Table of Contents


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


cumminsca06.jpg
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended April 2,October 1, 2017
 
Commission File Number 1-4949

CUMMINS INC.
(Exact name of registrant as specified in its charter)
Indiana
(State of Incorporation)
 
35-0257090
 (IRS Employer Identification No.)
500 Jackson Street
Box 3005
Columbus, Indiana 47202-3005
(Address of principal executive offices)
 
Telephone (812) 377-5000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit and post such files).  Yes x  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.  (Check one):
Large accelerated filer x
 
Accelerated filer o
 
Non-accelerated filer o
Smaller reporting company o
 
Emerging growth company o
  
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o   No x
 
As of April 2,October 1, 2017, there were 167,975,197165,967,528 shares of common stock outstanding with a par value of $2.50 per share.
 
Website Access to Company’s Reports
 
Cummins maintains an internet website at www.cummins.com.  Investors can obtain copies of our filings from this website free of charge as soon as reasonably practicable after they are electronically filed with, or furnished, to the Securities and Exchange Commission. Cummins is not including the information provided on the website as part of, or incorporating such information by reference into, this Quarterly Report on Form 10-Q.
 

CUMMINS INC. AND SUBSIDIARIES
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
 
  Page
 
PART I. FINANCIAL INFORMATION
 
ITEM 1.
Condensed Consolidated Financial Statements (Unaudited)
3
 Condensed Consolidated Statements of Income for the three and nine months ended April 2,October 1, 2017 and April 3,October 2, 2016
3
 Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended April 2,October 1, 2017 and April 3,October 2, 2016
4
 Condensed Consolidated Balance Sheets at April 2,October 1, 2017 and December 31, 2016
5
 Condensed Consolidated Statements of Cash Flows for the threenine months ended April 2,October 1, 2017 and April 3,October 2, 2016
6
 Condensed Consolidated Statements of Changes in Equity for the threenine months ended April 2,October 1, 2017 and April 3,October 2, 2016
7
 
Notes to Condensed Consolidated Financial Statements
8
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
1924
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
4050
ITEM 4.
Controls and Procedures
4050
 
PART II. OTHER INFORMATION
 
ITEM 1.
Legal Proceedings
4151
ITEM 1A.
Risk Factors
4151
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
4151
ITEM 3.
Defaults Upon Senior Securities
4252
ITEM 4.
Mine Safety Disclosures
4252
ITEM 5.
Other Information
4252
ITEM 6.
Exhibits
4252
 
Signatures
43
Cummins Inc. Exhibit Index
4453

PART I.  FINANCIAL INFORMATION

ITEM 1.  Condensed Consolidated Financial Statements
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 Three months ended Three months ended Nine months ended
In millions, except per share amounts  April 2,
2017		 April 3,
2016		 October 1,
2017		 October 2,
2016		 October 1,
2017		 October 2,
2016
NET SALES (a)
 $4,589
 $4,291
 $5,285
 $4,187
 $14,952
 $13,006
Cost of sales 3,461
 3,235
 3,946
 3,108
 11,236
 9,674
GROSS MARGIN 1,128
 1,056
 1,339
 1,079
 3,716
 3,332
OPERATING EXPENSES AND INCOME  
  
  
  
  
  
Selling, general and administrative expenses 537
 490
 624
 513
 1,757
 1,527
Research, development and engineering expenses 158
 166
 213
 157
 545
 478
Equity, royalty and interest income from investees (Note 4) 108
 72
 95
 74
 301
 234
Loss contingency (Note 9) —
 99
 —
 138
Other operating income (expense), net 5
 (2) 32
 —
 55
 (2)
OPERATING INCOME 546
 470
 629
 384
 1,770
 1,421
Interest income 2
 6
 4
 6
 11
 18
Interest expense (Note 7) 18
 19
 18
 16
 57
 51
Other income (expense), net 18
 8
 7
 8
 45
 34
INCOME BEFORE INCOME TAXES 548
 465
 622
 382
 1,769
 1,422
Income tax expense 143
 132
 165
 82
 466
 362
CONSOLIDATED NET INCOME 405
 333
 457
 300
 1,303
 1,060
Less: Net income attributable to noncontrolling interests 9
 12
 4
 11
 30
 44
NET INCOME ATTRIBUTABLE TO CUMMINS INC. $396
 $321
 $453
 $289
 $1,273
 $1,016
            
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.  
  
