UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended ~~October~~July 2, ~~2016~~2017

Commission File Number 1-4949

CUMMINS INC.

(Exact name of registrant as specified in its charter)



Indiana (State of Incorporation)		35-0257090 (IRS Employer Identification No.)

500 Jackson Street

Box 3005

Columbus, Indiana 47202-3005

(Address of principal executive offices)

Telephone (812) 377-5000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the ~~definition~~definitions of “large accelerated filer,” “accelerated ~~filer” and~~filer,” “smaller reporting ~~company”~~company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of ~~October~~July 2, ~~2016~~2017, there were ~~168,275,116~~167,620,608 shares of common stock outstanding with a par value of $2.50 per share.

Website Access to Company’s Reports

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

CUMMINS INC. AND SUBSIDIARIES

TABLE OF CONTENTS

QUARTERLY REPORT ON FORM 10-Q



		Page
	PART I. FINANCIAL INFORMATION
ITEM 1.	Condensed Consolidated Financial Statements (Unaudited)	3
	Condensed Consolidated Statements of Income for the three and ~~nine~~six months ended ~~October~~July 2, ~~2016~~2017 and ~~September 27, 2015~~July 3, 2016	3
	Condensed Consolidated Statements of Comprehensive Income for the three and ~~nine~~six months ended ~~October~~July 2, ~~2016~~2017 and ~~September 27, 2015~~July 3, 2016	4
	Condensed Consolidated Balance Sheets at ~~October~~July 2, ~~2016~~2017 and December 31, ~~2015~~2016	5
	Condensed Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~October~~July 2, ~~2016~~2017 and ~~September 27, 2015~~July 3, 2016	6
	Condensed Consolidated Statements of Changes in Equity for the ~~nine~~six months ended ~~October~~July 2, ~~2016~~2017 and ~~September 27, 2015~~July 3, 2016	7
	Notes to Condensed Consolidated Financial Statements	8
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2221
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	4846
ITEM 4.	Controls and Procedures	4846
	PART II. OTHER INFORMATION
ITEM 1.	Legal Proceedings	4947
ITEM 1A.	Risk Factors	4947
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4947
ITEM 3.	Defaults Upon Senior Securities	5048
ITEM 4.	Mine Safety Disclosures	5048
ITEM 5.	Other Information	5048
ITEM 6.	Exhibits	5048
	Signatures	5149
	Cummins Inc. Exhibit Index	5250

PART I. FINANCIAL INFORMATION

ITEM 1. Condensed Consolidated Financial Statements

CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three months ended					Nine months ended						Three months ended				Six months ended
In millions, except per share amounts	October 2, 2016		September 27, 2015			October 2, 2016			September 27, 2015			July 2, 2017		July 3, 2016		July 2, 2017		July 3, 2016
NET SALES ^(a)	$	4,187	$	4,620		$	13,006		$	14,344		$	5,078	$	4,528	$	9,667	$	8,819
Cost of sales	3,108		3,412			9,674			10,609			3,829		3,331		7,290		6,566
GROSS MARGIN	1,079		1,208			3,332			3,735			1,249		1,197		2,377		2,253
OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses	513		530			1,527			1,584			596		524		1,133		1,014
Research, development and engineering expenses	157		197			478			558			174		155		332		321
Equity, royalty and interest income from investees (Note 4)	74		78			234			240			98		88		206		160
Loss contingency (Note 10)	99		—			138			—
Other operating expense, net	—		(2		)	(2		)	(5		)
Loss contingency (Note 9)												—		39		—		39
Other operating income (expense), net												18		—		23		(2		)
OPERATING INCOME	384		557			1,421			1,828			595		567		1,141		1,037
Interest income	6		9			18			20			5		6		7		12
Interest expense (Note 8)	16		16			51			47
Other income, net	8		11			34			12
Interest expense (Note 7)												21		16		39		35
Other income (expense), net												20		18		38		26
INCOME BEFORE INCOME TAXES	382		561			1,422			1,813			599		575		1,147		1,040
Income tax expense (Note 5)	82		169			362			521
Income tax expense												158		148		301		280
CONSOLIDATED NET INCOME	300		392			1,060			1,292			441		427		846		760
Less: Net income attributable to noncontrolling interests	11		12			44			54			17		21		26		33
NET INCOME ATTRIBUTABLE TO CUMMINS INC.	$	289	$	380		$	1,016		$	1,238		$	424	$	406	$	820	$	727

EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
Basic	$	1.72	$	2.15		$	5.99		$	6.92		$	2.53	$	2.41	$	4.90	$	4.27
Diluted	$	1.72	$	2.14		$	5.99		$	6.90		$	2.53	$	2.40	$	4.88	$	4.26

WEIGHTED AVERAGE SHARES OUTSTANDING
Basic	167.8		177.0			169.5			178.9			167.3		168.8		167.4		170.3
Dilutive effect of stock compensation awards	0.4		0.4			0.2			0.4			0.5		0.2		0.5		0.2
Diluted	168.2		177.4			169.7			179.3			167.8		169.0		167.9		170.5

CASH DIVIDENDS DECLARED PER COMMON SHARE	$	1.025	$	0.975		$	2.975		$	2.535		$	1.025	$	0.975	$	2.05	$	1.95

^(a)Includes sales to nonconsolidated equity investees of ~~$275~~$283 million and ~~$793~~$550 million and ~~$274~~$276 million and ~~$956~~$518 million for the three and ~~nine~~six months ended ~~October~~July 2, ~~2016~~2017 and ~~September 27, 2015,~~July 3, 2016, respectively.

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

CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Three months ended						Nine months ended						Three months ended					Six months ended
In millions	October 2, 2016			September 27, 2015			October 2, 2016			September 27, 2015			July 2, 2017		July 3, 2016			July 2, 2017		July 3, 2016
CONSOLIDATED NET INCOME	$	300		$	392		$	1,060		$	1,292		$	441	$	427		$	846	$	760
Other comprehensive (loss) income, net of tax (Note 11)
Other comprehensive income (loss), net of tax (Note 10)
Foreign currency translation adjustments	(29		)	(221		)	(299		)	(252		)	102		(213		)	182		(270		)
Unrealized gain (loss) on derivatives	7			7			(20		)	15			—		(6		)	1		(27		)
Change in pension and other postretirement defined benefit plans	13			15			31			43			15		9			36		18
Unrealized gain (loss) on marketable securities	—			(1		)	1			(1		)	1		1			1		1
Total other comprehensive loss, net of tax	(9		)	(200		)	(287		)	(195		)
Total other comprehensive income (loss), net of tax													118		(209		)	220		(278		)
COMPREHENSIVE INCOME	291			192			773			1,097			559		218			1,066		482
Less: Comprehensive income (loss) attributable to noncontrolling interests	14			(1		)	41			39
Less: Comprehensive income attributable to noncontrolling interests													18		15			40		27
COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC.	$	277		$	193		$	732		$	1,058		$	541	$	203		$	1,026	$	455

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

CUMMINS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)	CUMMINS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)							CUMMINS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

In millions, except par value		October 2, 2016			December 31, 2015				July 2, 2017			December 31, 2016
ASSETS
Current assets
Cash and cash equivalents		$	1,251		$	1,711			$	1,293		$	1,120
Marketable securities (Note 6)		250			100
Marketable securities (Note 5)									174			260
Total cash, cash equivalents and marketable securities		1,501			1,811				1,467			1,380
Accounts and notes receivable, net
Trade and other		2,680			2,640				3,237			2,803
Nonconsolidated equity investees		193			180				316			222
Inventories (Note 7)		2,820			2,707
Inventories (Note 6)									2,982			2,675
Prepaid expenses and other current assets		600			609				600			627
Total current assets		7,794			7,947				8,602			7,707
Long-term assets
Property, plant and equipment		7,460			7,322				7,804			7,635
Accumulated depreciation		(3,783		)	(3,577		)		(4,017		)	(3,835		)
Property, plant and equipment, net		3,677			3,745				3,787			3,800
Investments and advances related to equity method investees		1,077			975				1,162			946
Goodwill		482			482				488			480
Other intangible assets, net		319			328				339			332
Pension assets		773			735				852			731
Other assets		1,014			922				1,030			1,015
Total assets		$	15,136		$	15,134			$	16,260		$	15,011

LIABILITIES
Current liabilities
Accounts payable (principally trade)		$	1,781		$	1,706			$	2,300		$	1,854
Loans payable (Note 8)		48			24
Commercial paper (Note 8)		273			—
Loans payable (Note 7)									54			41
Commercial paper (Note 7)									134			212
Accrued compensation, benefits and retirement costs		393			409				475			412
Current portion of accrued product warranty (Note 9)		333			359
Current portion of accrued product warranty (Note 8)									392			333
Current portion of deferred revenue		460			403				520			468
Other accrued expenses		985			863				974			970
Current maturities of long-term debt (Note 8)		35			39
Current maturities of long-term debt (Note 7)									45			35
Total current liabilities		4,308			3,803				4,894			4,325
Long-term liabilities
Long-term debt (Note 8)		1,593			1,576
Long-term debt (Note 7)									1,564			1,568
Postretirement benefits other than pensions		326			349				318			329
Pensions		301			298				327			326
Other liabilities and deferred revenue		1,344			1,358				1,335			1,289
Total liabilities		$	7,872		$	7,384			$	8,438		$	7,837

Commitments and contingencies (Note 10)
Commitments and contingencies (Note 9)

EQUITY
Cummins Inc. shareholders’ equity
Common stock, $2.50 par value, 500 shares authorized, 222.4 and 222.4 shares issued		$	2,209		$	2,178
Common stock, $2.50 par value, 500 shares authorized, 222.3 and 222.4 shares issued									$	2,184		$	2,153
Retained earnings		10,833			10,322				11,517			11,040
Treasury stock, at cost, 54.1 and 47.2 shares		(4,468		)	(3,735		)
Common stock held by employee benefits trust, at cost, 0.7 and 0.9 shares		(8		)	(11		)
Accumulated other comprehensive loss (Note 11)		(1,632		)	(1,348		)
Treasury stock, at cost, 54.7 and 54.2 shares									(4,586		)	(4,489		)
Common stock held by employee benefits trust, at cost, 0.6 and 0.7 shares									(7		)	(8		)
Accumulated other comprehensive loss (Note 10)									(1,615		)	(1,821		)
Total Cummins Inc. shareholders’ equity		6,934			7,406				7,493			6,875
Noncontrolling interests		330			344				329			299
Total equity		$	7,264		$	7,750			$	7,822		$	7,174
Total liabilities and equity		$	15,136		$	15,134			$	16,260		$	15,011

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

CUMMINS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)	CUMMINS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)							CUMMINS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

		Nine months ended							Six months ended
In millions		October 2, 2016			September 27, 2015				July 2, 2017			July 3, 2016
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income		$	1,060		$	1,292			$	846		$	760
Adjustments to reconcile consolidated net income to net cash provided by operating activities
Restructuring payments (Note 12)		(53		)	—
Loss contingency (Note 10)		138			—
Depreciation and amortization		391			383				284			259
Gain on fair value adjustment for consolidated investees		—			(17		)
Deferred income taxes		60			(120		)		—			2
Equity in income of investees, net of dividends		(94		)	(68		)
Equity in income of investees, net of dividends (Note 4)									(132		)	(87		)
Pension contributions in excess of expense (Note 3)		(92		)	(119		)		(44		)	(82		)
Other post-retirement benefits payments in excess of expense (Note 3)		(16		)	(18		)		(8		)	(17		)
Stock-based compensation expense		28			24				23			20
Restructuring payments									—			(42		)
Loss contingency (Note 9)									—			39
Translation and hedging activities		(39		)	22				31			(45		)
Changes in current assets and liabilities, net of acquisitions
Changes in current assets and liabilities
Accounts and notes receivable		(112		)	(163		)		(488		)	(252		)
Inventories		(150		)	(179		)		(264		)	(101		)
Other current assets		138			133				21			189
Accounts payable		97			(52		)		403			143
Accrued expenses		(279		)	(153		)		132			(209		)
Changes in other liabilities and deferred revenue		188			219				103			129
Other, net		45			(53		)		(81		)	32
Net cash provided by operating activities		1,310			1,131				826			738

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(312		)	(393		)		(182		)	(189		)
Investments in internal use software		(42		)	(38		)		(40		)	(27		)
Investments in and advances to equity investees		(29		)	(9		)		(64		)	(17		)
Acquisitions of businesses, net of cash acquired		(1		)	(102		)
Investments in marketable securities—acquisitions (Note 6)		(447		)	(175		)
Investments in marketable securities—liquidations (Note 6)		291			228
Investments in marketable securities—acquisitions (Note 5)									(69		)	(379		)
Investments in marketable securities—liquidations (Note 5)									162			237
Cash flows from derivatives not designated as hedges		(64		)	17				19			(21		)
Other, net		14			(5		)		14			5
Net cash used in investing activities		(590		)	(477		)		(160		)	(391		)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings		111			24				2			109
Net borrowings of commercial paper (Note 8)		273			—
Net (payments) borrowings of commercial paper (Note 7)									(78		)	200
Payments on borrowings and capital lease obligations		(156		)	(64		)		(29		)	(133		)
Net borrowings (payments) under short-term credit agreements		25			(38		)
Distributions to noncontrolling interests		(42		)	(35		)		(10		)	(24		)
Dividend payments on common stock		(505		)	(452		)		(343		)	(333		)
Repurchases of common stock		(745		)	(650		)
Repurchases of common stock (Note 2)									(120		)	(695		)
Other, net		(2		)	—				34			(20		)
Net cash used in financing activities		(1,041		)	(1,215		)		(544		)	(896		)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		(139		)	(52		)		51			(117		)
Net decrease in cash and cash equivalents		(460		)	(613		)
Net increase (decrease) in cash and cash equivalents									173			(666		)
Cash and cash equivalents at beginning of year		1,711			2,301				1,120			1,711
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	1,251		$	1,688			$	1,293		$	1,045

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

CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)


In 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, 2014	$	556	$	1,583		$	9,545		$	(2,844	)	$	(13	)	$	(1,078	)	$	7,749		$	344		$	8,093
BALANCE AT DECEMBER 31, 2015																											$	556	$	1,622		$	10,322		$	(3,735	)	$	(11	)	$	(1,348	)	$	7,406		$	344		$	7,750
Net income						1,238												1,238			54			1,292								727												727			33			760
Other comprehensive (loss) income, net of tax (Note 11)															(180		)	(180		)	(15		)	(195		)
Issuance of shares			7															7			—			7
Other comprehensive income (loss), net of tax (Note 10)																																									(272		)	(272		)	(6		)	(278		)
Issuance of common stock																													4															4			—			4
Employee benefits trust activity			21									2						23			—			23					14									2						16			—			16
Acquisition of shares									(650		)							(650		)	—			(650		)
Repurchases of common stock (Note 2)																																			(695		)							(695		)	—			(695		)
Cash dividends on common stock						(452		)										(452		)	—			(452		)						(333		)										(333		)	—			(333		)
Distributions to noncontrolling interests																		—			(46		)	(46		)																		—			(31		)	(31		)
Stock based awards			(4		)				8									4			—			4					(6		)				8									2			—			2
Other shareholder transactions			10															10			(5		)	5					6															6			(6		)	—
BALANCE AT SEPTEMBER 27, 2015	$	556	$	1,617		$	10,331		$	(3,486	)	$	(11	)	$	(1,258	)	$	7,749		$	332		$	8,081
BALANCE AT JULY 3, 2016																											$	556	$	1,640		$	10,716		$	(4,422	)	$	(9	)	$	(1,620	)	$	6,861		$	334		$	7,195

BALANCE AT DECEMBER 31, 2015	$	556	$	1,622		$	10,322		$	(3,735	)	$	(11	)	$	(1,348	)	$	7,406		$	344		$	7,750
BALANCE AT DECEMBER 31, 2016																											$	556	$	1,597		$	11,040		$	(4,489	)	$	(8	)	$	(1,821	)	$	6,875		$	299		$	7,174
Net income						1,016												1,016			44			1,060								820												820			26			846
Other comprehensive (loss) income, net of tax (Note 11)															(284		)	(284		)	(3		)	(287		)
Issuance of shares			5															5			—			5
Other comprehensive income (loss), net of tax (Note 10)																																									206			206			14			220
Issuance of common stock																													3															3			—			3
Employee benefits trust activity			19									3						22			—			22					12									1						13			—			13
Acquisition of shares (Note 2)									(745		)							(745		)	—			(745		)
Repurchases of common stock																																			(120		)							(120		)	—			(120		)
Cash dividends on common stock						(505		)										(505		)	—			(505		)						(343		)										(343		)	—			(343		)
Distributions to noncontrolling interests																		—			(49		)	(49		)																		—			(10		)	(10		)
Stock based awards			(7		)				12									5			—			5											23									23			—			23
Other shareholder transactions			14															14			(6		)	8					16															16			—			16
BALANCE AT OCTOBER 2, 2016	$	556	$	1,653		$	10,833		$	(4,468	)	$	(8	)	$	(1,632	)	$	6,934		$	330		$	7,264
BALANCE AT JULY 2, 2017																											$	556	$	1,628		$	11,517		$	(4,586	)	$	(7	)	$	(1,615	)	$	7,493		$	329		$	7,822

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

CUMMINS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. NATURE OF OPERATIONS

Cummins Inc. (“Cummins,” “we,” “our” or “us”) was founded in 1919 as Cummins Engine Company, a corporation in Columbus, Indiana, as one of the first diesel engine manufacturers. We changed our name to Cummins Inc. in 2001. We are a global power leader that designs, manufactures, distributes and services diesel and natural gas engines and engine-related component products, including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems and electric power generation systems. We sell our products to original equipment manufacturers (OEMs), distributors and other customers worldwide. We serve our customers through a network of approximately 600 ~~company-owned~~wholly-owned and independent distributor locations and over ~~7,200~~7,400 dealer locations in more than 190 countries and territories.

NOTE 2. BASIS OF PRESENTATION

Interim Condensed Financial Statements

The unaudited Condensed Consolidated Financial Statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of operations, financial position and cash flows. All such adjustments are of a normal recurring nature. The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles ~~generally accepted~~ in the United States of America (GAAP) pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial information. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted as permitted by such rules and regulations. ~~Certain reclassifications have been made to prior period amounts to conform to the presentation of the current period condensed financial statements.~~

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, ~~2015.~~2016. Our interim period financial results for the three and ~~nine~~six month periods presented are not necessarily indicative of results to be expected for any other interim period or for the entire year. The year-end Condensed Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.

Reclassifications

Certain amounts for prior year periods have been reclassified to conform to the presentation of the current year.

Use of Estimates in Preparation of Financial Statements

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

Reporting Period

Our reporting period usually ends on the Sunday closest to the last day of the quarterly calendar period. The ~~third~~second quarters of ~~2016~~2017 and ~~2015~~2016 ended on ~~October~~July 2 and ~~September 27,~~July 3, respectively. Our fiscal year ends on December 31, regardless of the day of the week on which December 31 falls.

Weighted-average Diluted Shares Outstanding

The weighted-average diluted common shares outstanding excludes the anti-dilutive effect of certain stock options since such options had an exercise price in excess of the monthly average market value of our common stock. The options excluded from diluted earnings per share ~~for the three and nine months ended October 2, 2016 and September 27, 2015,~~ were as follows:

Three months ended Nine months ended
October 2,
2016 September 27,
2015 October 2,
2016 September 27,
2015
Options excluded 936,857
950,345
1,295,664
593,436



	Three months ended		Six months ended
	July 2, 2017	July 3, 2016	July 2, 2017	July 3, 2016
Options excluded	6,155	1,262,469	61,345	1,475,068

InAccelerated Share Repurchase

On February 9, 2016, we entered into an accelerated share repurchase (ASR) agreement with a third party financial institution to repurchase $500 million of our common stock under our previously announced share repurchase ~~plans~~plans. Pursuant to the terms of the agreement, we paid the full $500 million purchase price and initially received approximately 4.1 million shares representing approximately 80 percent of the shares expected to be repurchased. The unsettled portion of the ASR met the criteria to be accounted for as a forward contract indexed to our stock and qualified as an equity transaction. This resulted in a $100 million reduction to additional paid-in capital during the first quarter of 2016. In the second quarter of 2016, the ASR was completed, and we received approximately 0.6 million additional shares, based on our volume-weighted average stock price during the term of the transaction, less a discount, for a total of 4.7 million shares purchased under the ASR at an average purchase price of $105.50 per share. The settlement resulted in the reclassification of the $100 million reduction of additional paid-in capital recognized in the first quarter of 2016 to treasury stock.

