per Share Total Cost of
Repurchases
Remaining
Authorized
Capacity ⁽¹⁾
December 2012, $1 billion repurchase program

March 29 1.0
$ 138.15
$ 137
$ 37
June 28 0.3
136.68
37
—
Subtotal 1.3
137.83
174
—

July 2014, $1 billion repurchase program

June 28 2.4
140.04
340
660
Total 3.7
139.29
$ 514

⁽¹⁾~~The remaining authorized capacities under the 2012~~worldwide pension obligation, was 119 percent funded and ~~2014 Plans were calculated based on the cost to purchase the shares, but excludes commission expenses in accordance with the authorized Plans.~~

~~We may continue to repurchase outstanding shares from time to time during 2015 to offset the dilutive impact of employee stock based compensation plans and to enhance shareholder value.~~

~~Dividends~~

~~In July 2015, the Board of Directors authorized a dividend increase of 25~~our U.K. plan was 123 percent ~~from $0.78 per share to $0.975 per share on a quarterly basis. We paid dividends of $280 million during the six months ended June 28, 2015.~~

~~Acquisitions~~

In September 2013, we announced our intention to acquire the equity that we do not already own in most of our partially-owned U.S. and Canadian distributors over a three to five year period. We plan to spend $150 million to $190 million on North American distributor acquisitions and the related debt retirements in the third quarter of 2015.

~~Pensions~~

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 ~~2015~~, 2016, the investment return on our U.S. pension trust was ~~flat~~9.0 percent while our U.K. pension trust return was ~~1.0~~14.0 percent.Approximately 78 percent of our pension plan assets are held in highly liquid investments such as fixed income and equity securities. The remaining 22 percent of our plan assets are held in less liquid, but market valued

investments, including real estate, private equity and insurance contracts.

~~We sponsor funded and unfunded domestic and foreign defined benefit pension and other postretirement plans. Contributions to these plans were as follows:~~

Six months ended
In millions June 28,
2015 June 29,
2014
Defined benefit pension and other postretirement plans

Voluntary contribution $ 72
$ 75
Mandatory contribution 82
81
Defined benefit pension contributions 154
156
Other postretirement plans 25
23
Total defined benefit plans $ 179
$ 179

Defined contribution pension plans $ 42
$ 41

~~Table of Contents~~

We anticipate making additional defined benefit pension contributions ~~and other postretirement benefit payments~~ during the remainder of ~~2015~~2016 of ~~$21~~$43 million. The estimated $146 million ~~and~~ ~~$15 million, respectively. The~~ ~~$175 million~~ of pension contributions for the full year include voluntary contributions of approximately ~~$82 million~~.$102 million. These contributions ~~and payments~~ may be made from trusts or company funds either to increase pension assets or to make direct benefit payments to plan participants. ~~Claims and premiums for other postretirement benefits are expected to approximate~~ ~~$40 million~~ in ~~2015~~. We expect our ~~2015~~2016 net periodic pension cost to approximate ~~$63~~$42 million.

Current Maturities of Short and Long-Term Debt

We had $200 million of commercial paper outstanding at July 3, 2016, 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 $7 million to $38 million over the next five years (including the remainder of 2016).

Restructuring Actions

We executed restructuring actions primarily in the form of professional voluntary and involuntary employee separation programs in the fourth quarter of 2015. We reduced our worldwide workforce by approximately 1,900 employees. We incurred a fourth quarter charge of $90 million ($61 million after tax) for these headcount reductions, of which $86 million was expected to be settled in cash. In 2016, we paid $42 million of restructuring payments. The majority of these payments will be made by the end of September 2016. At July 3, 2016, substantially all terminations have been completed. See Note 12, "RESTRUCTURING ACTIONS AND OTHER CHARGES," 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 ~~L-T~~ Debt Rating	Debt Rating	Outlook	~~Last Updated~~
Standard & Poor’s Rating Services	A+	~~Stable~~A1	~~August 2014~~Stable
Fitch Ratings	A	~~Stable~~F1	~~October 2014~~Stable
Moody’s Investors Service, Inc.	A2	~~Stable~~P1	~~December 2014~~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 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 liquidity provides us with the financial flexibility needed to fund working capital, ~~capital expenditures,~~ common stock repurchases, capital expenditures, dividend payments, ~~acquisitions~~acquisition of ~~our~~the remaining North American ~~distributors,~~distributor, projected pension obligations and debt service obligations. We continue to generate cash from operations in the U.S. and maintain access to ~~$1.7 billion of~~ our revolving credit facility.