  
  
  
  
Basic $2.36
 $1.87
 $2.72
 $1.72
 $7.62
 $5.99
Diluted $2.36
 $1.87
 $2.71
 $1.72
 $7.60
 $5.99
            
WEIGHTED AVERAGE SHARES OUTSTANDING  
  
  
  
  
  
Basic 167.5
 171.8
 166.3
 167.8
 167.0
 169.5
Dilutive effect of stock compensation awards 0.5
 0.2
 0.7
 0.4
 0.6
 0.2
Diluted 168.0
 172.0
 167.0
 168.2
 167.6
 169.7
            
CASH DIVIDENDS DECLARED PER COMMON SHARE $1.025
 $0.975
 $1.08
 $1.025
 $3.13
 $2.975

(a) Includes sales to nonconsolidated equity investees of $267$285 million and $242$835 million and $275 million and $793 million for the three and nine months ended April 2,October 1, 2017 and April 3,October 2, 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 Three months ended Nine months ended
In millions  April 2,
2017		 April 3,
2016		 October 1,
2017		 October 2,
2016		 October 1,
2017		 October 2,
2016
CONSOLIDATED NET INCOME $405
 $333
 $457
 $300
 $1,303
 $1,060
Other comprehensive income (loss), net of tax (Note 10)  
  
  
  
  
  
Change in pension and other postretirement defined benefit plans 16
 13
 52
 31
Foreign currency translation adjustments 80
 (57) 94
 (29) 276
 (299)
Unrealized gain (loss) on marketable securities —
 —
 1
 1
Unrealized gain (loss) on derivatives 1
 (21) (1) 7
 —
 (20)
Change in pension and other postretirement defined benefit plans 21
 9
Total other comprehensive income (loss), net of tax 102
 (69) 109
 (9) 329
 (287)
COMPREHENSIVE INCOME 507
 264
 566
 291
 1,632
 773
Less: Comprehensive income attributable to noncontrolling interests 22
 12
 2
 14
 42
 41
COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC. $485
 $252
 $564
 $277
 $1,590
 $732
 
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 April 2,
2017		 December 31,
2016		 October 1,
2017		 December 31,
2016
ASSETS  
  
  
  
Current assets  
  
  
  
Cash and cash equivalents $1,322
 $1,120
 $1,290
 $1,120
Marketable securities (Note 5) 145
 260
 154
 260
Total cash, cash equivalents and marketable securities 1,467
 1,380
 1,444
 1,380
Accounts and notes receivable, net        
Trade and other 2,980
 2,803
 3,532
 2,803
Nonconsolidated equity investees 267
 222
 278
 222
Inventories (Note 6) 2,894
 2,675
 3,146
 2,675
Prepaid expenses and other current assets 551
 627
 656
 627
Total current assets 8,159
 7,707
 9,056
 7,707
Long-term assets  
  
  
  
Property, plant and equipment 7,746
 7,635
 7,901
 7,635
Accumulated depreciation (3,944) (3,835) (4,085) (3,835)
Property, plant and equipment, net 3,802
 3,800
 3,816
 3,800
Investments and advances related to equity method investees 1,059
 946
 1,213
 946
Goodwill 482
 480
 1,036
 480
Other intangible assets, net 345
 332
 964
 332
Pension assets 785
 731
 912
 731
Other assets 1,002
 1,015
 995
 1,015
Total assets $15,634
 $15,011
 $17,992
 $15,011
        
LIABILITIES  
  
  
  
Current liabilities  
  
  
  
Accounts payable (principally trade) $2,168
 $1,854
 $2,486
 $1,854
Loans payable (Note 7) 48
 41
 64
 41
Commercial paper (Note 7) 274
 212
 514
 212
Accrued compensation, benefits and retirement costs 334
 412
 674
 412
Current portion of accrued product warranty (Note 8) 352
 333
 462
 333
Current portion of deferred revenue 498
 468
 528
 468
Other accrued expenses 941
 970
 968
 970
Current maturities of long-term debt (Note 7) 47
 35
 62
 35
Total current liabilities 4,662
 4,325
 5,758
 4,325
Long-term liabilities  
  
  
  
Long-term debt (Note 7) 1,576
 1,568
 1,615
 1,568
Postretirement benefits other than pensions 317
 329
 319
 329
Pensions 325
 326
 328
 326
Other liabilities and deferred revenue 1,278
 1,289
 1,411
 1,289
Total liabilities $8,158
 $7,837
 $9,431
 $7,837
        