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

NOTE 3. PENSION AND OTHER POSTRETIREMENT BENEFITS

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


	Three months ended				Nine months ended				Three months ended				Six months ended
In millions	October 2, 2016		September 27, 2015		October 2, 2016		September 27, 2015		July 2, 2017		July 3, 2016		July 2, 2017		July 3, 2016
Defined benefit pension plans
Voluntary contribution	$	16	$	7	$	101	$	79	$	41	$	37	$	84	$	85
Mandatory contribution	5		5		23		87		—		6		—		18
Defined benefit pension contributions	$	21	$	12	$	124	$	166	$	41	$	43	$	84	$	103

Other postretirement plans	$	4	$	8	$	32	$	33	$	3	$	15	$	18	$	28

Defined contribution pension plans	$	17	$	14	$	53	$	56	$	19	$	14	$	48	$	35

We anticipate making additional defined benefit pension contributions during the remainder of ~~2016~~2017 of ~~$22~~$50 million for our U.S. and ~~U.K~~U.K. pension plans. ~~The~~Approximately $133 million of the estimated ~~$146~~$134 million of pension contributions for the full year ~~include voluntary contributions of approximately $103 million.~~are voluntary. These contributions may be made from trusts or company funds either to increase pension assets or to make direct benefit payments to plan participants. We expect our ~~2016~~2017 net periodic pension cost to approximate ~~$42~~$83 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	October 2, 2016			September 27, 2015			October 2, 2016			September 27, 2015			October 2, 2016		September 27, 2015		July 2, 2017			July 3, 2016			July 2, 2017			July 3, 2016			July 2, 2017		July 3, 2016
Service cost	$	22		$	20		$	5		$	7		$	—	$	—	$	26		$	23		$	7		$	6		$	—	$	—
Interest cost	26			25			13			14			4		4		27			28			10			13			4		4
Expected return on plan assets	(50		)	(47		)	(17		)	(23		)	—		—		(52		)	(51		)	(17		)	(19		)	—		—
Recognized net actuarial loss	9			11			3			8			1		1		9			7			10			4			1		2
Net periodic benefit cost	$	7		$	9		$	4		$	6		$	5	$	5	$	10		$	7		$	10		$	4		$	5	$	6



	Pension																Pension
	U.S. Plans						U.K. Plans						Other Postretirement Benefits				U.S. Plans						U.K. Plans						Other Postretirement Benefits
	Nine months ended																Six months ended
In millions	October 2, 2016			September 27, 2015			October 2, 2016			September 27, 2015			October 2, 2016		September 27, 2015		July 2, 2017			July 3, 2016			July 2, 2017			July 3, 2016			July 2, 2017		July 3, 2016
Service cost	$	68		$	60		$	16		$	20		$	—	$	—	$	53		$	46		$	13		$	11		$	—	$	—
Interest cost	82			76			39			42			12		12		53			56			20			26			7		8
Expected return on plan assets	(152		)	(142		)	(55		)	(68		)	—		—		(103		)	(102		)	(34		)	(38		)	—		—
Recognized net actuarial loss	23			34			11			25			4		3		18			14			20			8			3		3
Net periodic benefit cost	$	21		$	28		$	11		$	19		$	16	$	15	$	21		$	14		$	19		$	7		$	10	$	11

NOTE 4. EQUITY, ROYALTY AND INTEREST INCOME FROM INVESTEES

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


	Three months ended				Nine months ended				Three months ended				Six months ended
In millions	October 2, 2016		September 27, 2015		October 2, 2016		September 27, 2015		July 2, 2017		July 3, 2016		July 2, 2017		July 3, 2016
Distribution entities
Komatsu Cummins Chile, Ltda.	$	8	$	8	$	26	$	23	$	8	$	8	$	15	$	18
North American distributors	7		9		18		27		—		6		—		11
All other distributors	1		1		2		2		—		1		—		1
Manufacturing entities
Beijing Foton Cummins Engine Co., Ltd.	19		18		59		47		22		22		55		40
Dongfeng Cummins Engine Company, Ltd.									19		15		41		22
Chongqing Cummins Engine Company, Ltd.	11		9		28		32		10		9		19		17
Dongfeng Cummins Engine Company, Ltd.	10		11		32		40
All other manufacturers	8		13		40		41		27		16		51		32
Cummins share of net income	64		69		205		212		86		77		181		141
Royalty and interest income	10		9		29		28		12		11		25		19
Equity, royalty and interest income from investees	$	74	$	78	$	234	$	240	$	98	$	88	$	206	$	160

~~NOTE 5. INCOME TAXES~~

Our effective tax rate for the year is expected to approximate 25.5 percent, excluding any one-time items that may arise. 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 and the research tax credit.

~~Our effective tax rate for the three and nine months ended October 2, 2016, was 21.5 percent and 25.5 percent, respectively.~~

Our effective tax rate for the three and nine months ended September 27, 2015, was 30.1 percent and 28.7 percent, respectively. The tax rate for the nine months ended September 27, 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.

The decrease in the effective tax rate for the three and nine months ended October 2, 2016, versus the comparable periods in 2015 was primarily due to 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 $20 million to $26 million within the next 12 months for U.S. and non-U.S. audits that are in progress.

NOTE 6.5. MARKETABLE SECURITIES

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


	October 2, 2016						December 31, 2015							July 2, 2017						December 31, 2016
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(1)
Level 2⁽¹⁾
Debt mutual funds														$	157	$	—	$	157	$	132	$	—	$	132
Bank debentures	$	118	$	—	$	118	$	—	$	—		$	—	3		—		3		114		—		114
Debt mutual funds	118		—		118		88		—			88
Equity mutual funds	12		—		12		11		(1		)	10		12		1		13		12		—		12
Government debt securities	2		—		2		2		—			2		1		—		1		2		—		2
Total marketable securities	$	250	$	—	$	250	$	101	$	(1	)	$	100	$	173	$	1	$	174	$	260	$	—	$	260

⁽¹⁾All marketable securities are classified as Level 2 securities. The fair value of Level 2 securities is estimated using actively quoted prices for similar instruments from brokers and observable inputs where available, including market transactions and third-party pricing services, or net asset values provided to investors. We do not currently have any Level 3 securities and there were no transfers between Level 2 or 3 during the first ~~nine months~~half of ~~2016 or~~2017 and for the year ended ~~December 31, 2015.~~2016.

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

Debt mutual funds— The fair value measure for the vast majority of these investments is the daily net asset value published on a regulated governmental website. Daily quoted prices are available from the issuing brokerage and are used on a test basis to corroborate this Level 2 input.

Bank debentures— These investments provide us with a contractual rate of return and generally range in maturity from three months to ~~one year.~~five years. The ~~counter-parties~~counterparties to these investments are reputable financial institutions with investment grade credit ratings. Since these instruments are not tradable and must be settled directly by us with the respective financial institution, our fair value measure is the financial institutions’ month-end statement.

~~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.~~securities— The fair value measure for these securities is broker quotes received from reputable firms. These securities are infrequently traded on a national stock exchange and these values are used on a test basis to corroborate our Level 2 input measure.

The proceeds from sales and maturities of marketable securities and gross realized gains and losses from the sale of available-for-sale securities were as follows:


	Three months ended				Nine months ended				Three months ended				Six months ended
In millions	October 2, 2016		September 27, 2015		October 2, 2016		September 27, 2015		July 2, 2017		July 3, 2016		July 2, 2017		July 3, 2016
Proceeds from sales and maturities of marketable securities(1)	$	54	$	73	$	291	$	228	$	15	$	202	$	162	$	237
Gross realized gains from the sale of marketable securities⁽¹⁾	—		—		—		1

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

~~At October 2, 2016, the~~The fair value of available-for-sale investments in debt securities that utilize a Level 2 fair value measure is shown by contractual maturity below:


Contractual Maturity	(In millions)
Contractual Maturity (In millions)			July 2, 2017
1 year or less	$	237	$	160
5 - 10 years	1
1 - 5 years			1
Total	$	238	$	161

NOTE 7.6. INVENTORIES

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


In millions	October 2, 2016			December 31, 2015			July 2, 2017			December 31, 2016
Finished products	$	1,779		$	1,796		$	1,905		$	1,779
Work-in-process and raw materials	1,146			1,022			1,192			1,005
Inventories at FIFO cost	2,925			2,818			3,097			2,784
Excess of FIFO over LIFO	(105		)	(111		)	(115		)	(109		)
Total inventories	$	2,820		$	2,707		$	2,982		$	2,675

NOTE 8.7. DEBT

Loans Payable and Commercial Paper

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


	October 2, 2016					December 31, 2015
Dollars in millions	Amount		Weighted Average Interest Rate			Amount		Weighted Average Interest Rate
In millions									July 2, 2017		December 31, 2016
Loans payable ⁽¹⁾	$	48				$	24		$	54	$	41
Commercial paper ⁽²⁾	273		0.47	%	⁽³⁾	—		—	134		212

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

⁽²⁾ 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.~~fees, was 1.20 percent and 0.79 percent at July 2, 2017 and December 31, 2016, respectively.

Long-term Debt

A summary of long-term debt was as follows:


In millions	October 2, 2016			December 31, 2015			July 2, 2017			December 31, 2016
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
Other debt	49			55			56			51
Unamortized discount	(56		)	(57		)	(55		)	(56		)
Fair value adjustments due to hedge on indebtedness	77			63			45			47
Capital leases	85			81			90			88
Total long-term debt	1,628			1,615			1,609			1,603
Less: Current maturities of long-term debt	35			39			45			35
Long-term debt	$	1,593		$	1,576		$	1,564		$	1,568

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


	Required Principal Payments
In millions	2016		2017		2018		2019		2020		2017		2018		2019		2020		2021
Principal payments	$	9	$	28	$	31	$	24	$	7	$	18	$	45	$	36	$	10	$	4

Fair Value of Debt

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


In millions	October 2, 2016		December 31, 2015		July 2, 2017		December 31, 2016
Fair value of total debt⁽¹⁾	$	2,292	$	1,821	$	2,036	$	2,077
Carrying value of total debt	1,949		1,639		1,797		1,856

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

NOTE 9.8. PRODUCT WARRANTY LIABILITY

A tabular reconciliation of the product warranty liability, including the deferred revenue related to our extended warranty coverage and accrued recall programs was as follows:


In millions	October 2, 2016			September 27, 2015			July 2, 2017			July 3, 2016
Balance, beginning of year	$	1,404		$	1,283		$	1,414		$	1,404
Provision for warranties issued	256			326			239			181
Deferred revenue on extended warranty contracts sold	179			217			101			116
Payments	(291		)	(282		)	(199		)	(199		)
Amortization of deferred revenue on extended warranty contracts	(148		)	(132		)	(109		)	(98		)
Changes in estimates for pre-existing warranties	22			18			74			12
Foreign currency translation	(6		)	(10		)	1			(5		)
Balance, end of period	$	1,416		$	1,420		$	1,521		$	1,411

Warranty related deferred ~~revenue~~revenues and the long-term portion of the warranty ~~liability~~liabilities on our ~~October~~July 2, ~~2016,~~2017, balance sheet were as follows:


In millions	October 2, 2016		Balance Sheet Location	July 2, 2017		Balance Sheet Location
Deferred revenue related to extended coverage programs
Current portion	$	210	Current portion of deferred revenue	$	232	Current portion of deferred revenue
Long-term portion	537		Other liabilities and deferred revenue	505		Other liabilities and deferred revenue
Total	$	747		$	737

Long-term portion of warranty liability	$	336	Other liabilities and deferred revenue	$	392	Other liabilities and deferred revenue

NOTE ~~10.~~9. COMMITMENTS AND CONTINGENCIES

We are subject to numerous lawsuits and claims arising out of the ordinary course of our business, including actions related to product liability; personal injury; the use and performance of our products; warranty matters; product recalls; patent, trademark or other intellectual property infringement; contractual liability; the conduct of our business; tax reporting in foreign jurisdictions; distributor termination; workplace safety; and environmental matters. We also have been identified as a potentially responsible party at multiple waste disposal sites under U.S. federal and related state environmental statutes and regulations and may have joint and several liability for any investigation and remediation costs incurred with respect to such sites. We have denied liability with respect to many of these lawsuits, claims and proceedings and are vigorously defending such lawsuits, claims and proceedings. We carry various forms of commercial, property and casualty, product liability and other forms of insurance; however, such insurance may not be applicable or adequate to cover the costs associated with a judgment against us with respect to these lawsuits, claims and proceedings. We do not believe that these lawsuits are material individually or in the aggregate. While we believe we have also established adequate accruals pursuant to GAAP for our expected future liability with respect to pending lawsuits, claims and proceedings, where the nature and extent of any such liability can be reasonably estimated based upon then presently available information, there can be no assurance that the final resolution of any existing or future lawsuits, claims or proceedings will not have a material adverse effect on our business, results of operations, financial condition or cash flows.

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

Loss Contingency

Engine systems sold in the U.S. must be certified to comply with the Environmental Protection Agency (EPA) and California Air Resources Board (CARB) emission standards. EPA and CARB regulations require that in-use testing be performed on vehicles by the emission certificate holder and reported to the EPA and CARB in order to ensure ongoing compliance with these emission standards. We are the holder of this emission certificate for our engines, including engines installed in certain vehicles with one customer on which we did not also manufacture or sell the emission aftertreatment system. During 2015, a

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

While we are not responsible for the warranty issues related to a component that we did not manufacture or sell, as the emission compliance certificate holder, we are responsible for proposing a remedy to the EPA and CARB. As a result, we have proposed actions to the agencies that we believe will address the emission failures. As the certificate holder, we expect to participate in the cost of the proposed voluntary Campaign and recorded a charge of $60 million in 2015. The Campaign design was finalized with our OEM customer, reviewed with the EPA and submitted for final approval in ~~the second quarter of 2016, and we recorded an additional accrual of $39 million.~~2016. We ~~have~~ concluded based upon additional in-use emission testing performed in ~~the third quarter of~~ 2016, that the Campaign should be expanded to include a larger population of vehicles manufactured by this one OEM. ~~As a result, we~~We recorded an additional ~~accrual~~charges of $39 million and $99 million in the second and third quarter, respectively, in 2016 to reflect the estimated cost of our participation in the ~~expanded~~ Campaign. We continue to work with our OEM customer to resolve the allocation of costs for the Campaign, including pending litigation between the parties. The Campaign is not expected to be completed for some time and our final cost could differ from the amount we have recorded.

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

~~The accrual related to~~

We are funding the Campaign, which began in the fourth quarter of 2016, with a combination of cash and credit memos. The remaining accrual of $159 million is included in ~~"Other~~''Other accrued ~~expenses"~~expenses'' in our Condensed Consolidated Balance Sheets.

Guarantees and Commitments

~~From time to time~~Periodically, we enter into guarantee arrangements, including guarantees of non-U.S. distributor financings, residual value guarantees on equipment under operating leases and other miscellaneous guarantees of joint ventures or third-party obligations. At ~~October~~July 2, ~~2016,~~2017, the maximum potential loss related to these guarantees was ~~$24~~$43 million.

We have arrangements with certain suppliers that require us to purchase minimum volumes or be subject to monetary penalties. At ~~October~~July 2, ~~2016,~~2017, if we were to stop purchasing from each of these suppliers, the aggregate amount of the penalty would be approximately ~~$108~~$107 million, of which ~~$55~~$35 million relates to a contract with a components supplier that extends to ~~2018.~~2018 and $28 million relates to a contract with a power systems supplier that extends to 2019. Most of these arrangements enable us to secure critical components. We do not currently anticipate paying any penalties under these contracts.

We enter into physical forward contracts with suppliers of platinum, palladium and copper to purchase minimum volumes of the commodities at contractually stated prices for various periods, not to exceed two years. At ~~October~~July 2, ~~2016,~~2017, the total commitments under these contracts were ~~$27~~$43 million. These arrangements enable us to fix the prices of these commodities, which otherwise are subject to market volatility.

We have guarantees with certain customers that require us to satisfactorily honor contractual or regulatory obligations, or compensate for monetary losses related to nonperformance. These performance bonds and other performance-related guarantees were ~~$79~~$82 million at ~~October~~July 2, ~~2016.~~2017.

Indemnifications

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

product liability and license, patent or trademark indemnifications;

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

any contractual agreement where we agree to indemnify the ~~counter-party~~counterparty for losses suffered as a result of a misrepresentation in the contract.

We regularly evaluate the probability of having to incur costs associated with these indemnities and accrue for expected losses that are probable. Because the indemnifications are not related to specified known liabilities and due to their uncertain nature, we are unable to estimate the maximum amount of the potential loss associated with these indemnifications.

NOTE ~~11.~~10. ACCUMULATED OTHER COMPREHENSIVE LOSS

Following are the changes in accumulated other comprehensive income (loss) ~~income~~ by component for the three ~~and nine~~ months ended:


	Three months ended																					Three months ended
In millions	Change in pensions and other postretirement defined benefit plans			Foreign currency translation adjustment			Unrealized gain (loss) on marketable securities			Unrealized gain (loss) on derivatives			Total attributable to Cummins Inc.			Noncontrolling interests			Total other comprehensive income (loss)			Change in pensions and other postretirement defined benefit plans			Foreign currency translation adjustment			Unrealized gain (loss) on marketable securities			Unrealized gain (loss) on derivatives			Total attributable to Cummins Inc.			Noncontrolling interests			Total other comprehensive income (loss)
Balance at June 28, 2015	$	(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	—			(239		)	(1		)	13			(227		)	$	(13	)	$	(240	)	—			(207		)	1			(10		)	(216		)	$	(6	)	$	(222	)
Tax benefit (expense)	—			31			—			(1		)	30			—			30			—			—			—			2			2			—			2
After tax amount	—			(208		)	(1		)	12			(197		)	(13		)	(210		)	—			(207		)	1			(8		)	(214		)	(6		)	(220		)
Amounts reclassified from accumulated other comprehensive income⁽¹⁾⁽²⁾	15			—			—			(5		)	10			—			10
Amounts reclassified from accumulated other comprehensive loss⁽¹⁾⁽²⁾																						9			—			—			2			11			—			11
Net current period other comprehensive income (loss)	15			(208		)	(1		)	7			(187		)	$	(13	)	$	(200	)	9			(207		)	1			(6		)	(203		)	$	(6	)	$	(209	)
Balance at September 27, 2015	$	(626	)	$	(643	)	$	(2	)	$	13		$	(1,258	)
Balance at July 3, 2016																						$	(636	)	$	(960	)	$	(1	)	$	(23	)	$	(1,620	)

Balance at July 3, 2016	$	(636	)	$	(960	)	$	(1	)	$	(23	)	$	(1,620	)
Balance at April 2, 2017																						$	(664	)	$	(1,060	)	$	(1	)	$	(7	)	$	(1,732	)
Other comprehensive income before reclassifications
Before tax amount	5			(51		)	—			(4		)	(50		)	$	3		$	(47	)	—			105			1			(2		)	104			$	1		$	105
Tax (expense) benefit	(1		)	19			—			1			19			—			19
Tax benefit (expense)																						—			(4		)	(1		)	1			(4		)	—			(4		)
After tax amount	4			(32		)	—			(3		)	(31		)	3			(28		)	—			101			—			(1		)	100			1			101
Amounts reclassified from accumulated other comprehensive income⁽¹⁾⁽²⁾	9			—			—			10			19			—			19
Amounts reclassified from accumulated other comprehensive loss⁽¹⁾⁽²⁾																						15			—			1			1			17			—			17
Net current period other comprehensive income (loss)	13			(32		)	—			7			(12		)	$	3		$	(9	)	15			101			1			—			117			$	1		$	118
Balance at October 2, 2016	$	(623	)	$	(992	)	$	(1	)	$	(16	)	$	(1,632	)
Balance at July 2, 2017																						$	(649	)	$	(959	)	$	—		$	(7	)	$	(1,615	)

⁽¹⁾ Amounts are net of tax.

⁽²⁾ ~~See reclassifications~~Reclassifications out of accumulated other comprehensive income (loss) ~~income disclosure below~~and the related tax effects are immaterial for ~~further details.~~separate disclosure.