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APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

A summary of our significant accounting policies is included in Note 1, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,” of the Notes to the Consolidated Financial Statements of our ~~2014~~2015 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 ~~2014~~2015 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 ~~2015.~~2016.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

See Note ~~13,~~14, "RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS," in the Notes to Condensed Consolidated Financial ~~Statements.~~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 ~~2014~~2015 Form 10-K. There have been no material changes in this information since the filing of our ~~2014~~2015 Form 10-K.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the quarter ended ~~June 28, 2015~~,July 3, 2016, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1.Legal Proceedings

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, ~~2014,~~2015, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K or the "CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION" in this Quarterly report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently judge to be immaterial also may materially adversely affect our business, financial condition or operating results.

ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds

The following information is provided pursuant to Item 703 of Regulation S-K:

Issuer Purchases of Equity Securities
Period
(a) Total
Number of
Shares
Purchased⁽¹⁾
(b) Average
Price Paid
per Share (c) Total Number of
Shares Purchased
as Part of Publicly
Announced
Plans or Programs
(d) Maximum
Number of Shares
that May Yet Be
Purchased Under the
Plans or Programs⁽²⁾
March 30 - May 3, 2015 188,281
$ 134.93
185,359
84,796
May 4 - May 31, 2015 1,990,477
141.00
1,987,926
83,272
June 1 - June 28, 2015 524,016
136.60
523,842
82,805
Total 2,702,774
139.73
2,697,127



	Issuer Purchases of Equity Securities
Period	(a) Total Number of Shares Purchased⁽¹⁾	(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs⁽²⁾
April 4 - May 8	1,689	$	115.63	—	120,690
May 9 - June 5	1,749,089	109.82		1,745,034	120,113
June 6 - July 3	7,491	117.10		—	114,097
Total	1,758,269	109.85		1,745,034

⁽¹⁾ Shares purchased represent shares under our Key Employee Stock Investment Plan established in 1969 (there is no maximum repurchase limitation in this plan) and our Board of Directors authorized share repurchase programs.

⁽²⁾ These values reflect the sum of shares held in loan status under our Key Employee Stock Investment Plan. The repurchase programs authorized by the Board of Directors do not limit the number of shares that may be purchased and ~~was~~were excluded from this column. The dollar value remaining available for future purchases under such programs as of July 3, 2016, was $579 million.

~~During the three months ended June 28,~~In November 2015, ~~we repurchased $37 million of common stock under the 2012 Board of Directors Authorized Plan, completing this program. In July 2014,~~ our Board of Directors authorized the acquisition of up to $1 billion of additional common stock upon the completion of the ~~2012 Plan.~~2014 repurchase plan. On February 9, 2016, we entered into an accelerated share repurchase (ASR) agreement with a third party financial institution to repurchase $500 million of our common stock under our previously announced share repurchase plans. Pursuant to the terms of the agreement, we paid the full $500 million purchase price and initially received approximately 4.1 million shares representing approximately 80 percent of the shares expected to be repurchased. The unsettled portion of the ASR met the criteria to be accounted for as a forward contract indexed to our stock

and qualified as an equity transaction. This resulted in a $100 million reduction to additional paid-in capital during the first quarter of 2016. In the second quarter of 2016, the ASR was completed, and we received approximately 0.6 million additional shares, based on our volume-weighted average stock price during the term of the transaction, less a discount, for a total of 4.7 million shares purchased under the ASR at an average purchase price of $105.50 per share. The settlement resulted in the reclassification of the $100 million reduction of additional paid-in capital recognized in the first quarter of 2016 to treasury stock. We repurchased ~~$340~~a total of $192 million of stock under the ~~new authorization.~~2015 authorized stock repurchase plan during the three months ended July 3, 2016, including the ASR shares discussed above.

~~Table of Contents~~

During the three months ended ~~June 28, 2015~~,July 3, 2016, we repurchased ~~5,647~~13,235 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 its initial five-year period for an additional five-year period. Participants must hold shares for a minimum of six months from date of ~~purchase and after~~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.

~~Not applicable.~~

ITEM 4.Mine Safety Disclosures

Not applicable.

~~Not applicable.~~

ITEM 5.Other Information

Not applicable.

~~Not applicable.~~

ITEM 6.Exhibits

See Exhibit Index at the end of this Quarterly Report on Form 10-Q.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



Cummins Inc.
Date:	~~July 29, 2015~~August 2, 2016

	By:	/s/ PATRICK J. WARD	By:	/s/ MARSHA L. HUNT
		Patrick J. Ward		Marsha L. Hunt
		Vice President and Chief Financial Officer		Vice President-Corporate Controller
		(Principal Financial Officer)		(Principal Accounting Officer)

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CUMMINS INC.

EXHIBIT INDEX



Exhibit No.		Description of Exhibit
12		Calculation of Ratio of Earnings to Fixed Charges.
31(a)		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31(b)		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document.
101.SCH		XBRL Taxonomy Extension Schema Document.
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.

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