Commitments and contingencies (Note 9) 

 

 


 


  
  
  
  
EQUITY        
Cummins Inc. shareholders’ equity  
  
  
  
Common stock, $2.50 par value, 500 shares authorized, 222.3 and 222.4 shares issued $2,163
 $2,153
Common stock, $2.50 par value, 500 shares authorized, 222.4 and 222.4 shares issued $2,198
 $2,153
Retained earnings 11,265
 11,040
 11,791
 11,040
Treasury stock, at cost, 54.4 and 54.2 shares (4,524) (4,489)
Treasury stock, at cost, 56.4 and 54.2 shares (4,849) (4,489)
Common stock held by employee benefits trust, at cost, 0.6 and 0.7 shares (7) (8) (7) (8)
Accumulated other comprehensive loss (Note 10) (1,732) (1,821) (1,504) (1,821)
Total Cummins Inc. shareholders’ equity 7,165
 6,875
 7,629
 6,875
Noncontrolling interests 311
 299
 932
 299
Total equity $7,476
 $7,174
 $8,561
 $7,174
Total liabilities and equity $15,634
 $15,011
 $17,992
 $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)
 Three months ended Nine months ended
In millions April 2,
2017		 April 3,
2016		 October 1,
2017		 October 2,
2016
CASH FLOWS FROM OPERATING ACTIVITIES  
  
  
  
Consolidated net income $405
 $333
 $1,303
 $1,060
Adjustments to reconcile consolidated net income to net cash provided by operating activities  
  
  
  
Depreciation and amortization 139
 128
 433
 391
Deferred income taxes 10
 (2) 26
 60
Equity in income of investees, net of dividends (Note 4) (83) (48)
Equity in income of investees, net of dividends (166) (94)
Pension contributions in excess of expense (Note 3) (23) (50) (63) (92)
Other post-retirement benefits payments in excess of expense (Note 3) (10) (8)
Other post retirement benefits payments in excess of expense (Note 3) (4) (16)
Stock-based compensation expense 7
 5
 34
 28
Restructuring charges and other actions, net of cash payments —
 (25)
Restructuring payments —
 (53)
Loss contingency (Note 9) —
 138
Translation and hedging activities 11
 (14) 61
 (39)
Changes in current assets and liabilities, net of acquisitions    
    
Accounts and notes receivable (205) (98) (722) (112)
Inventories (202) (54) (401) (150)
Other current assets 73
 188
 (28) 138
Accounts payable 296
 107
 567
 101
Accrued expenses (90) (283) 369
 (279)
Changes in other liabilities and deferred revenue 48
 78
 177
 188
Other, net 3
 10
 (115) 45
Net cash provided by operating activities 379
 267
 1,471
 1,314
        
CASH FLOWS FROM INVESTING ACTIVITIES  
  
  
  
Capital expenditures (81) (71) (282) (312)
Investments in internal use software (27) (13) (59) (42)
Proceeds from disposals of property, plant and equipment 104
 11
Investments in and advances to equity investees (20) (25) (71) (29)
Acquisitions of businesses, net of cash acquired (Note 11) (600) (1)
Investments in marketable securities—acquisitions (Note 5) (26) (291) (106) (447)
Investments in marketable securities—liquidations (Note 5) 147
 35
 218
 291
Cash flows from derivatives not designated as hedges (24) (26) 9
 (64)
Other, net 4
 3
 1
 3
Net cash used in investing activities (27) (388) (786) (590)
        
CASH FLOWS FROM FINANCING ACTIVITIES  
  
  
  
Proceeds from borrowings —
 105
 4
 111
Net borrowings of commercial paper (Note 7) 62
 50
Net borrowings of commercial paper 302
 273
Payments on borrowings and capital lease obligations (11) (15) (38) (156)
Net borrowings under short-term credit agreements 19
 25
Distributions to noncontrolling interests (10) (10) (29) (42)
Dividend payments on common stock (171) (170) (522) (505)
Repurchases of common stock (Note 2) (51) (575)
Repurchases of common stock (391) (745)
Other, net 17
 (21) 55
 (6)
Net cash used in financing activities (164) (636) (600) (1,045)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 14
 (39) 85
 (139)
Net increase (decrease) in cash and cash equivalents 202
 (796) 170
 (460)
Cash and cash equivalents at beginning of year 1,120
 1,711
 1,120
 1,711
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,322
 $915
 $1,290
 $1,251