Following are the changes in accumulated other comprehensive income (loss) by component for the six months ended:



	Nine months ended																					Six months ended
In millions	Change in pensions and other postretirement defined benefit plans			Foreign currency translation adjustment			Unrealized gain (loss) on marketable securities			Unrealized gain (loss) on derivatives			Total attributable to Cummins Inc.			Noncontrolling interests			Total other comprehensive income (loss)			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, 2014	$	(669	)	$	(406	)	$	(1	)	$	(2	)	$	(1,078	)
Balance at December 31, 2015																						$	(654	)	$	(696	)	$	(2	)	$	4		$	(1,348	)
Other comprehensive income before reclassifications
Before tax amount	(3		)	(290		)	—			23			(270		)	$	(15	)	$	(285	)	—			(265		)	1			(36		)	(300		)	$	(6	)	$	(306	)
Tax benefit (expense)	1			53			—			(3		)	51			—			51			—			1			—			6			7			—			7
After tax amount	(2		)	(237		)	—			20			(219		)	(15		)	(234		)	—			(264		)	1			(30		)	(293		)	(6		)	(299		)
Amounts reclassified from accumulated other comprehensive income⁽¹⁾⁽²⁾	45			—			(1		)	(5		)	39			—			39
Amounts reclassified from accumulated other comprehensive loss⁽¹⁾⁽²⁾																						18			—			—			3			21			—			21
Net current period other comprehensive income (loss)	43			(237		)	(1		)	15			(180		)	$	(15	)	$	(195	)	18			(264		)	1			(27		)	(272		)	$	(6	)	$	(278	)
Balance at September 27, 2015	$	(626	)	$	(643	)	$	(2	)	$	13		$	(1,258	)
Balance at July 3, 2016																						$	(636	)	$	(960	)	$	(1	)	$	(23	)	$	(1,620	)

Balance at December 31, 2015	$	(654	)	$	(696	)	$	(2	)	$	4		$	(1,348	)
Balance at December 31, 2016																						$	(685	)	$	(1,127	)	$	(1	)	$	(8	)	$	(1,821	)
Other comprehensive income before reclassifications
Before tax amount	5			(316		)	1			(40		)	(350		)	$	(3	)	$	(353	)	8			180			2			(8		)	182			$	14		$	196
Tax (expense) benefit	(1		)	20			—			7			26			—			26
Tax benefit (expense)																						(3		)	(12		)	(1		)	3			(13		)	—			(13		)
After tax amount	4			(296		)	1			(33		)	(324		)	(3		)	(327		)	5			168			1			(5		)	169			14			183
Amounts reclassified from accumulated other comprehensive income⁽¹⁾⁽²⁾	27			—			—			13			40			—			40
Amounts reclassified from accumulated other comprehensive loss⁽¹⁾⁽²⁾																						31			—			—			6			37			—			37
Net current period other comprehensive income (loss)	31			(296		)	1			(20		)	(284		)	$	(3	)	$	(287	)	36			168			1			1			206			$	14		$	220
Balance at October 2, 2016	$	(623	)	$	(992	)	$	(1	)	$	(16	)	$	(1,632	)
Balance at July 2, 2017																						$	(649	)	$	(959	)	$	—		$	(7	)	$	(1,615	)

⁽¹⁾ Amounts are net of tax.

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

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

In millions Three months ended Nine months ended
(Gain)/Loss Components October 2,
2016 September 27,
2015 October 2,
2016 September 27,
2015 Statement of Income Location

Change in pensions and other postretirement defined benefit plans

Recognized actuarial loss $ 14
$ 22
$ 40
$ 65

⁽¹⁾
Tax effect (5 ) (7 ) (13 ) (20 ) Income tax expense
Net change in pensions and other postretirement defined benefit plans 9
15
27
45

Realized (gain) on marketable securities —
—
—
(1 ) Other income, net
Tax effect —
—
—
—
Income tax expense
Net realized (gain) on marketable securities —

—
—

(1 )

Realized loss (gain) on derivatives

Foreign currency forward contracts 12
(6 ) 17
(6 ) Net sales
Tax effect (2 ) 1
(4 ) 1
Income tax expense
Net realized loss (gain) on derivatives 10

(5 ) 13

(5 )

Total reclassifications for the period $ 19

$ 10
$ 40

$ 39

⁽¹⁾ ~~These accumulated other comprehensive income components~~effects 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 costsimmaterial for ~~both voluntary and involuntary terminations and $4 million 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.~~separate disclosure.

~~At October 2, 2016, substantially all terminations have been completed.~~NOTE 11. ACQUISITION

In April 2017, we entered into an agreement to form a joint venture with Eaton Corporation PLC and we closed the transaction on July 31, 2017. We purchased a 50 percent interest in the new venture named Eaton Cummins Automated Transmission Technologies for $600 million in cash. The ~~table below summarizes~~joint venture will design, assemble, sell and support medium-duty and heavy-duty automated transmissions for the ~~activity and balance~~commercial vehicle market, including new product launches. We will consolidate the results of ~~accrued workforce reductions, which is included in "Other accrued expenses"~~the joint venture in our ~~Condensed Consolidated Balance Sheets~~:

In millions October 2, 2016
Balance, beginning of year $ 60
Cash payments for 2015 actions (53 )
Balance, end of period $ 7
Components segment as we have a majority voting interest in the venture by virtue of a tie-breaking vote on the board of directors. We expect to record total assets of approximately $1.2 billion upon consolidation, the substantial majority of which will be intangible assets and goodwill.

NOTE ~~13.~~12. OPERATING SEGMENTS

Operating segments under GAAP are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (CODM), or decision-making group, in deciding how to allocate resources and in assessing performance. Our CODM is the President and Chief Operating Officer.

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 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.~~

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

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. ~~As noted above, we~~We allocate certain common costs and expenses, primarily corporate functions, among ~~segments.~~segments differently than we would for stand-alone financial information prepared in accordance with GAAP. These include certain costs and expenses of shared services, such as information technology, human resources, legal, finance and supply chain management. We do not allocate debt-related items, actuarial gains or losses, prior service costs or credits, changes in cash surrender value of corporate owned life insurance or income taxes to individual segments. Segment EBIT may not be consistent with measures used by other companies.

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


In millions	Engine			Distribution		Components		Power Systems		Non-segment Items ⁽¹⁾			Total		Engine		Distribution		Components		Power Systems		Intersegment Eliminations ⁽¹⁾			Total
Three months ended October 2, 2016
External sales	$	1,357		$	1,497	$	824	$	509	$	—		$	4,187
Intersegment sales	502			7		319		347		(1,175		)	—
Total sales	1,859			1,504		1,143		856		(1,175		)	4,187
Depreciation and amortization⁽²⁾	42			28		32		29		—			131
Research, development and engineering expenses	56			3		54		44		—			157
Equity, royalty and interest income from investees	38			19		9		8		—			74
Loss contingency	99		⁽³⁾	—		—		—		—			99
Interest income	3			1		1		1		—			6
Segment EBIT	89			96		148		59		6			398

Three months ended September 27, 2015
Three months ended July 2, 2017
External sales	$	1,627		$	1,543	$	891	$	559	$	—		$	4,620	$	1,711	$	1,716	$	1,064	$	587	$	—		$	5,078
Intersegment sales	475			8		349		423		(1,255		)	—		596		6		390		430		(1,422		)	—
Total sales	2,102			1,551		1,240		982		(1,255		)	4,620		2,307		1,722		1,454		1,017		(1,422		)	5,078
Depreciation and amortization⁽²⁾	47			26		28		27		—			128		46		31		38		29		—			144
Research, development and engineering expenses	73			2		65		57		—			197		63		4		57		50		—			174
Equity, royalty and interest income from investees	33			19		9		17		—			78		56		13		15		14		—			98
Interest income	6			1		1		1		—			9		2		1		1		1		—			5
Segment EBIT	217			123		156		74		7			577		277		96		190		61		(4		)	620

Nine months ended October 2, 2016
Three months ended July 3, 2016
External sales	$	4,350		$	4,493	$	2,654	$	1,509	$	—		$	13,006	$	1,504	$	1,538	$	933	$	553	$	—		$	4,528
Intersegment sales	1,487			18		1,005		1,076		(3,586		)	—		498		6		346		368		(1,218		)	—
Total sales	5,837			4,511		3,659		2,585		(3,586		)	13,006		2,002		1,544		1,279		921		(1,218		)	4,528
Depreciation and amortization⁽²⁾	121			86		95		87		—			389		41		29		32		29		—			131
Research, development and engineering expenses	166			10		161		141		—			478		53		3		51		48		—			155
Equity, royalty and interest income from investees	120			56		29		29		—			234		46		19		12		11		—			88
Loss contingency	138		⁽³⁾	—		—		—		—			138
Loss contingency⁽³⁾															39		—		—		—		—			39
Interest income	8			3		3		4		—			18		3		1		1		1		—			6
Segment EBIT	492			270		501		195		15			1,473		206		87		190		90		18			591

Nine months ended September 27, 2015
Six months ended July 2, 2017
External sales	$	5,150		$	4,499	$	2,839	$	1,856	$	—		$	14,344	$	3,168	$	3,353	$	2,044	$	1,102	$	—		$	9,667
Intersegment sales	1,422			23		1,097		1,225		(3,767		)	—		1,162		14		754		797		(2,727		)	—
Total sales	6,572			4,522		3,936		3,081		(3,767		)	14,344		4,330		3,367		2,798		1,899		(2,727		)	9,667
Depreciation and amortization⁽²⁾	140			78		82		81		—			381		90		61		75		57		—			283
Research, development and engineering expenses	195			8		183		172		—			558		117		8		107		100		—			332
Equity, royalty and interest income from investees	107			60		26		47		—			240		128		24		28		26		—			206
Interest income	10			3		3		4		—			20		3		2		1		1		—			7
Segment EBIT	695			324		574		302		(35		)	1,860		506		196		369		118		(3		)	1,186

Six months ended July 3, 2016
External sales															$	2,993	$	2,996	$	1,830	$	1,000	$	—		$	8,819
Intersegment sales															985		11		686		729		(2,411		)	—
Total sales															3,978		3,007		2,516		1,729		(2,411		)	8,819
Depreciation and amortization⁽²⁾															80		57		63		58		—			258
Research, development and engineering expenses															110		7		107		97		—			321
Equity, royalty and interest income from investees															82		37		20		21		—			160
Loss contingency ⁽³⁾															39		—		—		—		—			39
Interest income															5		2		2		3		—			12
Segment EBIT															403		174		353		136		9			1,075

⁽¹⁾Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three and ~~nine~~six months ended ~~October~~July 2, ~~2016~~2017 and ~~September 27, 2015.~~July 3, 2016.

⁽²⁾Depreciation and amortization as shown on a segment basis excludes the amortization of debt discount and deferred costs included in the Condensed Consolidated Statements of Income as "Interest expense." The amortization of debt discount and deferred costs ~~was $2~~were $1 million and $1 million for the ~~nine~~six months ended ~~October~~July 2, 2017 and July 3, 2016, ~~and September 27, 2015.~~respectively.

⁽³⁾See Note ~~10,~~9, "COMMITMENTS AND CONTINGENCIES,"for additional information.

A reconciliation of our segment information to the corresponding amounts in the Condensed Consolidated Statements of Income is shown in the table below:


	Three months ended				Nine months ended				Three months ended				Six months ended
In millions	October 2, 2016		September 27, 2015		October 2, 2016		September 27, 2015		July 2, 2017		July 3, 2016		July 2, 2017		July 3, 2016
Total segment EBIT	$	398	$	577	$	1,473	$	1,860	$	620	$	591	$	1,186	$	1,075
Less: Interest expense	16		16		51		47		21		16		39		35
Income before income taxes	$	382	$	561	$	1,422	$	1,813	$	599	$	575	$	1,147	$	1,040

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

Accounting Pronouncements Recently Adopted

In ~~August~~March 2016, the Financial Accounting Standards Board (FASB) amended its standards related to accounting for stock compensation, which became effective for us beginning January 1, 2017. The amendment replaced the requirement to record excess tax benefits and certain tax deficiencies in additional paid-in capital by recording all excess tax benefits and tax deficiencies as income tax expense / benefit in the Condensed Consolidated Statements of Income and was adopted prospectively. Excess tax benefits and deficiencies are required to be recorded as discrete items in the period in which they occur and were not material for the three and six months ended July 2, 2017. In addition, the standard impacted our Condensed Consolidated Statements of Cash Flows retrospectively, as excess tax benefits are now required to be presented as an operating activity and the cash paid to tax authorities is required to be presented as a financing activity. This resulted in a net reclassification of $4 million from operating to financing activities for the six months ended July 2, 2017. Finally, in accordance with the standard, we elected to continue our historical approach of estimating forfeitures during the award's vesting period and adjusting our estimate when it is no longer probable that the employee will fulfill the service condition. The adoption of the standard was not material to our diluted earnings per common share.

Accounting Pronouncements Issued But Not Yet Effective

In March 2017, the FASB amended its standards related to the presentation of pension and other postretirement benefit costs in the financial statements. Under the new standard, we will be required to separate service costs from all other elements of pension costs and reflect the other elements of pension costs outside of operating income in ourConsolidated Statements of Income. In addition, the standard will limit the amount eligible for capitalization (into inventory or self-constructed assets) to the amount of service cost. This portion of the standard will be applied on a prospective basis. The remainder of the new standard is effective for us on a retrospective basis beginning January 1, 2018. While we are still evaluating the impact of this standard, the change in presentation will likely result in a decrease in operating income primarily due to the requirement to present the expected return on plan assets outside of operating income.

In August 2016, the FASB amended its standards related to the classification of certain cash receipts and cash payments. The new standard will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case it would be required to apply the amendments prospectively as of the earliest date practicable. We are in the process of evaluating the impact this standard will have on our Consolidated Statements of Cash Flows.

In June 2016, the FASB amended its standards related to ~~the~~ accounting for credit losses on financial instruments. This amendment introduces new guidance for accounting for credit losses on instruments including trade receivables and held-to-maturity debt securities. The new rules are effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are in the 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 impact 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~~occur 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 inof 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~~, including our internal controls over financial reporting. While we have not yet quantified the amount, we do expect the standard will have a material impact on our Consolidated Balance Sheets due to the recognition of additional assets and liabilities for operating leases.

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

In May 2014, the FASB amended its standards related to revenue recognition. This amendment replaces all existing revenue recognition guidance and provides a single, comprehensive revenue recognition model for all contracts with customers. The standard contains principles that we will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that we will recognize revenue in a manner that depicts the transfer of goods or services to customers at an amount that we expect to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization

of certain contract costs, consideration of the time value of money in the transaction price and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The amendment also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in those judgments and assets recognized from costs incurred to fulfill a contract. The standard allows either full or modified retrospective adoption effective for annual and interim periods beginning January 1, 2018. We are in the process of evaluating the impact the amendment will have on our Consolidated Financial ~~Statements.~~ Statements, including our internal controls over financial reporting. We expect to adopt the standard using the modified retrospective approach. While we have not yet completed our evaluation process, we have identified that a change will be required related to our accounting for remanufactured product sales that include an exchange of the used product, referred to as core. Revenue is not currently recognized related to the core component unless the used product is not returned. Under the new standard, the transaction will be accounted for as a gross sale and a purchase of inventory. As a result, the exchange will increase both sales and cost of sales, in equal amounts, related to core. This will not impact gross margin dollars, but will impact the gross margin percentage. We are still quantifying the amount of this change. We have also identified transactions where revenue recognition is currently limited to the amount of billings not contingent on our future performance. With the allocation provisions of the new model, we expect to accelerate the timing of revenue recognition for amounts related to satisfied performance obligations that would have been delayed under the current guidance. We do not expect the impact of this change to be material, but we are still quantifying the impact. Using the modified retrospective adoption method, we will record an adjustment to our opening equity balance at January 1, 2018, to account for the differences between existing revenue recorded and revenue that would have been recorded under the new standard related to contracts for which we have begun to recognize revenue prior to the adoption date. We are still quantifying the potential amount of this adjustment.

~~NOTE 15. SUBSEQUENT EVENT~~

~~Acquisition of Cummins Pacific, LLC~~

In October 2016, we acquired the remaining 50 percent interest in Cummins Pacific, LLC from the former distributor principal. The purchase consideration was $97 million, which included $17 million in cash and an additional $66 million paid to eliminate outstanding debt. The remaining $14 million will be paid in future periods, subject to customary purchase price adjustments. We will recognize a gain of $13 million on the fair value adjustment in the fourth quarter of 2016, resulting from this acquisition.

~~This is the final acquisition of the plan we announced on September 17, 2013, to acquire the equity that we did not already own in most of our partially-owned U.S. and Canadian distributors.~~

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;

a major customer experiencing financial distress;

lower than expected acceptance of new or existing products or services;

any significant problems in our new engine platforms;

a further slowdown in infrastructure ~~development;~~development and/or continuing depressed commodity prices;

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

foreign currency exchange rate changes;

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

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

our plan to ~~grow~~reposition our portfolio of product offerings through exploring strategic acquisitions and divestitures and related uncertainties of entering ~~into~~ such transactions;

~~challenges or unexpected costs in completing restructuring and cost reduction initiatives;~~

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 systems and data security;

political, economic and other risks from operations in numerous countries;

changes in taxation;

global legal and ethical compliance costs and risks;

aligning our capacity and production with our demand;

product liability claims;

increasingly stringent environmental laws and regulations;

the price and availability of energy;

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

labor relations;

changes in ~~actuarial and~~ accounting standards;

future bans or limitations on the use of diesel-powered vehicles;

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; and

other risk factors described in our 2016 Form 10-K, Part I, Item 1A under the caption “Risk Factors.”

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

ORGANIZATION OF INFORMATION

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

•Executive Summary and Financial Highlights

•Outlook

•Results of Operations

•Operating Segment Results

•Liquidity and Capital Resources

•Application of Critical Accounting Estimates

•Recently Adopted and Recently Issued Accounting Pronouncements

EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS

We are a global power leader that designs, manufactures, distributes and services diesel and natural gas engines and engine-related component products, including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems 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 and Fiat Chrysler ~~Automobiles, Volvo AB, Komatsu and MAN Nutzfahrzeuge AG.~~Automobiles. We serve our customers through a network of approximately 600 ~~company-owned~~wholly-owned and independent distributor locations and over ~~7,200~~7,400 dealer locations in more than 190 countries and territories.

Our reportable operating segments consist of Engine, Distribution, Components and Power Systems. This reporting structure is organized according to the products and markets each segment serves. The Engine segment produces engines (15 liters and less in size) and associated parts for sale to customers in on-highway and various off-highway markets. Our engines are used in trucks of all sizes, buses and recreational vehicles, as well as in various industrial applications, including construction, agriculture, power generation systems and other off-highway applications. The Distribution segment includes wholly-owned and partially-owned distributorships engaged in wholesaling engines, generator sets and service parts, as well as performing service and repair activities on our products and maintaining relationships with various OEMs throughout the world. The Components segment sells filtration products, aftertreatment systems, turbochargers and fuel systems. The Power Systems segment is an integrated power provider, which designs, manufactures and sells engines (16 liters and larger) for industrial applications (including mining, oil and gas, marine and ~~marine)~~rail), standby and prime power generator sets, alternators and 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, 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 ~~decreased 9~~increased 12 percent in the three months ended ~~October~~July 2, ~~2016,~~2017, 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, lower demand in most distribution markets and unfavorable foreign currency fluctuations, partially offset by sales increases related to the consolidation of North American distributors since December 31, 2014.2016, with all operating segments reporting higher revenue. Revenue in the U.S. and Canada ~~declined~~improved by 13 percent primarily due to ~~decreased~~increased demand in the North American on-highway markets ~~partially offset by~~and increased ~~Distribution segment sales related to the consolidation of North American distributors. Continued global economic weakness~~industrial demand (especially in the ~~third quarter of 2016 negatively impacted our international revenues~~oil and gas market). International demand growth (excludes the U.S. and Canada)~~, which declined~~ improved revenues by 311 percent, with sales ~~down~~up in ~~many~~most of our markets ~~especially~~(especially in ~~Africa, Korea, Mexico~~China, India and ~~Middle East.~~Russia). The ~~decline~~increase in international sales was primarily due to increased demand in industrial markets (especially construction markets in China and mining markets in Europe) and increased demand in all Components businesses (especially on-highway truck demand in China and product sales to meet new emission requirements for trucks in India), partially offset by unfavorable foreign currency impacts of 2 percent (primarily in the Chinese renminbi and British pound).

Worldwide revenues increased 10 percent in the six months ended July 2, 2017, as compared to the same period in 2016, with all operating segments reporting higher revenue. International demand growth (excludes the U.S. and Canada) in 2017 improved revenues by 12 percent, with sales up in most of our markets, especially in China, India, Russia and the U.K. The increase in international sales was primarily due to increased demand in industrial markets (especially construction markets in China and mining markets in Europe) and increased demand in all Components businesses (especially on-highway truck demand in China and product sales to meet new emission requirements for trucks in India), partially offset by unfavorable foreign currency impacts of 3 percent ~~of international sales~~ (primarily in the British pound and Chinese renminbi) ~~and lower demand in the power generation markets, especially in Middle East and Asia (excluding China)~~.

Worldwide revenues declined 9 percent in the first nine 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 high-horsepower industrial markets, partially offset by sales increases related to the consolidation of North American distributors since December 31, 2014. Revenue in the U.S. and Canada ~~declined~~improved by 128 percent primarily due to ~~decreased~~increased demand in the North American on-highway markets and ~~lower~~increased industrial demand (especially in the ~~industrial~~construction, oil and gas ~~construction~~ and mining markets, partially offset by increased Distribution segment sales related to the consolidation of North American distributors. Continued global economic weakness in 2016 negatively impacted our international revenues (excludes the U.S. and Canada), which declined by 5 percent, with sales down in most of our markets, especially in South America, Mexico, Middle East and the U.K. The decline in international sales was primarily due to declines in most international power generation markets, unfavorable foreign currency impacts of 4 percent of international sales (primarily in the Chinese renminbi, British pound, Brazilian real, Indian rupee, Australian dollar and South African rand), lower demand in the on-highway markets in Brazil and Mexico and decreased demand in international high-horsepower industrial markets led by declines in marine and mining.

argiculture markets).

The following tables contain sales and earnings before interest expense, income tax expense and noncontrolling interests (EBIT) ~~results~~ by operating segment for the three and ~~nine~~six months ended ~~October~~July 2, ~~2016~~2017 and ~~September 27, 2015.~~July 3, 2016. Refer to the section titled ~~“Operating Segment Results”~~“OPERATING SEGMENT RESULTS” for a more detailed discussion of ~~net~~ sales and EBIT by operating segment, including the reconciliation of segment EBIT to net income ~~before income taxes.~~attributable to Cummins Inc.


	Three months ended																		Three months ended
Operating Segments	October 2, 2016							September 27, 2015							Percent change				July 2, 2017								July 3, 2016							Percent change
				Percent							Percent				2016 vs. 2015							Percent								Percent				2017 vs. 2016
In millions	Sales			of Total		EBIT		Sales ⁽¹⁾			of Total		EBIT ⁽¹⁾		Sales		EBIT		Sales			of Total		EBIT			Sales			of Total		EBIT		Sales		EBIT
Engine	$	1,859		44	%	$	89	$	2,102		45	%	$	217	(12	)%	(59	)%	$	2,307		45	%	$	277		$	2,002		44	%	$	206	15	%	34	%
Distribution	1,504			36	%	96		1,551			34	%	123		(3	)%	(22	)%	1,722			34	%	96			1,544			34	%	87		12	%	10	%
Components	1,143			27	%	148		1,240			27	%	156		(8	)%	(5	)%	1,454			29	%	190			1,279			28	%	190		14	%	—	%
Power Systems	856			21	%	59		982			21	%	74		(13	)%	(20	)%	1,017			20	%	61			921			21	%	90		10	%	(32	)%
Intersegment eliminations	(1,175		)	(28	)%	—		(1,255		)	(27	)%	—		(6	)%	—		(1,422		)	(28	)%	—			(1,218		)	(27	)%	—		17	%	—
Non-segment	—			—		6		—			—		7		—		(14	)%	—			—		(4		)	—			—		18		—		NM
Total	$	4,187		100	%	$	398	$	4,620		100	%	$	577	(9	)%	(31	)%	$	5,078		100	%	$	620		$	4,528		100	%	$	591	12	%	5	%

⁽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.~~NM" - not meaningful information

Net income attributable to Cummins was ~~$289~~$424 million, or ~~$1.72~~$2.53 per diluted share, on sales of ~~$4.2~~$5.1 billion for the three months ended ~~October~~July 2, ~~2016,~~2017, versus the comparable prior year period net income attributable to Cummins of ~~$380~~$406 million, or ~~$2.14~~$2.40 per diluted share, on sales of ~~$4.6~~$4.5 billion. The ~~decrease~~increase in net income and earnings per diluted share was driven by ~~lower~~significantly higher net sales, higher gross margin, ~~and~~the absence of an accrual for a loss contingency recorded in the second quarter of 2016, higher equity, royalty and interest income from investees, partially offset by ~~decreased~~increased selling, general and administrative expenses, higher research, development and engineering expenses and a ~~lower~~higher effective tax ~~rate and decreased selling, general and administrative expenses.~~rate. The ~~decrease~~increase in gross margin was primarily due to ~~lower volume and unfavorable mix, partially offset by lower material and commodity costs.~~

Nine months ended
Operating Segments October 2, 2016 September 27, 2015 Percent change
Percent Percent 2016 vs. 2015
In millions Sales of Total EBIT
Sales ⁽¹⁾
of Total
EBIT ⁽¹⁾
Sales EBIT
Engine $ 5,837
45 % $ 492
$ 6,572
46 % $ 695
(11 )% (29 )%
Distribution 4,511
35 % 270
4,522
32 % 324
— % (17 )%
Components 3,659
28 % 501
3,936
27 % 574
(7 )% (13 )%
Power Systems 2,585
20 % 195
3,081
21 % 302
(16 )% (35 )%
Intersegment eliminations (3,586 ) (28 )% —
(3,767 ) (26 )% —
(5 )% —
Non-segment —
—
15
—
—
(35 ) —
NM
Total $ 13,006
100 % $ 1,473
$ 14,344
100 % $ 1,860
(9 )% (21 )%

~~"NM" - not meaningful information~~

⁽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 $1.0 billion, or $5.99 per diluted share, on sales of $13.0 billion for the nine months ended October 2, 2016, versus the comparable prior year period net income attributable to Cummins of $1.2 billion, or $6.90 per diluted share, on sales of $14.3 billion. The decrease in net income and earnings per diluted share was driven by lower gross margin and an accrual for a loss contingency, partially offset by lower research, development and engineering expenses, decreased selling, general and administrative expenses and a lower effective tax rate. The decrease in gross margin was primarily due to lowerhigher volumes, unfavorable mix and unfavorable foreign currency fluctuations (primarily in the Canadian dollar, Australian dollar, Brazilian real and South African rand), partially offset by lower material and commodity costs, lower warranty expense and improved Distribution segment margins related to the acquisition of North American distributors since December 31, ~~2014.~~2015 and lower material costs, partially offset by higher warranty costs ($87 million primarily due to changes in estimates in the Engine and Component segments and campaigns in the Power Systems segment) and increased variable compensation expense of $93 million. Diluted earnings per share for the ~~nine~~three months ended ~~October~~July 2, 2017, benefited $0.01 from fewer weighted average shares outstanding due to purchases under the stock repurchase program.




	Six months ended
Operating Segments	July 2, 2017								July 3, 2016								Percent change
				Percent								Percent		��			2017 vs. 2016
In millions	Sales			of Total		EBIT			Sales			of Total			EBIT		Sales		EBIT
Engine	$	4,330		45	%	$	506		$	3,978		45	%		$	403	9	%	26	%
Distribution	3,367			35	%	196			3,007			34	%		174		12	%	13	%
Components	2,798			29	%	369			2,516			28	%		353		11	%	5	%
Power Systems	1,899			19	%	118			1,729			20	%		136		10	%	(13	)%
Intersegment eliminations	(2,727		)	(28	)%	—			(2,411		)	(27	)%		—		13	%	—
Non-segment	—			—		(3		)	—			—			9		—		NM
Total	$	9,667		100	%	$	1,186		$	8,819		100	%		$	1,075	10	%	10	%

"NM" - not meaningful information

Net income attributable to Cummins was $820 million, or $4.88 per diluted share, on sales of $9.7 billion for the six months ended July 2, 2017, versus the comparable prior year period net income attributable to Cummins of $727 million, or $4.26 per diluted share, on sales of $8.8 billion. The increase in net income and earnings per diluted share was driven by significantly higher net sales, higher gross margin, higher equity, royalty and interest income from investees, the absence of an accrual for a loss contingency recorded in the second quarter of 2016 and a lower effective tax rate, partially offset by increased selling, general and administrative expenses and higher research, development and engineering expenses. The increase in gross margin was primarily due to higher volumes, lower material costs, improved Distribution segment margins related to the acquisition of North American distributors since December 31, 2015, favorable pricing and favorable foreign currency fluctuations (primarily the British pound, South African rand and Brazilian real), partially offset by higher warranty costs ($120 million primarily due to changes in estimates in the Engine and Component segments and campaigns in the Power Systems segment) and increased variable compensation expense of $109 million. Diluted earnings per share for the six months ended July 2, 2017, benefited ~~$0.18~~$0.01 from fewer weighted average shares outstanding, primarily due to purchases under the stock repurchase ~~programs.~~program.

We generated ~~$1.3 billion~~$826 million of operating cash flows for the ~~nine~~six months ended ~~October~~July 2, ~~2016,~~2017, compared to ~~$1.1 billion~~$738 million for the ~~same~~comparable period in ~~2015.~~2016. Refer to the section titled "Cash Flows" in the ~~"Liquidity and Capital Resources"~~"LIQUIDITY AND CAPITAL RESOURCES" section for a discussion of items impacting cash flows.

During the first ~~nine months~~half of ~~2016,~~2017, we repurchased ~~$745~~$120 million, or ~~7.1~~0.8 million shares of common ~~stock, including completion of the accelerated share repurchase agreement finalized in the second quarter of 2016. See Note 2, "BASIS OF PRESENTATION," to the~~ ~~Condensed Consolidated Financial Statements~~ ~~for additional information.~~stock.

Our debt to capital ratio (total capital defined as debt plus equity) at ~~October~~July 2, ~~2016,~~2017, was ~~21.2~~18.7 percent, compared to ~~17.5~~20.6 percent at December 31, ~~2015. The increase was due to the repurchases of common stock and higher total debt, primarily due to the commercial paper program.~~2016. At ~~October~~July 2, ~~2016,~~2017, we had $1.5 billion in cash and marketable securities on hand and access to our $1.75 billion credit facilities, if necessary, to meet currently anticipated investment and funding needs.

In July ~~2016,~~2017, our Board of Directors authorized an increase to our quarterly dividend of ~~5.1~~5.4 percent from ~~$0.975~~$1.025 per share to ~~$1.025~~$1.08 per share.

Our global pension plans, including our 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 worldwide pension obligation, was 119 percent funded and our U.K. plan was 123 percent funded. We expect to contribute $146 million to our U.S. and U.K. pension plans and $44 million to our German pension plans in 2016. In addition, we expect our 2016 net periodic pension cost to approximate $42 million. See Note 3, "PENSION AND OTHER POSTRETIREMENT BENEFITS," to the ~~Condensed Consolidated Financial Statements~~ ~~for additional information.~~

In the third quarter of 2016, we recorded an additional accrual of $99 million for an existing loss contingency. For the nine months ended October 2, 2016, we accrued a total of $138 million related to this matter. See Note 10, "COMMITMENTS AND CONTINGENCIES," to the ~~Condensed Consolidated Financial Statements~~ ~~for additional information.~~

We expect our effective tax rate for the full year of ~~2016~~2017 to approximate ~~25.5~~26.0 percent, excluding any one-time tax items.

In ~~October 2016,~~April 2017, we ~~completed~~entered into an agreement to form a joint venture with Eaton Corporation PLC and we closed the ~~acquisition of the remaining~~transaction on July 31, 2017. We purchased a 50 percent interest in the ~~final previously unconsolidated North American distributor~~new venture named Eaton Cummins Automated Transmission Technologies for ~~$97 million and will recognize a gain of $13~~$600 million in cash. The joint venture will design, assemble, sell and support medium-duty and heavy-duty automated transmissions for the ~~fourth quarter~~commercial vehicle market, including new product launches. We will consolidate the results of the joint venture in our Components segment as we have a majority voting interest in the venture by virtue of a tie-breaking vote on the ~~fair value adjustment resulting from~~board of directors. We are still in the ~~acquisition.~~process of finalizing the purchase accounting and we do not expect this new venture to have a significant impact on our consolidated results in 2017.

OUTLOOK

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

~~We expect demand for pick-up trucks in North America to remain strong.~~

~~We intend to realize annualized savings from the 2015 restructuring actions of approximately $160 million.~~

~~Our outlook reflects the following~~and challenges to our business that ~~may reduce~~we expect could impact our revenue and earnings potential for the remainder of ~~2016:~~2017.

~~We expect industry production of heavy-duty~~Positive Trends

Demand for pick-up trucks in North America ~~to decline.~~remains strong.

~~We expect power generation~~Market demand in off-highway markets ~~to remain weak.~~in China and India remains strong.

~~We expect industry~~Industry production of medium-duty trucks in North America ~~to decline.~~should remain strong.

~~We expect~~ North American construction markets may stabilize.

Market demand may continue to ~~weaken.~~improve in global mining.

~~We believe weak~~North American heavy-duty truck demand may stabilize.

Challenges

Power generation markets may remain soft.

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

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

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

~~We expect demand for equipment in global mining markets~~are expected to remain weak.

Demand has improved in certain markets and we expect demand will continue to improve over time, as in prior economic cycles. We ~~could close or restructure additional manufacturing facilities~~are well positioned to benefit as ~~we evaluate the appropriate size and structure of our manufacturing capacity, which could result in additional charges.~~market conditions improve.

RESULTS OF OPERATIONS


		Three months ended						Favorable/							Nine months ended							Favorable/						Three months ended							Favorable/							Six months ended						Favorable/
		October 2, 2016		September 27, 2015				(Unfavorable)							October 2, 2016				September 27, 2015			(Unfavorable)						July 2, 2017				July 3, 2016			(Unfavorable)							July 2, 2017		July 3, 2016				(Unfavorable)
In millions (except per share amounts)		October 2, 2016					Amount				Percent							Amount				Percent																				July 2, 2017		July 3, 2016
In millions, except per share amounts																											In millions, except per share amounts	July 2, 2017			July 2, 2017				July 3, 2016				Amount				Percent	July 2, 2017				July 3, 2016				Amount				Percent
NET SALES	NET SALES	$	4,187	September 27, 2015	$	4,620			$	(433	)		(9	)%	October 2, 2016		$	13,006	September 27, 2015			$	14,344		$	(1,338	)		(9	)%	July 2, 2017			NET SALES				$	550			12	%				$	July 3, 2016			848			10	%
Cost of sales	Cost of sales	3,108		3,412				304				9	%		9,674				10,609			935			9	%	Cost of sales	3,829				3,331			July 3, 2016	(498		)		(15	)%		7,290	July 2, 2017		6,566				(724		)		(11	)%
GROSS MARGIN	GROSS MARGIN	1,079		1,208				(129		)		(11	)%		3,332				3,735			(403		)	(11	)%	GROSS MARGIN	1,249				1,197			52				4	%		2,377		2,253				124				6	%
OPERATING EXPENSES AND INCOME	OPERATING EXPENSES AND INCOME																										OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses	Selling, general and administrative expenses	513		530				17				3	%		1,527				1,584			57			4	%	Selling, general and administrative expenses	596				524			(72		)		(14	)%		1,133		1,014				(119		)		(12	)%
Research, development and engineering expenses	Research, development and engineering expenses	157		197				40				20	%		478				558			80			14	%	Research, development and engineering expenses	174				155			(19		)		(12	)%		332		321				(11		)		(3	)%
Equity, royalty and interest income from investees	Equity, royalty and interest income from investees	74		78				(4		)		(5	)%		234				240			(6		)	(3	)%	Equity, royalty and interest income from investees	98				88			10				11	%		206		160				46				29	%
Loss contingency	Loss contingency	99		—				(99		)		NM			138				—			(138		)	NM		Loss contingency	—				39			39				100	%		—		39				39				100	%
Other operating expense, net		—		(2		)		2				100	%		(2		)		(5		)	3			60	%
Other operating income (expense), net																											Other operating income (expense), net	18				—			18				NM			23		(2		)		25				NM
OPERATING INCOME	OPERATING INCOME	384		557				(173		)		(31	)%		1,421				1,828			(407		)	(22	)%	OPERATING INCOME	595				567			28				5	%		1,141		1,037				104				10	%
Interest income	Interest income	6		9				(3		)		(33	)%		18				20			(2		)	(10	)%	Interest income	5				6			(1		)		(17	)%		7		12				(5		)		(42	)%
Interest expense	Interest expense	16		16				—				—	%		51				47			(4		)	(9	)%	Interest expense	21				16			(5		)		(31	)%		39		35				(4		)		(11	)%
Other income, net		8		11				(3		)		(27	)%		34				12			22			NM
Other income (expense), net																											Other income (expense), net	20				18			2				11	%		38		26				12				46	%
INCOME BEFORE INCOME TAXES	INCOME BEFORE INCOME TAXES	382		561				(179		)		(32	)%		1,422				1,813			(391		)	(22	)%	INCOME BEFORE INCOME TAXES	599				575			24				4	%		1,147		1,040				107				10	%
Income tax expense	Income tax expense	82		169				87				51	%		362				521			159			31	%	Income tax expense	158				148			(10		)		(7	)%		301		280				(21		)		(8	)%
CONSOLIDATED NET INCOME	CONSOLIDATED NET INCOME	300		392				(92		)		(23	)%		1,060				1,292			(232		)	(18	)%	CONSOLIDATED NET INCOME	441				427			14				3	%		846		760				86				11	%
Less: Net income attributable to noncontrolling interests	Less: Net income attributable to noncontrolling interests	11		12				1				8	%		44				54			10			19	%	Less: Net income attributable to noncontrolling interests	17				21			4				19	%		26		33				7				21	%
NET INCOME ATTRIBUTABLE TO CUMMINS INC.	NET INCOME ATTRIBUTABLE TO CUMMINS INC.	$	289	$	380			$	(91	)		(24	)%		$	1,016			$	1,238		$	(222	)	(18	)%	NET INCOME ATTRIBUTABLE TO CUMMINS INC.	$	424			$	406		$	18			4	%		$	820	$	727			$	93			13	%
Diluted Earnings Per Common Share Attributable to Cummins Inc.	Diluted Earnings Per Common Share Attributable to Cummins Inc.	$	1.72	$	2.14			$	(0.42	)		(20	)%		$	5.99			$	6.90		$	(0.91	)	(13	)%	Diluted Earnings Per Common Share Attributable to Cummins Inc.	$	2.53			$	2.40		$	0.13			5	%		$	4.88	$	4.26			$	0.62			15	%

"NM" - not meaningful information


	Three months ended					Favorable/ (Unfavorable)			Nine months ended						Favorable/ (Unfavorable)			Three months ended						Favorable/ (Unfavorable)			Six months ended						Favorable/ (Unfavorable)
	October 2, 2016			September 27, 2015				October 2, 2016			September 27, 2015				Favorable/ (Unfavorable)		July 2, 2017			July 3, 2016				Favorable/ (Unfavorable)		July 2, 2017			July 3, 2016				Favorable/ (Unfavorable)
Percent of sales			Percentage Points					October 2, 2016		Percentage Points						Percentage Points						Percentage Points				July 2, 2017			July 3, 2016
Gross margin	October 2, 2016		25.8	September 27, 2015	%	Favorable/ (Unfavorable)	26.1	%		(0.3	September 27, 2015	)		25.6	%		July 2, 2017	26.0	%	July 3, 2016			(0.4	)		24.6	%		26.4	%		(1.8	)		24.6	%	25.5	%	(0.9	)
Selling, general and administrative expenses	12.3	%		11.5	%	(0.8	)		11.7	%		11.0	%		(0.7	)		11.7	%		11.6	%		(0.1	)		11.7	%		11.5	%		(0.2	)
Research, development and engineering expenses	3.7	%		4.3	%	0.6			3.7	%		3.9	%		0.2			3.4	%		3.4	%		—			3.4	%		3.6	%		0.2

Net Sales

Net sales for the three months ended ~~October~~July 2, ~~2016, decreased~~2017, increased by ~~$433~~$550 million versus the comparable period in ~~2015.~~2016. The primary drivers were as follows:

Engine segment sales ~~decreased~~increased 15 percent primarily due to higher demand in North American medium-duty truck and bus, North American heavy-duty truck markets and improved demand in global off-highway markets.

Distribution segment sales increased 12 percent primarily due to ~~lower demand in North American on-highway markets and lower demand in most North American off-highway markets, partially offset by increased sales in the light-duty automotive market.~~

Power Systems segment sales decreased 13 percent primarily due to lower demand in all reporting structures and decreased sales in most regions with the largest declines in Asia (excluding China), Middle East, North America and Africa.