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

CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
 
In millionsCommon
Stock		 Additional
Paid-in
Capital		 Retained
Earnings		 Treasury
Stock		 Common
Stock
Held in
Trust		 Accumulated
Other
Comprehensive
Loss		 Total
Cummins Inc.
Shareholders’
Equity		 Noncontrolling
Interests		 Total
Equity		Common
Stock		 Additional
Paid-in
Capital		 Retained
Earnings		 Treasury
Stock		 Common
Stock
Held in
Trust		 Accumulated
Other
Comprehensive
Loss		 Total
Cummins Inc.
Shareholders’
Equity		 Noncontrolling
Interests		 Total
Equity
BALANCE AT DECEMBER 31, 2015$556
 $1,622
 $10,322
 $(3,735) $(11) $(1,348) $7,406
 $344
 $7,750
$556
 $1,622
 $10,322
 $(3,735) $(11) $(1,348) $7,406
 $344
 $7,750
Net income

 

 321
 

 

 

 321
 12
 333


 

 1,016
 

 

 

 1,016
 44
 1,060
Other comprehensive income (loss), net of tax (Note 10)

 

 

 

 

 (69) (69) —
 (69)

 

 

 

 

 (284) (284) (3) (287)
Issuance of common stock

 2
 

 

 

 

 2
 —
 2


 5
 

 

 

 

 5
 —
 5
Employee benefits trust activity

 9
 

 

 2
 

 11
 —
 11


 19
 

 

 3
 

 22
 —
 22
Repurchases of common stock (Note 2)

 (100) 

 (475) 

 

 (575) —
 (575)
Repurchases of common stock

 


 

 (745) 

 

 (745) —
 (745)
Cash dividends on common stock

 

 (170) 

 

 

 (170) —
 (170)

 

 (505) 

 

 

 (505) —
 (505)
Distributions to noncontrolling interests

 

 

 

 

 

 —
 (10) (10)

 

 

 

 

 

 —
 (49) (49)
Stock based awards

 (6) 

 7
 

 

 1
 —
 1


 (7) 

 12
 

 

 5
 —
 5
Acquisition of noncontrolling interests  (7)         (7) (6) (13)
BALANCE AT APRIL 3, 2016$556
 $1,520
 $10,473
 $(4,203) $(9) $(1,417) $6,920
 $340
 $7,260
Other shareholder transactions

 14
 

 

 

 

 14
 (6) 8
BALANCE AT OCTOBER 2, 2016$556
 $1,653
 $10,833
 $(4,468) $(8) $(1,632) $6,934
 $330
 $7,264
                                  
BALANCE AT DECEMBER 31, 2016$556
 $1,597
 $11,040
 $(4,489) $(8) $(1,821) $6,875
 $299
 $7,174
$556
 $1,597
 $11,040
 $(4,489) $(8) $(1,821) $6,875
 $299
 $7,174
Net income

 

 396
 

 

 

 396
 9
 405


 

 1,273
 

 

 

 1,273
 30
 1,303
Other comprehensive income (loss), net of tax (Note 10)

 

 

 

 

 89
 89
 13
 102


 

 

 

 

 317
 317
 12
 329
Issuance of common stock

 5
 

 

 

 

 5
 —
 5
Employee benefits trust activity

 9
 

 

 1
 

 10
 —
 10


 14
 

 

 1
 

 15
 —
 15
Repurchases of common stock

 

 

 (51) 

 

 (51) —
 (51)

 

 

 (391) 

 

 (391) —
 (391)
Cash dividends on common stock

 

 (171) 

 

 

 (171) —
 (171)

 

 (522) 

 

 

 (522) —
 (522)
Distributions to noncontrolling interests

 

 

 

 

 

 —
 (10) (10)

 

 

 

 

 

 —
 (29) (29)
Stock based awards

 (1) 

 16
 

 

 15
 —
 15


 2
 

 31
 

 

 33
 —
 33
Acquisition of business            —
 600
 600
Other shareholder transactions

 2
 

 

 

 

 2
 —
 2


 24
 

 

 

 

 24
 20
 44
BALANCE AT APRIL 2, 2017$556
 $1,607
 $11,265
 $(4,524) $(7) $(1,732) $7,165
 $311
 $7,476
BALANCE AT OCTOBER 1, 2017$556
 $1,642
 $11,791
 $(4,849) $(7) $(1,504) $7,629
 $932
 $8,561
 