~~Components segment sales decreased 8 percent primarily due to lower demand in most lines of businesses, primarily 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 British pound and Chinese renminbi.~~

~~Distribution segment sales decreased 3 percent, primarily due to a decline~~an increase in organic sales ~~in engine markets, partially offset by~~and higher sales related to the acquisition of North American distributors since December 31, ~~2014.~~2015.

Components segment sales increased 14 percent primarily due to higher demand across all lines of businesses, primarily in China, North America and India.

Power Systems segment sales increased 10 percent primarily due to higher demand in industrial markets.

These increases were unfavorably impacted by foreign currency fluctuations of approximately 1 percent, primarily in the Chinese renminbi and British pound.

Net sales for the ~~nine~~six months ended ~~October~~July 2, ~~2016, decreased by $1.3 billion~~2017, increased $848 million versus the comparable period in ~~2015.~~2016. The primary drivers were as follows:

Distribution segment sales increased 12 percent primarily due to an increase in organic sales and higher sales related to the acquisition of North American distributors since December 31, 2015.

Engine segment sales ~~decreased~~increased 9 percent primarily due to higher demand in off-highway markets, North American medium-duty truck and bus and North American heavy-duty truck markets.

Components segment sales increased 11 percent primarily due to ~~lower~~higher demand across all lines of businesses, primarily in ~~North American on-highway markets~~China and ~~lower demand in most global off-highway markets, partially offset by increased sales in the light-duty automotive market.~~India.

Power Systems segment sales ~~decreased 16~~increased 10 percent primarily due to lower demand in all reporting structures and decreased sales in most regions with the largest declines in North America, China, Asia, Middle East, Africa, Western Europe and Mexico, partially offset by increased sales in Russia.

~~Components segment sales decreased 7 percent primarily due to lower demand in all lines of business, mostly in North American on-highway markets, partially offset by~~ higher demand in ~~China.~~industrial markets, especially global mining, North American oil and gas markets and North American rail markets.

~~Foreign~~These increases were unfavorably impacted by foreign currency fluctuations ~~unfavorably impacted sales by~~of approximately 21 percent, primarily in the ~~Chinese renminbi,~~ British pound ~~Brazilian real, Indian rupee, Canadian dollar, Australian dollar~~ and ~~South African rand.~~Chinese renminbi.

Sales to international markets (excluding the U.S. and Canada), based on location of customers, for ~~both~~ the three and ~~nine~~six months months ended ~~October~~July 2, ~~2016,~~2017, were 42 percent and 42 percent of total net sales, respectively, compared with 42 percent and 41 percent of total net sales ~~compared with 38 percent and 39 percent of total net sales, respectively,~~ for the comparable periods in ~~2015.~~2016. A more detailed discussion of sales by segment is presented in the “OPERATING SEGMENT RESULTS” section.

Gross Margin

Gross margin ~~decreased $129~~increased $52 million for the three months ended ~~October~~July 2, ~~2016,~~2017, versus the comparable period in ~~2015,~~2016 and decreased ~~0.3~~1.8 points as a percentage of sales. The ~~decrease~~increase in gross margin dollars was primarily due to ~~lower volume and unfavorable mix, partially offset by lower material and commodity costs.~~

Gross margin decreased $403 million for the nine months ended October 2, 2016, versus the comparable period in 2015, and decreased 0.4 points as a percentage of sales. The decrease in gross margin dollars was primarily due to lowerhigher volumes, unfavorable mix and unfavorable foreign currency fluctuations (primarily in the Canadian dollar, Australian dollar, Brazilian real and South African rand), partially offset by lower material and commodity costs, lower warranty expense and improved Distribution segment margins related to the acquisition of North American distributors since December 31, ~~2014.~~2015 and lower material costs, partially offset by higher warranty costs ($87 million primarily due to changes in estimates in the Engine and Component segments and campaigns in the Power Systems segment) and increased variable compensation expense of $93 million.

Gross margin increased $124 million for the six months ended July 2, 2017, versus the comparable period in 2016 and decreased 0.9 points as a percentage of sales. The increase in gross margin dollars was primarily due to higher volumes, lower material costs, improved Distribution segment margins related to the acquisition of North American distributors since December 31, 2015, favorable pricing and favorable foreign currency fluctuations (primarily the British pound, South African rand and Brazilian real), partially offset by higher warranty costs ($120 million primarily due to changes in estimates in the Engine and Component segments and campaigns in the Power Systems segment) and increased variable compensation expense of $109 million.

The provision for base warranties issued, excluding campaigns, as a percent of sales for the three and ~~nine~~six months ended ~~October~~July 2, ~~2016,~~2017, was ~~1.5~~1.8 percent and ~~1.7~~1.9 percent, respectively, compared to 1.8 percent and ~~2.0~~1.9 percent for the comparable periods in ~~2015.~~2016. 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 $17~~increased $72 million for the three months ended ~~October~~July 2, ~~2016,~~2017, versus the comparable period in ~~2015,~~2016, primarily due to ~~lower~~higher variable compensation expenses ~~as a result of restructuring actions taken in the fourth quarter of 2015, partially offset by~~($49 million) and higher consulting ~~expenses.~~expenses ($10 million). Compensation and related expenses include salaries, fringe benefits and variable compensation. Overall, selling, general and administrative expenses, as a percentage of sales, increased to ~~12.3~~11.7 percent in the three months ended ~~October~~July 2, ~~2016,~~2017, from ~~11.5~~11.6 percent in the comparable period in ~~2015.~~2016.

Selling, general and administrative expenses ~~decreased $57~~increased $119 million for the ~~nine~~six months ended ~~October~~July 2, ~~2016,~~2017, versus the comparable period in ~~2015,~~2016, primarily due to ~~lower~~higher variable compensation expenses ~~as a result of restructuring actions taken in the fourth quarter of 2015,~~($64 million) and ~~lower~~higher consulting ~~expenses.~~ expenses ($30 million).Overall, selling, general and administrative expenses, as a percentage of sales, increased to 11.7 percent in the ~~nine~~six months ended ~~October~~July 2, ~~2016,~~2017, from ~~11.0~~11.5 percent in the comparable period in ~~2015.~~2016.

Research, Development and Engineering Expenses

Research, development and engineering expenses ~~decreased $40~~increased $19 million for the three months ended ~~October~~July 2, ~~2016,~~2017, versus the comparable period in ~~2015,~~2016, primarily due to ~~lower consulting expenses, decreased~~increased variable compensation expenses ~~as a result of restructuring actions taken in the fourth quarter of 2015,~~($13 million) and ~~increased~~lower expense recovery from customers ($5 million). Overall, research, development and ~~external parties. Compensation~~engineering expenses remained flat as a percentage of sales, versus the comparable period in 2016 .

Research, development and ~~related~~engineering expenses ~~include salaries, fringe benefits and~~increased $11 million for the six months ended July 2, 2017, versus the comparable period in 2016, primarily due to increased variable ~~compensation.~~compensation expense ($13 million), partially offset by higher

expense recovery from customers ($2 million). Overall, research, development and engineering expenses, as a percentage of sales, decreased to ~~3.7~~3.4 percent in the ~~three~~six months ended ~~October~~July 2, ~~2016,~~2017, from ~~4.3~~3.6 percent in the comparable period in ~~2015.~~

Research, development and engineering expenses decreased $80 million for the nine months ended October 2, 2016, versus the comparable period in 2015, primarily due to lower consulting expenses and decreased compensation expenses as a result of restructuring actions taken in the fourth quarter of 2015. Overall, research, development and engineering expenses, as a

~~percentage of sales, decreased to 3.7 percent in the nine months ended October 2, 2016, from 3.9 percent in the comparable period in 2015.~~2016.

Research activities continue to focus on development of new products to meet future emission standards around the world and improvements in fuel economy ~~performance.~~performance of diesel and natural gas powered engines.

Equity, Royalty and Interest Income from Investees

Equity, royalty and interest income from investees ~~decreased $4~~increased $10 million for the three months ended ~~October~~July 2, ~~2016,~~2017, versus the comparable period in ~~2015,~~2016, primarily due to ~~the impact of an asset impairment incurred by one of our Power Systems joint ventures ($8 million), partially offset by increased~~higher earnings at ~~Chongqing~~Dongfeng Cummins Engine Company, Ltd.

Equity, royalty and interest income from investees ~~decreased $6~~increased $46 million for the ~~nine~~six months ended ~~October~~July 2, ~~2016,~~2017, versus the comparable period in ~~2015,~~2016, primarily due to ~~lower earnings from North American distributors ($9 million), the impact of an asset impairment incurred by one of our Power Systems joint ventures ($8 million) and decreased~~higher earnings at Dongfeng Cummins Engine Company, Ltd. ~~($8 million). These decreases were partially offset by higher earnings at~~and Beijing Foton Cummins Engine Co., Ltd. ~~($12 million).~~

~~Loss Contingency~~

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

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


	Three months ended						Nine months ended						Three months ended						Six months ended
In millions	October 2, 2016			September 27, 2015			October 2, 2016			September 27, 2015			July 2, 2017			July 3, 2016			July 2, 2017			July 3, 2016
Royalty income, net													$	11		$	6		$	20		$	13
Amortization of intangible assets													(1		)	(2		)	(3		)	(5		)
Loss on write off of assets	$	(5	)	$	(3	)	$	(14	)	$	(3	)	(1		)	(4		)	(2		)	(9		)
Amortization of intangible assets	(2		)	(4		)	(7		)	(15		)
Royalty income, net	7			4			20			14
Other, net	—			1			(1		)	(1		)	9			—			8			(1		)
Total other operating expense, net	$	—		$	(2	)	$	(2	)	$	(5	)
Total other operating income (expense), net													$	18		$	—		$	23		$	(2	)

Interest Income

Interest income for the three ~~and nine~~ months ended ~~October~~July 2, ~~2016, decreased $3 million and $2 million, respectively,~~2017, remained relatively flat versus the comparable ~~periods~~period in ~~2015~~2016. Interest income for the six months ended July 2, 2017, decreased $5 million versus the comparable period in 2016, primarily due to ~~interest earned on a favorable tax settlement in Brazil in 2015.~~lower short-term investments.

Interest Expense

Interest expense for the three months ended ~~October~~July 2, ~~2016, remained flat~~2017, increased $5 million versus the comparable period in ~~2015.~~

2016, primarily due to hedge ineffectiveness on our interest rate swap. Interest expense for the ~~nine~~six months ended ~~October~~July 2, ~~2016,~~2017, increased $4 million versus the comparable period in ~~2015,~~2016, primarily due to ~~an increase in total weighted average debt outstanding.~~

hedge ineffectiveness on our interest rate swap.

Other Income (Expense), Net

Other income (expense), net was as follows:


	Three months ended						Nine months ended						Three months ended						Six months ended
In millions	October 2, 2016			September 27, 2015			October 2, 2016			September 27, 2015			July 2, 2017			July 3, 2016			July 2, 2017			July 3, 2016
Change in cash surrender value of corporate owned life insurance	$	10		$	(11	)	$	33		$	(9	)	$	16		$	15		$	29		$	23
Dividend income	1			—			3			2			2			1			3			2
Gain on fair value adjustment for consolidated investees	—			17			—			17
Foreign currency (loss) gain, net	—			3			(11		)	(2		)
Foreign currency gain (loss), net													1			(8		)	3			(11		)
Bank charges	(3		)	(3		)	(7		)	(7		)	(2		)	(1		)	(5		)	(4		)
Other, net	—			5			16			11			3			11			8			16
Total other income, net	$	8		$	11		$	34		$	12
Total other income (expense), net													$	20		$	18		$	38		$	26

Income Tax Expense

Our effective tax rate for the year is expected to approximate ~~25.5~~26.0 percent, excluding any one-time items that may arise. 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 and the research tax credit.

Our effective tax rate for the three and ~~nine~~six months ended ~~October~~July 2, ~~2016,~~2017, was ~~21.5~~26.4 percent and ~~25.5~~26.2 percent, ~~respectively.~~respectively, and contained only immaterial discrete items.

Our effective tax rate for the three and ~~nine~~six months ended ~~September 27, 2015,~~July 3, 2016, was ~~30.1~~25.7 percent and ~~28.7~~26.9 percent, ~~respectively.~~ respectively, and contained only immaterial discrete items.

The tax rate for the nine months ended September 27, 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.

~~The decrease~~changes in the effective tax rate for the three and ~~nine~~six months ended ~~October~~July 2, ~~2016,~~2017, versus the comparable periods in ~~2015 was~~2016, were primarily due to ~~favorable changes~~differences in the jurisdictional mix of pre-tax income.

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 ~~October~~July 2, ~~2016, remained relatively flat~~2017, decreased $4 million versus the comparable period in ~~2015.~~2016, primarily due to the acquisition of the remaining interest in Wuxi Cummins Turbo Technologies Co. Ltd, in the fourth quarter of 2016.

Noncontrolling interests in income of consolidated subsidiaries for the ~~nine~~six months ended ~~October~~July 2, ~~2016,~~2017, decreased ~~$10~~$7 million versus the comparable period in 2016, primarily due to ~~lower earnings as a result~~the acquisition of the ~~consolidation~~remaining interest in Wuxi Cummins Turbo Technologies Co. Ltd, in the fourth quarter of ~~North American distributors since December 31, 2014 and lower earnings at Cummins India Ltd.~~2016.

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 ~~October~~July 2, ~~2016, decreased $91~~2017, increased $18 million and ~~$0.42~~$0.13 per share, respectively versus the comparable period in ~~2015,~~2016, primarily due to ~~lower~~significantly higher net sales, higher gross margin, ~~and~~the absence of an accrual for a loss contingency recorded in the second quarter of 2016, higher equity, royalty and interest income from investees, partially offset by ~~decreased~~increased selling, general and administrative expenses, higher research, development and engineering expenses and a ~~lower~~higher effective tax ~~rate and decreased selling, general and administrative expenses.~~ rate. Diluted earnings per share for the three months ended July 2, 2017, benefited $0.01 from fewer weighted average shares outstanding due to purchases under the stock repurchase program.

Net income and diluted earnings per share attributable to Cummins Inc. for the ~~nine~~six months ended ~~October~~July 2, ~~2016, decreased $222~~2017, increased $93 million and ~~$0.91~~$0.62 per share, respectively versus the comparable period in ~~2015,~~2016, primarily due to ~~lower~~significantly higher net sales, higher gross margin, higher equity, royalty and interest income from investees, the absence of an accrual for a loss contingency recorded in the second quarter of 2016 and a lower effective tax rate, partially offset by ~~lower research, development and engineering expenses, decreased~~increased selling, general and administrative expenses and ~~a lower effective tax rate.~~higher research, development and engineering expenses. Diluted earnings per share for the ~~nine~~six months ended ~~October~~July 2, ~~2016,~~2017, benefited ~~$0.18~~$0.01 from fewer weighted average shares outstanding, primarily due to purchases under the stock repurchase ~~programs.~~program.

Comprehensive Income - Foreign Currency Translation Adjustment

The foreign currency translation adjustment was a net ~~loss~~gain of ~~$29~~$102 million and ~~$299~~$182 million, respectively, for the three and ~~nine~~six months ended ~~October~~July 2, ~~2016,~~2017, compared to a net loss of ~~$221~~$213 million and ~~$252~~$270 million for the three and ~~nine~~six months ended ~~September 27, 2015, respectively,~~July 3, 2016, and was driven by the following:


	Three months ended								Three months ended
	October 2, 2016				September 27, 2015				July 2, 2017			July 3, 2016
In millions	Translation adjustment			Primary currency driver vs. U.S. dollar	Translation adjustment			Primary currency driver vs. U.S. dollar	Translation adjustment		Primary currency driver vs. U.S. dollar	Translation adjustment			Primary currency driver vs. U.S. dollar
Wholly owned subsidiaries	$	(33	)	British pound, Brazilian real offset by Indian rupee	$	(189	)	British pound, Brazilian real
Wholly-owned subsidiaries									$	90	British pound, Chinese renminbi	$	(193	)	British pound, Chinese renminbi offset by Brazilian real
Equity method investments	1			Indian rupee, Japanese yen offset by Chinese renminbi	(19		)	Chinese renminbi, Indian rupee	11		Chinese renminbi	(14		)	Chinese renminbi, Indiana rupee offset by Japanese yen
Consolidated subsidiaries with a non-controlling interest	3			Indian rupee	(13		)	Indian rupee
Consolidated subsidiaries with a noncontrolling interest									1		Indian rupee	(6		)	Indian rupee, Chinese renminbi
Total	$	(29	)		$	(221	)		$	102		$	(213	)



	Nine months ended								Six months ended
	October 2, 2016				September 27, 2015				July 2, 2017			July 3, 2016
In millions	Translation adjustment			Primary currency driver vs. U.S. dollar	Translation adjustment			Primary currency driver vs. U.S. dollar	Translation adjustment		Primary currency driver vs. U.S. dollar	Translation adjustment			Primary currency driver vs. U.S. dollar
Wholly owned subsidiaries	$	(288	)	British pound, Chinese renminbi offset by Brazilian real	$	(218	)	Brazilian real, British pound
Wholly-owned subsidiaries									$	147	British pound, Indian rupee, Chinese renminbi	$	(255	)	British pound, Chinese renminbi offset by Brazilian real
Equity method investments	(8		)	Chinese renminbi offset by Japanese yen, Mexican peso⁽¹⁾	(19		)	Chinese renminbi, Indian rupee	21		Chinese renminbi, Indian rupee	(9		)	Chinese renminbi, Indian rupee offset by Japanese yen, Mexican peso
Consolidated subsidiaries with a non-controlling interest	(3		)	Indian rupee, Chinese renminbi	(15		)	Indian rupee
Consolidated subsidiaries with a noncontrolling interest									14		Indian rupee	(6		)	Indian rupee, Chinese renminbi
Total	$	(299	)		$	(252	)		$	182		$	(270	)

⁽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 Engine, Distribution, Components and Power Systems segments. This reporting structure is organized according to the products and markets each segment serves. We use segment EBIT as ~~the~~a primary basis for the ~~Chief Operating Decision Maker (CODM)~~CODM to evaluate the performance of each of our operating segments.

~~As previously announced, beginning with the second quarter of 2016, we realigned~~ Segment amounts exclude certain ~~of our reportable segments~~expenses not specifically identifiable 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 were 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.

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 additionSee Note 12, "OPERATING SEGMENTS," 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 effectiveCondensed Consolidated Financial Statements 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.additional information.

Following is a discussion of results for each of our operating segments.

Engine Segment Results

Financial data for the Engine segment was as follows:


	Three months ended						Favorable/					Nine months ended						Favorable/					Three months ended						Favorable/					Six months ended						Favorable/
	October 2,			September 27,			(Unfavorable)					October 2,			September 27,			(Unfavorable)					July 2,			July 3,			(Unfavorable)					July 2,			July 3,			(Unfavorable)
In millions	2016			2015			Amount			Percent		2016			2015			Amount			Percent		2017			2016			Amount			Percent		2017			2016			Amount			Percent
External sales ⁽¹⁾	$	1,357		$	1,627		$	(270	)	(17	)%	$	4,350		$	5,150		$	(800	)	(16	)%	$	1,711		$	1,504		$	207		14	%	$	3,168		$	2,993		$	175		6	%
Intersegment sales ⁽¹⁾	502			475			27			6	%	1,487			1,422			65			5	%	596			498			98			20	%	1,162			985			177			18	%
Total sales	1,859			2,102			(243		)	(12	)%	5,837			6,572			(735		)	(11	)%	2,307			2,002			305			15	%	4,330			3,978			352			9	%
Depreciation and amortization	42			47			5			11	%	121			140			19			14	%	46			41			(5		)	(12	)%	90			80			(10		)	(13	)%
Research, development and engineering expenses	56			73			17			23	%	166			195			29			15	%	63			53			(10		)	(19	)%	117			110			(7		)	(6	)%
Equity, royalty and interest income from investees	38			33			5			15	%	120			107			13			12	%	56			46			10			22	%	128			82			46			56	%
Loss contingency	99			—			(99		)	NM		138			—			(138		)	NM		—			39			39			100	%	—			39			39			100	%
Interest income	3			6			(3		)	(50	)%	8			10			(2		)	(20	)%	2			3			(1		)	(33	)%	3			5			(2		)	(40	)%
Segment EBIT	89			217			(128		)	(59	)%	492			695			(203		)	(29	)%	277			206			71			34	%	506			403			103			26	%

							Percentage Points											Percentage Points											Percentage Points											Percentage Points
Segment EBIT as a percentage of total sales	4.8		%	10.3		%				(5.5	)	8.4		%	10.6		%				(2.2	)	12.0		%	10.3		%				1.7		11.7		%	10.1		%				1.6

~~"NM" - not meaningful information~~

⁽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 Engine segment reorganized its reporting structure as follows:~~

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

~~Medium-duty truck and bus -~~ We manufacture 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 and natural gas engines for school buses, transit buses and shuttle buses worldwide,

~~with key markets including North America, Europe, Latin America and Asia, and diesel engines for Class A motor homes (RVs), primarily in North America.~~

~~Light-duty automotive (Pickup and Light Commercial Vehicle (LCV)) -~~ ~~We manufacture 105 to 385 horsepower diesel engines, including engines for the pickup truck market for Chrysler and Nissan in North America, and LCV markets in Europe, Latin America and Asia.~~

~~Off-highway -~~ We provide diesel engines that range from 60 to 755 horsepower to 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.

Sales for our Engine segment by market were as follows:


	Three months ended				Favorable/					Nine months ended				Favorable/					Three months ended				Favorable/				Six months ended				Favorable/
	October 2,		September 27,		(Unfavorable)					October 2,		September 27,		(Unfavorable)					July 2,		July 3,		(Unfavorable)				July 2,		July 3,		(Unfavorable)
In millions	2016		2015		Amount			Percent		2016		2015		Amount			Percent		2017		2016		Amount		Percent		2017		2016		Amount		Percent
Heavy-duty truck	$	625	$	784	$	(159	)	(20	)%	$	1,878	$	2,416	$	(538	)	(22	)%	$	714	$	622	$	92	15	%	$	1,334	$	1,253	$	81	6	%
Medium-duty truck and bus	517		585		(68		)	(12	)%	1,666		1,867		(201		)	(11	)%	701		600		101		17	%	1,245		1,149		96		8	%
Light-duty automotive	345		339		6			2	%	1,172		1,074		98			9	%	429		394		35		9	%	852		827		25		3	%
Total on-highway	1,487		1,708		(221		)	(13	)%	4,716		5,357		(641		)	(12	)%	1,844		1,616		228		14	%	3,431		3,229		202		6	%
Off-highway	372		394		(22		)	(6	)%	1,121		1,215		(94		)	(8	)%	463		386		77		20	%	899		749		150		20	%
Total sales	$	1,859	$	2,102	$	(243	)	(12	)%	$	5,837	$	6,572	$	(735	)	(11	)%	$	2,307	$	2,002	$	305	15	%	$	4,330	$	3,978	$	352	9	%

Unit shipments by engine classification (including unit shipments to Power Systems and off-highway engine units included in their respective classification) were as follows:


	Three months ended		Favorable/				Nine months ended		Favorable/				Three months ended		Favorable/			Six months ended		Favorable/
	October 2,	September 27,	(Unfavorable)				October 2,	September 27,	(Unfavorable)				July 2,	July 3,	(Unfavorable)			July 2,	July 3,	(Unfavorable)
	2016	2015	Amount		Percent		2016	2015	Amount		Percent		2017	2016	Amount	Percent		2017	2016	Amount	Percent
Heavy-duty	20,100	28,600	(8,500	)	(30	)%	60,500	90,100	(29,600	)	(33	)%	24,100	20,700	3,400	16	%	43,300	40,400	2,900	7	%
Medium-duty	53,400	59,600	(6,200	)	(10	)%	171,100	187,400	(16,300	)	(9	)%	71,600	62,300	9,300	15	%	131,900	117,700	14,200	12	%
Light-duty	49,800	47,800	2,000		4	%	168,600	152,400	16,200		11	%	65,600	57,100	8,500	15	%	128,700	118,800	9,900	8	%
Total unit shipments	123,300	136,000	(12,700	)	(9	)%	400,200	429,900	(29,700	)	(7	)%	161,300	140,100	21,200	15	%	303,900	276,900	27,000	10	%

Sales

Engine segment sales for the three months ended ~~October~~July 2, ~~2016, decreased $243~~2017, increased $305 million versus the comparable period in ~~2015. The following were the primary drivers:~~

~~Heavy-duty truck engine sales decreased $159 million primarily due to lower demand in the North American heavy-duty truck market with decreased engine shipments of 36 percent.~~2016, driven by:

Medium-duty truck and bus sales ~~decreased $68~~increased $101 million primarily due to ~~lower~~higher demand in ~~global~~North American medium-duty truck markets with ~~decreased~~increased engine shipments of ~~18 percent, primarily in North America, Western Europe and Latin America (excluding Brazil).~~35 percent.

~~Off-highway~~Heavy-duty truck sales ~~decrease~~increased $2292 million primarily due to ~~decreased engine~~higher demand in North American heavy-duty truck markets with increased shipments of 19 percent.

Off-highway sales increased $77 million primarily due to ~~most~~improved demand in global industrial markets, especially in ~~North America, partially offset by~~international construction markets, with increased unit shipments of 2245 percent in ~~international construction markets.~~

The decreases above were partially offset by an increase in light-duty automotive sales of $6 million primarily due to new sales for the Nissan pick-up truck platform launched in the second half of 2015.China.

Total on-highway-related sales for the three months ended ~~October~~July 2, ~~2016,~~2017, were 80 percent of total engine segment sales, compared to 81 percent for the comparable period in ~~2015.~~2016.

Engine segment sales for the ~~nine~~six months ended ~~October~~July 2, ~~2016, decreased $735~~2017, increased $352 million versus the comparable period in ~~2015.~~2016. The following were ~~the~~ primary drivers:

~~Heavy-duty truck engine~~Off-highway sales ~~decreased $538~~increased $150 million primarily due to ~~lower~~improved demand in ~~the North American heavy-duty truck market~~global industrial markets, especially in international construction markets, with ~~decreased engine~~increased unit shipments of ~~39 percent.~~

54 percent in China and Australia.

Medium-duty truck and bus sales ~~decreased $201~~increased $96 million primarily due to ~~lower~~higher demand in ~~most global~~North American medium-duty truck markets with ~~decreased~~increased engine shipments of ~~18 percent, primarily in North America, Brazil and Mexico.~~12 percent.

~~Off-highway~~Heavy-duty truck sales ~~decrease~~d ~~$94 million~~ ~~primarily due to decreased engine shipments in most North American industrial markets, partially offset by~~ increased ~~unit shipments of 21 percent in international construction markets.~~

~~The decreases above were partially offset by an increase in light-duty automotive sales of $98~~$81 million primarily due to ~~new sales for the Nissan pick-up~~higher demand in North American heavy-duty truck ~~platform launched in the second half of 2015.~~markets.

Total on-highway-related sales for the ~~nine~~six months ended ~~October~~July 2, ~~2016,~~2017, were 8179 percent of total engine segment sales, compared to 8281 percent for the comparable period in ~~2015.~~2016.

Segment EBIT

Engine segment EBIT for the three months ended ~~October~~July 2, ~~2016, decreased $128~~2017, increased $71 million versus the comparable period in ~~2015~~2016, primarily due to ~~an additional accrual for~~higher gross margin and the absence of a loss contingency ~~and lower gross margin,~~recorded in the second quarter of 2016, partially offset by ~~lower research, development and engineering expenses and lower~~higher selling, general and administrative expenses.

Engine segment EBIT for the ~~nine~~six months ended ~~October~~July 2, ~~2016, decreased $203~~2017, increased $103 million versus the comparable period in 2016 primarily due to higher equity, royalty and interest income from investees, improved gross margin and the absence of a loss contingency recorded in the second quarter of 2016, partially offset by higher selling, general and administrative expenses. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows:



	Three months ended							Six months ended
	July 2, 2017 vs. July 3, 2016							July 2, 2017 vs. July 3, 2016
	Favorable/(Unfavorable) Change							Favorable/(Unfavorable) Change
In millions	Amount			Percent		Percentage point change as a percent of total sales		Amount			Percent		Percentage point change as a percent of total sales
Gross margin	$	44		11	%	(0.7	)	$	44		6	%	(0.5	)
Selling, general and administrative expenses	(19		)	(13	)%	0.1		(32		)	(12	)%	(0.2	)
Research, development and engineering expenses	(10		)	(19	)%	(0.1	)	(7		)	(6	)%	0.1
Equity, royalty and interest income from investees	10			22	%	0.1		46			56	%	0.9
Loss contingency ⁽¹⁾	39			NM		NM		39			NM		NM

"NM" - not meaningful information

⁽¹⁾See Note 9, "COMMITMENTS AND CONTINGENCIES," to the Condensed Consolidated Financial Statements for additional information.

The increase in gross margin dollars for the three months ended July 2, 2017, versus the comparable period in 2016, was primarily due to higher volumes and favorable mix, partially offset by increased warranty costs related to claims for certain 2013 and 2014 engines and higher variable compensation expense. The increases in selling, general and administrative expenses and research, development and engineering expenses were primarily due to higher variable compensation expenses. The increase in equity, royalty and interest income from investees was primarily due to higher earnings at Dongfeng Cummins Engine Company, Ltd.

The increase in gross margin dollars for the six months ended July 2, 2017, versus the comparable period in 2016, was primarily due to higher volumes, favorable mix and improved pricing, partially offset by increased warranty costs related to claims for certain 2013 and 2014 engines and higher variable compensation expense. The increase in selling, general and administrative expenses was primarily due to higher variable compensation expense and higher consulting expenses. The increase in research, development and engineering expenses was primarily due to higher variable compensation expense. The increase in equity, royalty and interest income from investees was primarily due to higher earnings at Dongfeng Cummins Engine Company, Ltd. and Beijing Foton Cummins Engine Co.

Distribution Segment Results

Financial data for the Distribution segment was as follows:



	Three months ended						Favorable/					Six months ended						Favorable/
	July 2,			July 3,			(Unfavorable)					July 2,			July 3,			(Unfavorable)
In millions	2017			2016			Amount			Percent		2017			2016			Amount			Percent
External sales	$	1,716		$	1,538		$	178		12	%	$	3,353		$	2,996		$	357		12	%
Intersegment sales	6			6			—			—	%	14			11			3			27	%
Total sales	1,722			1,544			178			12	%	3,367			3,007			360			12	%
Depreciation and amortization	31			29			(2		)	(7	)%	61			57			(4		)	(7	)%
Research, development and engineering expenses	4			3			(1		)	(33	)%	8			7			(1		)	(14	)%
Equity, royalty and interest income from investees	13			19			(6		)	(32	)%	24			37			(13		)	(35	)%
Interest income	1			1			—			—	%	2			2			—			—	%
Segment EBIT	96			87			9			10	%	196			174			22			13	%

							Percentage Points											Percentage Points
Segment EBIT as a percentage of total sales	5.6		%	5.6		%				—		5.8		%	5.8		%				—

In the first quarter of 2017, our Distribution segment reorganized its regions to align with how the segment is managed. All prior year amounts have been reclassified to conform to our new regional structure. Sales for our Distribution segment by region were as follows:



	Three months ended				Favorable/					Six months ended				Favorable/
	July 2,		July 3,		(Unfavorable)					July 2,		July 3,		(Unfavorable)
In millions	2017		2016		Amount			Percent		2017		2016		Amount			Percent
North America	$	1,131	$	975	$	156		16	%	$	2,244	$	1,920	$	324		17	%
Asia Pacific	187		187		—			—	%	357		356		1			—	%
Europe	107		111		(4		)	(4	)%	204		212		(8		)	(4	)%
Africa and Middle East	86		100		(14		)	(14	)%	181		189		(8		)	(4	)%
China	75		55		20			36	%	133		114		19			17	%
India	52		46		6			13	%	95		87		8			9	%
Latin America	43		38		5			13	%	78		71		7			10	%
Russia	41		32		9			28	%	75		58		17			29	%
Total sales	$	1,722	$	1,544	$	178		12	%	$	3,367	$	3,007	$	360		12	%

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



	Three months ended				Favorable/				Six months ended				Favorable/
	July 2,		July 3,		(Unfavorable)				July 2,		July 3,		(Unfavorable)
In millions	2017		2016		Amount		Percent		2017		2016		Amount		Percent
Parts	$	759	$	642	$	117	18	%	$	1,504	$	1,290	$	214	17	%
Power generation	329		326		3		1	%	635		601		34		6	%
Service	320		297		23		8	%	639		596		43		7	%
Engines	314		279		35		13	%	589		520		69		13	%
Total sales	$	1,722	$	1,544	$	178	12	%	$	3,367	$	3,007	$	360	12	%

Sales

Distribution segment sales for the three months ended July 2, 2017, increased $178 million versus the comparable period in 2016, primarily due to an increase in organic sales of $113 million (primarily in North America) and $88 million of sales related to the acquisition of North American distributors since December 31, 2015, partially offset by unfavorable foreign currency fluctuations (primarily in the Chinese renminbi, Canadian dollar and British pound).

Distribution segment sales for the six months ended July 2, 2017, increased $360 million versus the comparable period in 2016 primarily due to an increase in organic sales of $214 million (primarily in North America) and $177 million of segment sales related to the acquisition of North American distributors since December 31, 2015, partially offset by unfavorable foreign currency fluctuations (primarily in the Chinese renminbi and British pound).

Segment EBIT

Distribution segment EBIT for the three months ended July 2, 2017, increased $9 million versus the comparable period in 2016, primarily due to higher gross margin, partially offset by higher selling, general and administrative expenses (mainly related to the acquisition of North American distributors since December 31, 2015).

Distribution segment EBIT for the six months ended July 2, 2017, increased $22 million versus the comparable period in 2016, primarily due to higher gross margin, partially offset by higher selling, general and administrative expenses (mainly related to the acquisition of North American distributors since December 31, 2015). Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows:



	Three months ended							Six months ended
	July 2, 2017 vs. July 3, 2016							July 2, 2017 vs. July 3, 2016
	Favorable/(Unfavorable) Change							Favorable/(Unfavorable) Change
In millions	Amount			Percent		Percentage point change as a percent of total sales		Amount			Percent		Percentage point change as a percent of total sales
Gross margin	$	35		13	%	0.3		$	68		13	%	0.1
Selling, general and administrative expenses	(27		)	(14	)%	(0.3	)	(42		)	(11	)%	0.1
Equity, royalty and interest income from investees	(6		)	(32	)%	(0.4	)	(13		)	(35	)%	(0.5	)

The increase in gross margin dollars for the three months ended July 2, 2017, versus the comparable period in 2016, was primarily due to higher volumes, the acquisition of North American distributors since December 31, 2015 and improved pricing, partially offset by higher product costs. The increase in selling, general and administrative expenses was primarily due to higher variable compensation expense and increased compensation expenses related to the acquisition of North American distributors. The decrease in equity, royalty and interest income from investees was primarily due to the acquisition of North American distributors.

The increase in gross margin for the six months ended July 2, 2017, versus the comparable period in 2016, was primarily due to improved pricing, the acquisition of North American distributors since December 31, 2015 and higher volumes, partially offset by higher product costs. The increase in selling, general and administrative expenses was primarily due to higher variable compensation expense, increased compensation expenses related to the acquisition of North American distributors and higher consulting expenses. The decrease in equity, royalty and interest income from investees was primarily due to the acquisition of North American distributors.

Components Segment Results

Financial data for the Components segment was as follows:



	Three months ended						Favorable/					Six months ended						Favorable/
	July 2,			July 3,			(Unfavorable)					July 2,			July 3,			(Unfavorable)
In millions	2017			2016			Amount			Percent		2017			2016			Amount			Percent
External sales ⁽¹⁾	$	1,064		$	933		$	131		14	%	$	2,044		$	1,830		$	214		12	%
Intersegment sales ⁽¹⁾	390			346			44			13	%	754			686			68			10	%
Total sales	1,454			1,279			175			14	%	2,798			2,516			282			11	%
Depreciation and amortization	38			32			(6		)	(19	)%	75			63			(12		)	(19	)%
Research, development and engineering expenses	57			51			(6		)	(12	)%	107			107			—			—	%
Equity, royalty and interest income from investees	15			12			3			25	%	28			20			8			40	%
Interest income	1			1			—			—	%	1			2			(1		)	(50	)%
Segment EBIT	190			190			—			—	%	369			353			16			5	%

							Percentage Points											Percentage Points
Segment EBIT as a percentage of total sales	13.1		%	14.9		%				(1.8	)	13.2		%	14.0		%				(0.8	)

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

In the first quarter of 2017, our Components segment reorganized its reporting structure to move an element of the emission solutions business to the fuel systems business to enhance operational, administrative and product development efficiencies. Prior year sales were reclassified to conform with this change.

Sales for our Components segment by business were as follows:



	Three months ended				Favorable/				Six months ended				Favorable/
	July 2,		July 3,		(Unfavorable)				July 2,		July 3,		(Unfavorable)
In millions	2017		2016		Amount		Percent		2017		2016		Amount		Percent
Emission solutions	$	674	$	603	$	71	12	%	$	1,290	$	1,192	$	98	8	%
Turbo technologies	307		276		31		11	%	594		541		53		10	%
Filtration	291		262		29		11	%	568		514		54		11	%
Fuel systems	182		138		44		32	%	346		269		77		29	%
Total sales	$	1,454	$	1,279	$	175	14	%	$	2,798	$	2,516	$	282	11	%

Sales

Components segment sales for the three months ended July 2, 2017, increased $175 million, across all lines of business, versus the comparable period in 2016. The following were the primary drivers:

Emission solutions sales increased $71 million primarily due to higher demand to meet new emission requirements in India and on-highway truck demand in China.

Fuel systems sales increased $44 million primarily due to higher demand in China and Mexico.

Turbo technologies sales increased $31 million primarily due to higher demand in North America and China.

Filtration sales increased $29 million primarily due to higher demand in North America and China.

These increases were partially offset by unfavorable foreign currency fluctuations (primarily in the Chinese renminbi, British pound and euro).

Components segment sales for the six months ended July 2, 2017, increased $282 million, across all lines of business, versus the comparable period in 2016. The following were the primary drivers:

Emission solutions sales increased $98 million primarily due to higher demand in China on-highway truck markets and higher demand to meet new emission requirements in India, partially offset by unfavorable pricing in North America.

Fuel systems sales increased $77 million primarily due to higher demand in China.

Filtration sales increased $54 million primarily due to higher demand in North America and China.

Turbo technologies sales increased $53 million primarily due to higher demand in China and North America.

These increases were partially offset by unfavorable foreign currency fluctuations (primarily in the Chinese renminbi, British pound and euro).

Segment EBIT

Components segment EBIT for the three months ended July 2, 2017, was flat versus the comparable period in 2016, as higher gross margin and higher equity, royalty and interest income from investees were offset by higher selling, general and administrative expenses and higher research, development and engineering expenses.

Components segment EBIT for the six months ended July 2, 2017, increased $16 million versus the comparable period in 2016 primarily due to higher gross margin and higher equity, royalty and interest income from investees, partially offset by higher selling, general and administrative expenses. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows:



	Three months ended							Six months ended
	July 2, 2017 vs. July 3, 2016							July 2, 2017 vs. July 3, 2016
	Favorable/(Unfavorable) Change							Favorable/(Unfavorable) Change
In millions	Amount			Percent		Percentage point change as a percent of total sales		Amount			Percent		Percentage point change as a percent of total sales
Gross margin	$	10		3	%	(2.3	)	$	28		5	%	(1.4	)
Selling, general and administrative expenses	(18		)	(20	)%	(0.4	)	(34		)	(20	)%	(0.5	)
Research, development and engineering expenses	(6		)	(12	)%	0.1		—			—	%	0.5
Equity, royalty and interest income from investees	3			25	%	0.1		8			40	%	0.2

The increase in gross margin for the three months ended July 2, 2017, versus the comparable period in 2016, was primarily due to higher volumes and lower material costs, partially offset by higher warranty costs driven by changes in estimates and unfavorable pricing in North America. The increase in selling, general and administrative expenses was primarily due to higher variable compensation expense and higher consulting expenses. The increase in research, development and engineering expenses was primarily due to lower expense recovery from customers and higher variable compensation expense.

The increase in gross margin for the six months ended July 2, 2017, versus the comparable period in 2016, was primarily due to higher volumes and lower material costs, partially offset by unfavorable pricing in North America and higher warranty costs driven by changes in estimates. The increase in selling, general and administrative expenses was primarily due to higher variable compensation expense and higher consulting expenses. The increase in equity, royalty and interest income from investees was primarily due to higher earnings at Dongfeng Cummins Emission Solutions Co., Ltd., Shanghai Fleetguard Filter Co. and Fleetguard Filtration Systems India Pvt.