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. NATURE OF OPERATIONS
Cummins Inc. (“Cummins,” “we,” “our” or “us”) was founded in 1919 as Cummins Engine Company, a corporation in Columbus, Indiana, as one of the first diesel engine manufacturers. We changed our name to Cummins Inc. in 2001. We are a global power leader that designs, manufactures, distributes and services diesel and natural gas engines and engine-related component products, including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems, transmissions and electric power generation systems. We sell our products to original equipment manufacturers (OEMs), distributors and other customers worldwide. We serve our customers through a network of approximately 600 wholly-owned and independent distributor locations and over 7,400 dealer locations in more than 190 countries and territories.
NOTE 2. BASIS OF PRESENTATION
Interim Condensed Financial Statements
The unaudited Condensed Consolidated Financial Statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of operations, financial position and cash flows. All such adjustments are of a normal recurring nature. The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles in the United States of America (GAAP) pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial information. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted as permitted by such rules and regulations.
These interim condensed financial statements should be read in conjunction with the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2016. Our interim period financial results for the three and nine month periods presented are not necessarily indicative of results to be expected for any other interim period or for the entire year. The year-end Condensed Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.
Reclassifications
Certain amounts for prior year periods have been reclassified to conform to the presentation of the current year.
Use of Estimates in Preparation of Financial Statements
Preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts presented and disclosed in our Condensed Consolidated Financial Statements. Significant estimates and assumptions in these Condensed Consolidated Financial Statements require the exercise of judgment and are used for, but not limited to, allowance for doubtful accounts, estimates of future cash flows and other assumptions associated with goodwill and long-lived asset impairment tests, useful lives for depreciation and amortization, warranty programs, determination of discount rate and other assumptions for pension and other postretirement benefit costs, income taxes and deferred tax valuation allowances, lease classification and contingencies. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be different from these estimates.
Reporting Period
Our reporting period usually ends on the Sunday closest to the last day of the quarterly calendar period. The firstthird quarters of 2017 and 2016 ended on AprilOctober 1 and October 2, and April 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 were as follows:

 Three months ended Nine months ended
 October 1,
2017		 October 2,
2016		 October 1,
2017		 October 2,
2016
Options excluded3,728
 936,857
 42,139
 1,295,664
 Three months ended
 April 2,
2017		 April 3,
2016
Options excluded116,535
 1,687,666
Accelerated 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. Pursuant to the terms of the agreement, we paid the full $500 million purchase price and received approximately 4.1 million shares at a price of $98.43 per share, 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. The initial delivery of shares resulted in a reduction to our common stock outstanding used to calculate earnings per share in the first quarter of 2016.
NOTE 3. PENSION AND OTHER POSTRETIREMENT BENEFITS
We sponsor funded and unfunded domestic and foreign defined benefit pension and other postretirement plans. Contributions to these plans were as follows:
  Three months ended Nine months ended
In millions October 1,
2017		 October 2,
2016		 October 1,
2017		 October 2,
2016
Defined benefit pension plans  
  
  
  
Voluntary contribution $41
 $16
 $125
 $101
Mandatory contribution —
 5
 —
 23
Defined benefit pension contributions $41
 $21
 $125
 $124
         
Other postretirement plans $1
 $4
 $19
 $32
         
Defined contribution pension plans $19
 $17
 $67
 $53
  Three months ended
In millions April 2,
2017		 April 3,
2016
Defined benefit pension plans  
  
Voluntary contribution $43
 $48
Mandatory contribution —
 12
Defined benefit pension contributions $43
 $60
     