Power Systems Segment Results

Financial data for the Power Systems segment was as follows:



	Three months ended						Favorable/					Six months ended						Favorable/
	July 2,			July 3,			(Unfavorable)					July 2,			July 3,			(Unfavorable)
In millions	2017			2016			Amount			Percent		2017			2016			Amount			Percent
External sales ⁽¹⁾	$	587		$	553		$	34		6	%	$	1,102		$	1,000		$	102		10	%
Intersegment sales ⁽¹⁾	430			368			62			17	%	797			729			68			9	%
Total sales	1,017			921			96			10	%	1,899			1,729			170			10	%
Depreciation and amortization	29			29			—			—	%	57			58			1			2	%
Research, development and engineering expenses	50			48			(2		)	(4	)%	100			97			(3		)	(3	)%
Equity, royalty and interest income from investees	14			11			3			27	%	26			21			5			24	%
Interest income	1			1			—			—	%	1			3			(2		)	(67	)%
Segment EBIT	61			90			(29		)	(32	)%	118			136			(18		)	(13	)%

							Percentage Points											Percentage Points
Segment EBIT as a percentage of total sales	6.0		%	9.8		%				(3.8	)	6.2		%	7.9		%				(1.7	)

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

In the first quarter of 2017, our Power Systems segment reorganized its product lines to better reflect how the segment is managed. Prior year sales were reclassified to reflect these changes. Sales for our Power Systems segment by product line were as follows:



	Three months ended				Favorable/					Six months ended				Favorable/
	July 2,		July 3,		(Unfavorable)					July 2,		July 3,		(Unfavorable)
In millions	2017		2016		Amount			Percent		2017		2016		Amount			Percent
Power generation	$	570	$	602	$	(32	)	(5	)%	$	1,096	$	1,120	$	(24	)	(2	)%
Industrial	353		236		117			50	%	628		451		177			39	%
Generator technologies	94		83		11			13	%	175		158		17			11	%
Total sales	$	1,017	$	921	$	96		10	%	$	1,899	$	1,729	$	170		10	%

High-horsepower unit shipments by engine classification were as follows:



	Three months ended		Favorable/				Six months ended		Favorable/
	July 2,	July 3,	(Unfavorable)				July 2,	July 3,	(Unfavorable)
Units	2017	2016	Amount		Percent		2017	2016	Amount	Percent
Power generation	2,100	2,200	(100	)	(5	)%	4,000	4,000	—	—	%
Industrial	1,700	1,100	600		55	%	3,000	2,100	900	43	%
Total engine shipments	3,800	3,300	500		15	%	7,000	6,100	900	15	%

Sales

Power Systems segment sales for the three months ended July 2, 2017, increased $96 million versus the comparable period in 2016 primarily due to increased industrial sales of $117 million principally due to higher demand in international mining markets and North American oil and gas markets.

These increases were partially offset by the following:

Power generation sales decreased $32 million primarily due to lower demand in the Middle East, China and Africa, partially offset by higher demand in Western Europe.

Foreign currency fluctuations negatively impacted sales, primarily due to the British pound.

Power Systems segment sales for the six months ended July 2, 2017, increased $170 million versus the comparable period in 2016. The following were the primary drivers:

Industrial sales increased $177 million primarily due to higher demand in global mining markets, North American oil and gas markets and North American rail markets.

Generator technologies sales increased $17 million primarily due to higher demand in Western Europe and China.

These increases were partially offset by the following:

Power generation sales decreased $24 million primarily due to lower demand in the Middle East, Brazil and Other Asia/Australia, partially offset by higher demand in Western Europe.

Foreign currency fluctuations negatively impacted sales, primarily due to the British pound.

Segment EBIT

Power Systems segment EBIT for the three months ended July 2, 2017, decreased $29 million versus the comparable period in 2016, primarily due to lower gross margin and ~~an additional accrual for a loss contingency, partially offset by lower~~higher selling, general and administrative expenses, ~~lower~~partially offset by higher equity, royalty and interest income from investees and favorable foreign currency fluctuations (primarily due to the British pound).

Power Systems segment EBIT for the six months ended July 2, 2017, decreased $18 million versus the comparable period in 2016 primarily due to higher selling, general and administrative expenses and higher research, development and engineering expenses, ~~and~~partially offset by higher equity, royalty and interest income from investees. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows:

Three months ended Nine months ended
October 2, 2016 vs. September 27, 2015 October 2, 2016 vs. September 27, 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 $ (67 ) (16 )% (1.1 ) $ (175 ) (14 )% (0.6 )
Selling, general and administrative expenses 14
9 % (0.2 ) 64
13 % 0.1
Research, development and engineering expenses 17
23 % 0.5
29
15 % 0.2
Equity, royalty and interest income from investees 5
15 % 0.4
13
12 % 0.5
Loss contingency ⁽¹⁾
(99 ) NM
NM
(138 ) NM
NM

~~"NM" - not meaningful information~~

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



	Three months ended							Six months ended
	July 2, 2017 vs. July 3, 2016							July 2, 2017 vs. July 3, 2016
	Favorable/(Unfavorable) Change							Favorable/(Unfavorable) Change
In millions	Amount			Percent		Percentage point change as a percent of total sales		Amount			Percent		Percentage point change as a percent of total sales
Gross margin	$	(15	)	(7	)%	(3.7	)	$	—		—	%	(2.1	)
Selling, general and administrative expenses	(8		)	(8	)%	0.3		(11		)	(6	)%	0.4
Research, development and engineering expenses	(2		)	(4	)%	0.3		(3		)	(3	)%	0.3
Equity, royalty and interest income from investees	3			27	%	0.2		5			24	%	0.2

The decrease in gross margin ~~dollars~~ for the three months ended ~~October~~July 2, ~~2016,~~2017, versus the comparable period in ~~2015,~~2016, was primarily due to ~~lower volumes~~higher warranty cost related to a campaign accrual, unfavorable mix and ~~unfavorable mix,~~increased material costs, partially offset by ~~lower material and commodity costs~~increased volumes and favorable ~~product coverage.~~foreign currency fluctuations (primarily in the British pound). The ~~decrease~~increase in selling, general and administrative expenses was primarily due to ~~lower~~higher variable compensation expenses as the result of restructuring actions taken in the fourth quarter of 2015, and lower consulting expenses. The decrease in research, development and engineering expenses was primarily due to lower compensation expenses as the result of restructuring actions taken in the fourth quarter of 2015.

The decrease in gross margin for the nine months ended October 2, 2016, versus the comparable period in 2015, was primarily due to lower volumes and unfavorable mix, partially offset by favorable product coverage and lower 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 the fourth quarter of 2015, and lower consulting expenses. The decrease in research, development and engineering expenses was primarily due to lower compensation expenses as a result of restructuring actions taken in the fourth quarter of 2015,expense and higher ~~expense recovery from customers and external parties, partially offset by increased engine testing costs.~~consulting expenses. The increase in equity, royalty and interest income from investees was primarily due to ~~increased~~higher earnings at ~~Beijing Foton~~Chongqing Cummins Engine Co.~~, Ltd., partially offset by decreased earnings at Dongfeng Cummins Engine Company, Ltd. and Cummins Westport, Inc.~~

~~Distribution Segment Results~~

~~Financial data~~Gross margin was flat for the ~~Distribution segment was as follows:~~

Three months ended Favorable/ Nine months ended Favorable/
October 2, September 27, (Unfavorable) October 2, September 27, (Unfavorable)
In millions 2016 2015 Amount Percent 2016 2015 Amount Percent
External sales $ 1,497
$ 1,543
$ (46 ) (3 )% $ 4,493
$ 4,499
$ (6 ) — %
Intersegment sales 7
8
(1 ) (13 )% 18
23
(5 ) (22 )%
Total sales 1,504
1,551
(47 ) (3 )% 4,511
4,522
(11 ) — %
Depreciation and amortization 28
26
(2 ) (8 )% 86
78
(8 ) (10 )%
Research, development and engineering expenses 3
2
(1 ) (50 )% 10
8
(2 ) (25 )%
Equity, royalty and interest income from investees 19
19
—
— % 56
60
(4 ) (7 )%
Interest income 1
1
—
— % 3
3
—
— %
Segment EBIT 96
123
(27 ) (22 )% 270
324
(54 ) (17 )%

Percentage Points Percentage Points
Segment EBIT as a percentage of total sales 6.4 % 7.9 %
(1.5 ) 6.0 % 7.2 %
(1.2 )

~~Sales for our Distribution segment by region were as follows:~~

Three months ended Favorable/ Nine months ended Favorable/
October 2, September 27, (Unfavorable) October 2, September 27, (Unfavorable)
In millions 2016 2015 Amount Percent 2016 2015 Amount Percent
North & Central America $ 988
$ 992
$ (4 ) �� % $ 2,928
$ 2,901
$ 27
1 %
Europe, CIS and China 185
190
(5 ) (3 )% 569
543
26
5 %
Asia Pacific 175
186
(11 ) (6 )% 531
550
(19 ) (3 )%
Africa 47
64
(17 ) (27 )% 154
169
(15 ) (9 )%
India 44
42
2
5 % 131
121
10
8 %
Middle East 38
48
(10 ) (21 )% 120
145
(25 ) (17 )%
South America 27
29
(2 ) (7 )% 78
93
(15 ) (16 )%
Total sales $ 1,504
$ 1,551
$ (47 ) (3 )% $ 4,511
$ 4,522
$ (11 ) — %

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

Three months ended Favorable/ Nine months ended Favorable/
October 2, September 27, (Unfavorable) October 2, September 27, (Unfavorable)
In millions 2016 2015 Amount Percent 2016 2015 Amount Percent
Parts ⁽¹⁾
$ 643
$ 604
$ 39
6 % $ 1,933
$ 1,775
$ 158
9 %
Service 299
301
(2 ) (1 )% 895
892
3
— %
Power generation 291
323
(32 ) (10 )% 892
893
(1 ) — %
Engines 271
323
(52 ) (16 )% 791
962
(171 ) (18 )%
Total sales $ 1,504
$ 1,551
$ (47 ) (3 )% $ 4,511
$ 4,522
$ (11 ) — %

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

~~Sales~~

~~Distribution segment sales for the three~~six months ended ~~October~~July 2, ~~2016, decreased $47 million~~2017, versus the comparable period in ~~2015~~,2016, primarily due to higher warranty cost related to a ~~decline in organic sales of $75 million (primarily engine markets)~~campaign accrual, unfavorable mix and ~~unfavorable~~higher material costs, offset by increased volumes and favorable foreign currency fluctuations (primarily in the ~~Canadian dollar, Chinese renminbi, South African rand and~~ British pound)~~, partially offset by $42 million of sales related to the acquisition of North American distributors since December 31, 2014.~~

Distribution segment sales for the nine months ended October 2, 2016, decreased $11 million versus the comparable period in 2015, primarily due to a decline in organic sales of $188 million (primarily engine markets) and unfavorable foreign currency fluctuations (primarily in the Canadian dollar, Australian dollar, South African rand, Indian rupee, Chinese renminbi and

~~Brazilian real), partially offset by $265 million of segment sales related to the acquisition of North American distributors since December 31, 2014.~~

~~Segment EBIT~~

Distribution segment EBIT for the three months ended October 2, 2016, decreased $27 million versus the comparable period in 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 the Canadian dollar and Australian dollar), partially offset by higher gross margin.

Distribution segment EBIT for the nine months ended October 2, 2016, decreased $54 million versus the comparable period in 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 the Australian dollar, Canadian dollar and Nigerian naira), partially offset by 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 Nine months ended
October 2, 2016 vs. September 27, 2015 October 2, 2016 vs. September 27, 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 $ 4
2 % 0.8
$ 25
3 % 0.6
Selling, general and administrative expenses (9 ) (5 )% (1.0 ) (50 ) (10 )% (1.1 )
Equity, royalty and interest income from investees —
— % 0.1
(4 ) (7 )% (0.1 )

The increase in gross margin dollars for the three months ended October 2, 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 lower volumes and unfavorable foreign currency fluctuations (primarily in the Canadian dollar, Australian dollar and South African rand). The increase in selling, general and administrative expenses was primarily due to higher variable compensation ~~expenses related to the acquisition of North American distributors~~expense and higher consulting expenses.

The increase in gross margin for the nine months ended October 2, 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 Canadian dollar, Australian dollar and South African rand) and lower volumes. 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/ Nine months ended Favorable/
October 2, September 27, (Unfavorable) October 2, September 27, (Unfavorable)
In millions 2016 2015 Amount Percent 2016 2015 Amount Percent
External sales ⁽¹⁾
$ 824
$ 891
$ (67 ) (8 )% $ 2,654
$ 2,839
$ (185 ) (7 )%
Intersegment sales ⁽¹⁾
319
349
(30 ) (9 )% 1,005
1,097
(92 ) (8 )%
Total sales 1,143
1,240
(97 ) (8 )% 3,659
3,936
(277 ) (7 )%
Depreciation and amortization 32
28
(4 ) (14 )% 95
82
(13 ) (16 )%
Research, development and engineering expenses 54
65
11
17 % 161
183
22
12 %
Equity, royalty and interest income from investees 9
9
—
— % 29
26
3
12 %
Interest income 1
1
—
— % 3
3
—
— %
Segment EBIT 148
156
(8 ) (5 )% 501
574
(73 ) (13 )%

Percentage Points Percentage Points
Segment EBIT as a percentage of total sales 12.9 % 12.6 %
0.3
13.7 % 14.6 %
(0.9 )

⁽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:~~

Three months ended Favorable/ Nine months ended Favorable/
October 2, September 27, (Unfavorable) October 2, September 27, (Unfavorable)
In millions 2016 2015 Amount Percent 2016 2015 Amount Percent
Emission solutions $ 540
$ 607
$ (67 ) (11 )% $ 1,771
$ 1,899
$ (128 ) (7 )%
Filtration 244
240
4
2 % 758
761
(3 ) — %
Turbo technologies 241
266
(25 ) (9 )% 782
874
(92 ) (11 )%
Fuel systems 118
127
(9 ) (7 )% 348
402
(54 ) (13 )%
Total sales $ 1,143
$ 1,240
$ (97 ) (8 )% $ 3,659
$ 3,936
$ (277 ) (7 )%

~~Sales~~

~~Components segment sales for the three months ended October 2, 2016, decreased $97 million, across most lines of business, versus the comparable period in 2015. The following were the primary drivers:~~

~~Emission solutions sales decreased $67 million primarily due to lower demand in North American on-highway markets, partially offset by higher demand in China.~~

~~Turbo technologies sales decreased $25 million primarily due to lower demand in North American on-highway markets.~~

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

~~Fuel systems sales decreased $9 million primarily due to lower demand in North American on-highway markets, partially offset by higher demand in China.~~

~~Components segment sales for the nine months ended October 2, 2016, decreased $277 million, across all lines of business, versus the comparable period in 2015. The following were the primary drivers:~~

~~Emission solutions sales decreased $128 million primarily due to lower demand in North American on-highway markets, partially offset by higher demand in China and Western Europe.~~

~~Turbo technologies sales decreased $92 million primarily due to lower demand in North American on-highway markets.~~

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

~~Fuel systems sales decreased $54 million primarily due to lower demand in North American on-highway markets, partially offset by higher demand in China.~~

~~Segment EBIT~~

Components segment EBIT for the three months ended October 2, 2016, decreased $8 million versus the comparable period in 2015, primarily due to lower gross margin and higher selling, general and administrative expenses, partially offset by lower research, development and engineering expenses.

Components segment EBIT for the nine months ended October 2, 2016, decreased $73 million versus the comparable period in 2015 primarily due to lower gross margin, 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 Nine months ended
October 2, 2016 vs. September 27, 2015 October 2, 2016 vs. September 27, 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 $ (13 ) (4 )% 0.8
$ (72 ) (8 )% (0.1 )
Selling, general and administrative expenses (6 ) (7 )% (1.1 ) (21 ) (9 )% (1.1 )
Research, development and engineering expenses 11
17 % 0.5
22
12 % 0.2
Equity, royalty and interest income from investees —
— % 0.1
3
12 % 0.1

The decrease in gross margin for the three months ended October 2, 2016, versus the comparable period in 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 consulting and compensation 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 the fourth quarter of 2015. The decrease in research, development and engineering expenses was primarily due to lower consulting expenses, higher expense recovery from customers and external parties and lower compensation expenses from restructuring actions taken in the fourth quarter of 2015.

The decrease in gross margin for the nine months ended October 2, 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 and Chinese renminbi), partially offset by lower material costs. The increase in selling, general and administrative expenses was primarily due to higher consulting and compensation 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 the fourth quarter of 2015. The decrease in research, development and engineering expenses was primarily due to lower consulting expenses, higher expense recovery from customers and external parties and lower compensation expenses from restructuring actions taken in the fourth quarter of 2015.

~~Power Systems Segment Results~~

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

Three months ended Favorable/ Nine months ended Favorable/
October 2, September 27, (Unfavorable) October 2, September 27, (Unfavorable)
In millions 2016 2015 Amount Percent 2016 2015 Amount Percent
External sales ⁽¹⁾
$ 509
$ 559
$ (50 ) (9 )% $ 1,509
$ 1,856
$ (347 ) (19 )%
Intersegment sales ⁽¹⁾
347
423
(76 ) (18 )% 1,076
1,225
(149 ) (12 )%
Total sales 856
982
(126 ) (13 )% 2,585
3,081
(496 ) (16 )%
Depreciation and amortization 29
27
(2 ) (7 )% 87
81
(6 ) (7 )%
Research, development and engineering expenses 44
57
13
23 % 141
172
31
18 %
Equity, royalty and interest income from investees 8
17
(9 ) (53 )% 29
47
(18 ) (38 )%
Interest income 1
1
—
— % 4
4
—
— %
Segment EBIT 59
74
(15 ) (20 )% 195
302
(107 ) (35 )%

Percentage Points Percentage Points
Segment EBIT as a percentage of total sales 6.9 % 7.5 %
(0.6 ) 7.5 % 9.8 %
(2.3 )

⁽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 into the following product lines:~~

~~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 were as follows:~~

Three months ended Favorable/ Nine months ended Favorable/
October 2, September 27, (Unfavorable) October 2, September 27, (Unfavorable)
In millions 2016 2015 Amount Percent 2016 2015 Amount Percent
Power generation $ 545
$ 621
$ (76 ) (12 )% $ 1,662
$ 1,955
$ (293 ) (15 )%
Industrial 233
275
(42 ) (15 )% 688
850
(162 ) (19 )%
Generator technologies 78
86
(8 ) (9 )% 235
276
(41 ) (15 )%
Total sales $ 856
$ 982
$ (126 ) (13 )% $ 2,585
$ 3,081
$ (496 ) (16 )%

~~High-horsepower unit shipments by engine classification were as follows:~~

Three months ended Favorable/ Nine months ended Favorable/
October 2, September 27, (Unfavorable) October 2, September 27, (Unfavorable)
Units 2016 2015 Amount Percent 2016 2015 Amount Percent
Power generation 2,000
2,000
—
— % 6,000
6,700
(700 ) (10 )%
Industrial 1,000
1,200
(200 ) (17 )% 3,100
3,700
(600 ) (16 )%
Total engine shipments 3,000
3,200
(200 ) (6 )% 9,100
10,400
(1,300 ) (13 )%

~~Sales~~

~~Power Systems segment sales for the three months ended October 2, 2016, decreased $126 million, across all product lines, versus the comparable period in 2015. The following were the primary drivers:~~

~~Power generation sales decreased $76 million, in most regions, with the largest declines in demand primarily in Middle East, Asia and North America.~~

Industrial sales decreased $42 million primarily due to lower demand in North America (mainly oil and gas markets, partially offset by rail markets), Asia (mainly mining markets) and China (mainly marine markets).

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

~~Power Systems segment sales for the nine months ended October 2, 2016, decreased $496 million, across all product lines, versus the comparable period in 2015. The following were the primary drivers:~~

~~Power generation sales decreased $293 million, in most regions, with the largest declines in demand primarily in China, Middle East, Asia, Western Europe, Africa, Mexico and Brazil.~~

Industrial sales decreased $162 million primarily due to lower demand in North America (mainly oil and gas markets, partially offset by rail markets), China (mainly marine and mining markets), Asia (mainly marine and mining markets) and Western Europe (mostly mining markets).

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

~~Segment EBIT~~

Power Systems segment EBIT for the three months ended October 2, 2016, decreased $15 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 nine months ended October 2, 2016, decreased $107 million versus the comparable period in 2015 primarily due to lower gross margin, partially offset by lower selling, general and administrative expenses, 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 Nine months ended
October 2, 2016 vs. September 27, 2015 October 2, 2016 vs. September 27, 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 $ (32 ) (14 )% (0.3 ) $ (189 ) (24 )% (2.4 )
Selling, general and administrative expenses 18
15 % 0.3
64
18 % 0.3
Research, development and engineering expenses 13
23 % 0.7
31
18 % 0.1
Equity, royalty and interest income from investees (9 ) (53 )% (0.8 ) (18 ) (38 )% (0.4 )

The decrease in gross margin for the three months ended October 2, 2016, versus the comparable period in 2015, was primarily due to lower volumes, partially offset by favorable foreign currency fluctuations (primarily in the British pound). The decrease in selling, general and administrative expenses was primarily due to lower compensation expenses as the result of restructuring actions taken in the fourth quarter of 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 restructuring actions taken in the fourth quarter of 2015. The decrease in equity, royalty and interest income from investees was primarily due to ~~the impact of an $8 million asset impairment incurred by one of our joint ventures.~~

The decrease in gross margin for the nine months ended October 2, 2016, versus the comparable period in 2015, was primarily due to lower volumes, partially offset by favorable foreign currency fluctuations (primarily in the British pound). The decrease in selling, general and administrative expenses was primarily due to lower compensation expenses as the result of restructuring actions taken in the fourth quarter of 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 restructuring actions taken in the fourth quarter of 2015. The decrease in equity, royalty and interest income from investees was primarily due to the impact of an $8 million asset impairment incurred by one of our joint ventures.higher earnings at Chongqing Cummins Engine Co.

Reconciliation of Segment EBIT to Net Income ~~Before Income Taxes~~Attributable to Cummins Inc.

The table below reconciles the segment information to the corresponding amounts in the Condensed Consolidated Statements of Income:


	Three months ended				Nine months ended					Three months ended					Six months ended
In millions	October 2, 2016		September 27, 2015		October 2, 2016		September 27, 2015			July 2, 2017			July 3, 2016		July 2, 2017			July 3, 2016
Total EBIT	$	392	$	570	$	1,458	$	1,895
TOTAL SEGMENT EBIT										$	624		$	573	$	1,189		$	1,066
Non-segment EBIT ⁽¹⁾	6		7		15		(35		)	(4		)	18		(3		)	9
Total segment EBIT	398		577		1,473		1,860
TOTAL EBIT										620			591		1,186			1,075
Less: Interest expense	16		16		51		47			21			16		39			35
Income before income taxes	$	382	$	561	$	1,422	$	1,813
INCOME BEFORE INCOME TAXES										599			575		1,147			1,040
Less: Income tax expense										158			148		301			280
CONSOLIDATED NET INCOME										441			427		846			760
Less: Net income attributable to noncontrolling interest										17			21		26			33
NET INCOME ATTRIBUTABLE TO CUMMINS INC.										$	424		$	406	$	820		$	727

LIQUIDITY AND CAPITAL RESOURCES

Key Working Capital and Balance Sheet Data

We fund our working capital with cash from operations and short-term borrowings, including commercial paper, when necessary. Various assets and liabilities, including short-term debt, can fluctuate significantly from month to month depending on short-term liquidity needs. As a result, working capital is a prime focus of management attention. Working capital and balance sheet measures are provided in the following table:


Dollars in millions	October 2, 2016			December 31, 2015			July 2, 2017			December 31, 2016
Working capital ⁽¹⁾	$	3,486		$	4,144		$	3,708		$	3,382
Current ratio	1.81			2.09			1.76			1.78
Accounts and notes receivable, net	$	2,873		$	2,820		$	3,553		$	3,025
Days’ sales in receivables	60			55			62			61
Inventories	$	2,820		$	2,707		$	2,982		$	2,675
Inventory turnover	4.5			4.9			4.9			4.7
Accounts payable (principally trade)	$	1,781		$	1,706		$	2,300		$	1,854
Days' payable outstanding	50			48			52			51
Total debt	$	1,949		$	1,639		$	1,797		$	1,856
Total debt as a percent of total capital ⁽²⁾	21.2		%	17.5		%	18.7		%	20.6		%

⁽¹⁾Working capital includes cash and cash equivalents.

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

Cash Flows

Cash and cash equivalents were impacted as follows:


	Nine months ended									Six months ended
In millions	October 2, 2016			September 27, 2015			Change			July 2, 2017			July 3, 2016			Change
Net cash provided by operating activities	$	1,310		$	1,131		$	179		$	826		$	738		$	88
Net cash used in investing activities	(590		)	(477		)	(113		)	(160		)	(391		)	231
Net cash used in financing activities	(1,041		)	(1,215		)	174			(544		)	(896		)	352
Effect of exchange rate changes on cash and cash equivalents	(139		)	(52		)	(87		)	51			(117		)	168
Net decrease in cash and cash equivalents	$	(460	)	$	(613	)	$	153
Net increase (decrease) in cash and cash equivalents										$	173		$	(666	)	$	839

Net cash provided by operating activities increased ~~$179~~$88 million for the ~~nine~~six months ended ~~October~~July 2, ~~2016,~~2017, versus the comparable period in ~~2015,~~2016, primarily due to higher consolidated net income, the absence of restructuring payments and lower working capital levels, ~~and an increase in deferred income taxes,~~ partially offset by ~~lower consolidated net~~higher equity in income ~~decreases from translation~~of investees and ~~hedging activities and restructuring payments.~~the absence of loss contingency charges. During the first ~~nine~~six months of ~~2016,~~2017, the lower working capital requirements resulted in a cash outflow of ~~$306~~$196 million compared to a cash outflow of ~~$414~~$230 million in the comparable period in ~~2015.~~2016.

Net cash used in investing activities ~~increased $113~~decreased $231 million for the ~~nine~~six months ended ~~October~~July 2, ~~2016,~~2017, versus the comparable period in ~~2015,~~2016, primarily due to ~~higher~~lower net investments in marketable securities of $209 million and decreased cash flows from derivatives not designated as hedges of $81 million, partially offset by lower acquisitions of businesses, net of cash acquired of $101 million and lower capital expenditures of $81$235 million.

Net cash used in financing activities decreased ~~$174~~$352 million for the ~~nine~~six months ended ~~October~~July 2, ~~2016,~~2017, versus the comparable period in ~~2015,~~2016, primarily due to ~~higher net borrowings~~lower repurchases of ~~commercial paper~~common stock of ~~$273 million, increased proceeds from borrowings of $87~~$575 million and ~~higher net borrowings under short term credit agreements of $63 million, partially offset by higher common stock repurchases of $95 million, higher~~lower payments on borrowings and capital lease obligations of ~~$92~~$104 million, partially offset by lower net borrowings of commercial paper of $278 million and ~~higher dividend payments~~lower proceeds from borrowings of ~~$53~~$107 million.

The effect of exchange rate changes on cash and cash equivalents for the ~~nine~~six months ended ~~October~~July 2, ~~2016,~~2017, versus the comparable period in ~~2015, decreased $87~~2016, increased $168 million primarily due to the British pound, which ~~decreased~~increased cash and cash equivalents by ~~$91~~$150 million.

Sources of Liquidity

We generate significant ongoing cash flow. Cash provided by operations is our principal source of liquidity with ~~$1.3 billion~~$826 million provided in the ~~nine~~six months ended ~~October~~July 2, ~~2016.~~2017.

At ~~October~~July 2, ~~2016,~~2017, our other sources of liquidity included:


	October 2, 2016							July 2, 2017
In millions	Total		U.S.		International		Primary location of international balances	Total		U.S.		International		Primary location of international balances
Cash and cash equivalents	$	1,251	$	318	$	933	U.K., China, Singapore	$	1,293	$	245	$	1,048	U.K., Singapore, China, Canada, Australia
Marketable securities ⁽¹⁾	250		39		211		China, India	174		41		133		India
Total	$	1,501	$	357	$	1,144		$	1,467	$	286	$	1,181
Available credit capacity
Revolving credit facility ⁽²⁾	$	1,750						$	1,616
International and other uncommitted domestic credit facilities ⁽³⁾	153							$	170

⁽¹⁾The majority of 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 ~~October~~July 2, ~~2016,~~2017, we had ~~$273~~$134 million of commercial paper outstanding, which effectively reduced the available capacity under our revolving credit facility to ~~$1.48~~$1.62 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. ~~The geographic location of our cash and marketable securities aligns well with our 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 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 example, 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.

Debt Facilities and Other Sources of Liquidity

~~In February 2016, the Board of Directors authorized the issuance of~~We can issue up to $1.75 billion of unsecured short-term promissory notes ("commercial paper") pursuant to a commercial paper program. The program ~~will facilitate~~facilitates 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.~~purposes and acquisitions.

We have a $1.75 billion revolving credit facility, the proceeds of which can be used for general corporate purposes. This facility expires on November 13, 2020. The revolving credit facility is maintained primarily to provide backup liquidity for our commercial paper borrowings, letters of credit and general corporate purposes. The total combined borrowing capacity under the revolving credit facility and commercial paper program should not exceed $1.75 billion.

As a well-known seasoned issuer, we filed an automatic shelf registration for an undetermined amount of debt and equity securities with the Securities and Exchange Commission on February 16, 2016. Under this shelf registration we may offer, from time to time, debt securities, common stock, preferred and preference stock, depositary shares, warrants, stock purchase contracts and stock purchase units.

Uses of Cash

Share Repurchases

In ~~November 2015,~~December 2016, our Board of Directors authorized the acquisition of up to $1 billion of additional common stock upon ~~the~~ completion of the ~~2014~~2015 repurchase plan. In the first ~~nine~~six months of ~~2016,~~2017, we made the following purchases under the ~~respective~~2015 stock repurchase ~~programs:~~program:

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
October 2 0.4
126.13
50
—
529
Subtotal 4.4
109.13
471
—

Total 7.1
$ 105.63
$ 745
$ —



In millions, except per share amounts	Shares Purchased	Average Cost Per Share		Total Cost of Repurchases		Remaining Authorized Capacity ⁽¹⁾
April 2	0.3	$	151.32	$	51	$	445
July 2	0.5	153.95		69		376
Total	0.8	$	152.82	$	120

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

⁽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.~~

In 2016, we entered into an accelerated share repurchase agreement with a third party financial institution to repurchase $500 million of our common stock under our previously announced share repurchase plans and received 4.7 million shares at an average purchase price of $105.50 per share.

We may continue to repurchase outstanding shares from time to time during ~~2016~~2017 to enhance shareholder value and to offset the dilutive impact of employee stock based compensation plans.

Dividends

In July ~~2016,~~2017, our Board of Directors authorized an increase to our quarterly dividend of ~~5.1~~5.4 percent from ~~$0.975~~$1.025 per share to ~~$1.025~~$1.08 per share. We paid dividends of ~~$505~~$343 million during the ~~nine~~six months ended ~~October~~July 2, ~~2016.~~2017.

Agreement to Form a Joint Venture

In April 2017, we entered into an agreement to form a joint venture with Eaton Corporation PLC and we closed the transaction on July 31, 2017. We purchased a 50 percent interest in the new venture named Eaton Cummins Automated Transmission Technologies for $600 million, which we funded with a combination of cash and short-term debt. We are still in the process of finalizing the purchase accounting and we do not expect this new venture to have a significant impact on our consolidated results in 2017.

Capital Expenditures

Capital expenditures, ~~and~~including spending on internal use software, for the ~~nine~~six months ended ~~October~~July 2, ~~2016,~~2017, were ~~$354~~$222 million compared to ~~$431~~$216 million in the comparable period in ~~2015. Despite the challenging conditions in many of our markets, we~~2016. We continue to invest in new product lines and targeted capacity expansions. We plan to spend between ~~$550~~$500 million and ~~$600~~$530 million in ~~2016~~2017 on capital expenditures as we continue with product launches and facility improvements. Approximately 4050 percent of our capital expenditures are expected to be invested outside of the U.S. in ~~2016.~~2017.

Pensions

Our global pension plans, including our unfunded and non-qualified plans, were ~~111~~110 percent funded at December 31, ~~2015.~~2016. Our U.S. qualified ~~plan,~~plans, which ~~represents~~represent approximately 5756 percent of the worldwide pension obligation, ~~was 119~~were 118 percent funded and our U.K. ~~plan was 123~~plans were 121 percent funded. The funded status of our pension plans is dependent upon a variety of variables and assumptions including return on invested assets, market interest rates and levels of voluntary contributions to the plans. In the first ~~nine~~six months of ~~2016,~~2017, the investment return on our U.S. pension trust was ~~11.7~~7.1 percent while our U.K. pension trust return was ~~22.0~~0.8 percent. Approximately 7976 percent of our pension plan assets are held in highly liquid investments such as fixed income and equity securities. The remaining 2124 percent of our plan assets are held in less liquid, but market valued investments, including real estate, private equity, venture capital, opportunistic credit and insurance contracts. We anticipate making additional defined benefit pension contributions during the remainder of ~~2016~~2017 of ~~$22~~$50 million for our U.S. and ~~U.K~~U.K. pension ~~plans and $44 million ($27~~plans. Approximately $133 million of ~~which will be cash) for our German pension plans. The~~the estimated ~~$146~~$134 million of U.S. and U.K. pension contributions for the full year ~~include voluntary contributions of approximately $103 million. The $44 million contribution to the German plans is~~are voluntary. These contributions may be made from trusts or company funds either to increase pension assets

or to make direct benefit payments to plan participants. We expect our ~~2016~~2017 net periodic pension cost to approximate ~~$42~~$83 million.

Current Maturities of Short and Long-Term Debt

We had ~~$273~~$134 million of commercial paper outstanding at ~~October~~July 2, ~~2016,~~2017, 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$4 million to ~~$31~~$45 million over the next five years (including the remainder of ~~2016)~~2017).

~~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, with $86 million expected to be settled in cash, of which $60 million remained outstanding at December 31, 2015. In 2016, we paid $53 million (with approximately $7 million remaining) of restructuring payments and as of October 2, 2016 substantially all terminations were complete. See Note ~~12, "RESTRUCTURING ACTIONS AND OTHER CHARGES,~~7 "DEBT," to the Condensed Consolidated Financial Statementsfor additional information.

Credit Ratings

Our ratings and outlook from each of the credit rating agencies as of the date of filing are shown in the table below.



	Long-Term	Short-Term
Credit Rating Agency ⁽¹⁾	Senior Debt Rating	Debt Rating	Outlook
Standard & Poor’s Rating Services	A+	A1	Stable
~~Fitch Ratings~~	A	F1	~~Stable~~
Moody’s Investors Service, Inc.	A2	P1	Stable

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

Management's Assessment of Liquidity

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

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

A summary of our significant accounting policies is included in Note 1, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,” of the Notes to the Consolidated Financial Statements of our ~~2015~~2016 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 ~~2015~~2016 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 ~~nine~~six months of ~~2016.~~2017.

RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

See Note ~~14,~~13, "RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS," in the Notes to Condensed Consolidated Financial Statements for additional information.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

A discussion of quantitative and qualitative disclosures about market risk may be found in Item 7A of our ~~2015~~2016 Form 10-K. There have been no material changes in this information since the filing of our ~~2015~~2016 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 ~~October~~July 2, ~~2016,~~2017, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

We are subject to numerous lawsuits and claims arising out of the ordinary course of our business, including actions related to product liability; personal injury; the use and performance of our products; warranty matters; product recalls; patent, trademark or other intellectual property infringement; contractual liability; the conduct of our business; tax reporting in foreign jurisdictions; distributor termination; workplace safety; and environmental matters. We also have been identified as a potentially responsible party at multiple waste disposal sites under U.S. federal and related state environmental statutes and regulations and may have joint and several liability for any investigation and remediation costs incurred with respect to such sites. We have denied liability with respect to many of these lawsuits, claims and proceedings and are vigorously defending such lawsuits, claims and proceedings. We carry various forms of commercial, property and casualty, product liability and other forms of insurance; however, such insurance may not be applicable or adequate to cover the costs associated with a judgment against us with respect to these lawsuits, claims and proceedings. We do not believe that these lawsuits are material individually or in the aggregate. While we believe we have also established adequate accruals pursuant to U.S. generally accepted accounting principles for our expected future liability with respect to pending lawsuits, claims and proceedings, where the nature and extent of any such liability can be reasonably estimated based upon then presently available information, there can be no assurance that the final resolution of any existing or future lawsuits, claims or proceedings will not have a material adverse effect on our business, results of operations, financial condition or cash flows.

~~The disclosure set forth under "Loss Contingency" in Note 10, "COMMITMENTS AND CONTINGENCIES," to the~~ ~~Condensed Consolidated Financial Statements~~ ~~is incorporated herein by reference.~~

The disclosure set forth under "Loss Contingency" in Note 9, "COMMITMENTS AND CONTINGENCIES," to the Condensed Consolidated Financial Statements is incorporated herein by reference.

ITEM 1A. Risk Factors

In addition to other information set forth in this report, you should consider other risk factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, ~~2015~~,2016, 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⁾
July 4 - August 7 6,408
$ 123.57
—
107,089
August 8 - September 4 403,392
126.16
396,139
97,063
September 5 - October 2 6,391
125.20
—
91,672
Total 416,191
126.10
396,139



	Issuer Purchases of Equity Securities
Period	Total Number of Shares Purchased⁽¹⁾	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs⁽²⁾
April 3 - May 7	71,242	$	145.27	69,028	35,513
May 8 - June 4	349,431	155.49		346,899	35,681
June 5 - July 2	38,124	157.82		33,283	33,273
Total	458,797	154.09		449,210

⁽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 were excluded from this column. The dollar value remaining available for future purchases under such programs as of ~~October~~July 2, ~~2016,~~2017, was ~~$529 million.~~$1.4 billion.

In December 2016, our Board of Directors authorized the acquisition of up to $1 billion of additional common stock upon completion of the 2015 repurchase plan. In November 2015, our Board of Directors authorized the acquisition of up to $1 billion of additional common stock upon the completion of the 2014 repurchase plan. During the three months ended ~~October~~July 2, ~~2016,~~2017, we repurchased ~~$50~~$69 million of common stock under the 2015 Board of Directors authorized plan.

During the three months ended ~~October~~July 2, ~~2016,~~2017, we repurchased ~~20,052~~9,587 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~~their initial five-year period for an additional five-year period. Participants must hold shares for a minimum of six months from date of purchase. If the shares are sold before the loan is paid off, the employee must wait six months before another share purchase may be made. We hold participants’ shares as security for the loans and would, in effect repurchase shares if the participant defaulted in repayment of the loan. There is no maximum amount of shares that we may purchase under this plan.

ITEM 3. Defaults Upon Senior Securities

Not applicable.

ITEM 4. Mine Safety Disclosures

Not applicable.

ITEM 5. Other Information

Not applicable.

ITEM 6. Exhibits

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

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:	~~November~~August 1, ~~2016~~2017

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

CUMMINS INC.

EXHIBIT INDEX



Exhibit No.		Description of Exhibit
33.1		~~Bylaws,~~ By-Laws, as amended and restated effective as of ~~October 11, 2016 (filed as Exhibit 3.1~~May 9, 2017 (incorporated by reference to Annex B to the ~~Company's Current Report on Form 8-K~~Company’s definitive proxy statement filed with the Securities and Exchange Commission on ~~October 17, 2016).~~Schedule 14A on March 27, 2017 (File No. 001-04949))
1210.1		Cummins Inc. 2012 Omnibus Incentive Plan, as amended and restated (incorporated by reference to Annex A to the Company’s definitive proxy statement filed with the Securities and Exchange Commission on Schedule 14A on March 27, 2017 (File No. 001-04949))
12		Calculation of Ratio of Earnings to Fixed Charges.
31(a)		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31(b)		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.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.

5250



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



	Three months ended							Nine months ended
	October 2, 2016 vs. September 27, 2015							October 2, 2016 vs. September 27, 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	$	(67	)	(16	)%	(1.1	)	$	(175	)	(14	)%	(0.6	)
Selling, general and administrative expenses	14			9	%	(0.2	)	64			13	%	0.1
Research, development and engineering expenses	17			23	%	0.5		29			15	%	0.2
Equity, royalty and interest income from investees	5			15	%	0.4		13			12	%	0.5
Loss contingency ⁽¹⁾	(99		)	NM		NM		(138		)	NM		NM



	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⁾
July 4 - August 7	6,408	$	123.57	—	107,089
August 8 - September 4	403,392	126.16		396,139	97,063
September 5 - October 2	6,391	125.20		—	91,672
Total	416,191	126.10		396,139

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

Emerging growth company o