Other postretirement plans $15
 $13
     
Defined contribution pension plans $29
 $21

We anticipate making additional defined benefit pension contributions during the remainder of 2017 of $91$10 million for our U.S. and U.KU.K. pension plans. Approximately $133$134 million of the estimated $134$135 million of pension contributions for the full year are voluntary. These contributions may be made from trusts or company funds either to increase pension assets or to make direct benefit payments to plan participants. We expect our 2017 net periodic pension cost to approximate $83 million.
The components of net periodic pension and other postretirement benefit costs under our plans were as follows:
 Pension     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 April 2,
2017		 April 3,
2016		 April 2,
2017		 April 3,
2016		 April 2,
2017		 April 3,
2016		 October 1,
2017		 October 2,
2016		 October 1,
2017		 October 2,
2016		 October 1,
2017		 October 2,
2016
Service cost $27
 $23
 $6
 $5
 $—
 $—
 $27
 $22
 $7
 $5
 $—
 $—
Interest cost 26
 28
 10
 13
 3
 4
 26
 26
 10
 13
 3
 4
Expected return on plan assets (51) (51) (17) (19) —
 —
 (50) (50) (18) (17) —
 —
Recognized net actuarial loss 9
 7
 10
 4
 2
 1
 10
 9
 10
 3
 2
 1
Net periodic benefit cost $11
 $7
 $9
 $3
 $5
 $5
 $13
 $7
 $9
 $4
 $5
 $5
             
  Pension    
  U.S. Plans U.K. Plans Other Postretirement Benefits
  Nine months ended
In millions October 1,
2017		 October 2,
2016		 October 1,
2017		 October 2,
2016		 October 1,
2017		 October 2,
2016
Service cost $80
 $68
 $20
 $16
 $—
 $—
Interest cost 79
 82
 30
 39
 10
 12
Expected return on plan assets (153) (152) (52) (55) —
 —
Recognized net actuarial loss 28
 23
 30
 11
 5
 4
Net periodic benefit cost $34
 $21
 $28
 $11
 $15
 $16


NOTE 4. EQUITY, ROYALTY AND INTEREST INCOME FROM INVESTEES
Equity, royalty and interest income from investees included in our Condensed Consolidated Statements of Income for the reporting periods was as follows: 
  Three months ended Nine months ended
In millions October 1,
2017		 October 2,
2016		 October 1,
2017		 October 2,
2016
Distribution entities        
Komatsu Cummins Chile, Ltda. $8
 $8
 $23
 $26
North American distributors —
 7
 —
 18
All other distributors (1) 1
 (1) 2
Manufacturing entities      
  
Beijing Foton Cummins Engine Co., Ltd. 24
 19
 79
 59
Dongfeng Cummins Engine Company, Ltd. 15
 10
 56
 32
Chongqing Cummins Engine Company, Ltd. 11
 11
 30
 28
All other manufacturers 27
 8
 78
 40
Cummins share of net income 84
 64
 265
 205
Royalty and interest income 11
 10
 36
 29
Equity, royalty and interest income from investees $95
 $74
 $301
 $234
  Three months ended
In millions April 2,
2017		 April 3,
2016
Distribution entities    
Komatsu Cummins Chile, Ltda. $7
 $10
North American distributors —
 5
Manufacturing entities    
Beijing Foton Cummins Engine Co., Ltd. 33
 18
Dongfeng Cummins Engine Company, Ltd. 22
 7
Chongqing Cummins Engine Company, Ltd. 9
 8
All other manufacturers 24
 16
Cummins share of net income 95
 64
Royalty and interest income 13
 8
Equity, royalty and interest income from investees $108
 $72

NOTE 5. MARKETABLE SECURITIES
A summary of marketable securities, all of which are classified as current, was as follows:
 April 2, 2017 December 31, 2016 October 1, 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)
  
  
  
  
  
  
  
  
  
  
  
  
Debt mutual funds $130
 $—
 $130
 $132
 $—
 $132
 $139
 $—
 $139
 $132
 $—
 $132
Bank debentures —
 —
 —
 114
 —
 114
 —
 —
 —
 114
 —
 114
Equity mutual funds 12
 1
 13
 12
 —
 12
 12
 2
 14
 12
 —
 12
Government debt securities 2
 —
 2
 2
 —
 2
 1
 —
 1
 2
 —
 2
Total marketable securities $144
 $1
 $145
 $260
 $—
 $260
 $152
 $2
 $154
 $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 threenine months of 2017 and for the year ended 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 five years. The counterparties to these investments are reputable financial institutions with investment grade credit ratings. Since these instruments are not tradable and must be settled directly by us with the respective financial institution, our fair value measure is the financial institutions’ month-end statement.
Equity mutual funds— The fair value measure for these investments is the net asset value published by the issuing brokerage. Daily quoted prices are available from reputable third party pricing services and are used on a test basis to corroborate this Level 2 input measure.
Government debt securities— The fair value measure for these securities is broker quotes received from reputable firms. These securities are infrequently traded on a national stock exchange and these values are used on a test basis to corroborate our Level 2 input measure.
•
Debt mutual funds— The fair value measure for the vast majority of these investments is the daily net asset value published on a regulated governmental website. Daily quoted prices are available from the issuing brokerage and are used on a test basis to corroborate this Level 2 input.
•
Bank debentures— These investments provide us with a contractual rate of return and generally range in maturity from three months to five years. The counterparties to these investments are reputable financial institutions with investment grade credit ratings. Since these instruments are not tradable and must be settled directly by us with the respective financial institution, our fair value measure is the financial institutions’ month-end statement.
•
Equity mutual funds— The fair value measure for these investments is the net asset value published by the issuing brokerage. Daily quoted prices are available from reputable third party pricing services and are used on a test basis to corroborate this Level 2 input measure.
•
Government debt securities— The fair value measure for these securities is broker quotes received from reputable firms. These securities are infrequently traded on a national stock exchange and these values are used on a test basis to corroborate our Level 2 input measure.

The proceeds from sales and maturities of marketable securities and gross realized gains and losses from the sale of available-for-sale securities were as follows:
  Nine months ended
In millions October 1,
2017		 October 2,
2016
Proceeds from sales and maturities of marketable securities (1)
 $218
 $291
  Three months ended
In millions April 2,
2017		 April 3,
2016
Proceeds from sales and maturities of marketable securities (1)
 $147
 $35

(1) Gross realized gains and losses from the sale of available-for-sale securities were immaterial.
The fair value of available-for-sale investments in debt securities that utilize a Level 2 fair value measure is shown by contractual maturity below:
Contractual Maturity (In millions) October 1,
2017
1 year or less $139
1 - 5 years 1
Total $140
Contractual Maturity (In millions) April 2,
2017
1 year or less $131
5 - 10 years 1
Total $132

NOTE 6. INVENTORIES
Inventories are stated at the lower of cost or market. Inventories included the following:
In millions October 1,
2017		 December 31,
2016
Finished products $2,027
 $1,779
Work-in-process and raw materials 1,243
 1,005
Inventories at FIFO cost 3,270
 2,784
Excess of FIFO over LIFO (124) (109)
Total inventories $3,146
 $2,675

In millions April 2,
2017		 December 31,
2016
Finished products $1,867
 $1,779
Work-in-process and raw materials 1,145
 1,005
Inventories at FIFO cost 3,012
 2,784
Excess of FIFO over LIFO (118) (109)
Total inventories $2,894
 $2,675

NOTE 7. DEBT
Loans Payable and Commercial Paper
Loans payable, commercial paper and the related weighted-average interest rates were as follows:
In millions April 2, 2017 December 31, 2016 October 1, 2017 December 31, 2016
Loans payable (1)
 $48
 $41
 $64
 $41
Commercial paper (2)
 274
 212
 514
 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)The weighted average interest rate, inclusive of all brokerage fees, was 0.941.22 percent and 0.79 percent at April 2,October 1, 2017 and December 31, 2016, respectively.


Revolving Credit Facility
On September 5, 2017, we entered into a 364-day credit facility that allows us to borrow up to $1 billion of additional unsecured funds at any time through September 2018.
We have access to credit facilities that total $2.75 billion, including the new 364-day facility and the $1.75 billion facility that expires on November 13, 2020. We intend to maintain credit facilities of a similar aggregate amount by renewing or replacing these facilities before expiration. Revolving credit facilities are maintained primarily to provide backup liquidity for our commercial paper borrowings, letters of credit and general corporate purposes.
Long-term Debt
A summary of long-term debt was as follows:
In millions October 1,
2017		 December 31,
2016
Long-term debt  
  
Senior notes, 3.65%, due 2023 $500
 $500
Debentures, 6.75%, due 2027 58
 58
Debentures, 7.125%, due 2028 250
 250
Senior notes, 4.875%, due 2043 500
 500
Debentures, 5.65%, due 2098 (effective interest rate 7.48%) 165
 165
Other debt 91
 51
Unamortized discount (54) (56)
Fair value adjustments due to hedge on indebtedness 42
 47
Capital leases 125
 88
Total long-term debt 1,677
 1,603
Less: Current maturities of long-term debt 62
 35
Long-term debt $1,615
 $1,568

In millions April 2,
2017		 December 31,
2016
Long-term debt  
  
Senior notes, 3.65%, due 2023 $500
 $500
Debentures, 6.75%, due 2027 58
 58
Debentures, 7.125%, due 2028 250
 250
Senior notes, 4.875%, due 2043 500
 500
Debentures, 5.65%, due 2098 (effective interest rate 7.48%) 165
 165
Other debt 69
 51
Unamortized discount (55) (56)
Fair value adjustments due to hedge on indebtedness 43
 47
Capital leases 93
 88
Total long-term debt 1,623
 1,603
Less: Current maturities of long-term debt 47
 35
Long-term debt $1,576
 $1,568
Principal payments required on long-term debt during the next five years are as follows:
In millions 2017 2018 2019 2020 2021
Principal payments $23
 $59
 $51
 $12
 $6

In millions 2017 2018 2019 2020 2021
Principal payments $34
 $45
 $35
 $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 valuevalues and carrying valuevalues of total debt, including current maturities, were as follows:
In millions April 2,
2017		 December 31,
2016		 October 1,
2017		 December 31,
2016
Fair value of total debt (1)
 $2,150
 $2,077
 $2,528
 $2,077
Carrying value of total debt 1,945
 1,856
 2,255
 1,856

(1) The fair value of debt is derived from Level 2 inputs.
NOTE 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 1,
2017		 October 2,
2016
Balance, beginning of year $1,414
 $1,404
Provision for warranties issued 446
 256
Deferred revenue on extended warranty contracts sold 164
 179
Payments (296) (291)
Amortization of deferred revenue on extended warranty contracts (161) (148)
Changes in estimates for pre-existing warranties 71
 22
Foreign currency translation 5
 (6)
Balance, end of period $1,643
 $1,416
In millions  April 2,
2017		 April 3,
2016
Balance, beginning of year $1,414
 $1,404
Provision for warranties issued 92
 93
Deferred revenue on extended warranty contracts sold 48
 55
Payments (95) (102)
Amortization of deferred revenue on extended warranty contracts (54) (47)
Changes in estimates for pre-existing warranties 34
 —
Foreign currency translation (2) —
Balance, end of period $1,437
 $1,403


Warranty related deferred revenuerevenues and the long-term portion of the warranty liabilityliabilities on our April 2,October 1, 2017, balance sheet were as follows:
In millions October 1,
2017		 Balance Sheet Location
Deferred revenue related to extended coverage programs  
  
Current portion $229
 Current portion of deferred revenue
Long-term portion 519
 Other liabilities and deferred revenue
Total $748
  
     
Long-term portion of warranty liability $433
 Other liabilities and deferred revenue
In millions April 2,
2017		 Balance Sheet Location
Deferred revenue related to extended coverage programs  
  
Current portion $224
 Current portion of deferred revenue
Long-term portion 515
 Other liabilities and deferred revenue
Total $739
  
     
Long-term portion of warranty liability $346
 Other liabilities and deferred revenue

NOTE 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 ChargesContingencies
Third Party Aftertreatment
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 onfor 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 $60 million in 2015. The Campaign design was finalized with our OEM customer, reviewed with the EPA and submitted for final approval in 2016. We concluded based upon additional in-use emission testing performed in 2016 that the Campaign should be expanded to include a larger population of vehicles manufactured by this one OEM. We recorded additional charges of $138$39 million and $99 million in the second and third quarter, respectively, in 2016 to reflect the estimated cost of our overall participation in the Campaign. This charge is reflected in a separate line item on our Condensed Consolidated Statements of Income. 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 CampaignWe are currently reimbursing our customer for 50 percent of the campaign expenses pending final resolution in the litigation or pre-suit settlement. This began in the fourth quarter of 2016.2016 with a combination of cash and credit memos. The remaining accrual of $181$148 million is included in ''Other accrued expenses'' in our Condensed Consolidated Balance Sheets.
Engine System
During 2017, the CARB and U.S. EPA began selecting certain of our pre-2013 model year engine systems for additional emissions testing.  We have been notified that a portion of the CARB and EPA selected engine systems have failed emissions testing due to the unexpected degradation of an aftertreatment component.  Although we have no official notice from the CARB or EPA on these engine systems to date, we are working with the agencies on a resolution of these matters.  We are developing and testing solutions to address the technical issues, which could include a combination of calibration changes, service practices and hardware changes.  We recorded a charge of $29 millionto "cost of sales" in our Condensed Consolidated Statements of Income in the third quarter of 2017 for the expected cost of field campaigns to repair some of these engine systems.
In addition, we are currently evaluating other engine systems for model years 2010 through 2015 that could potentially be subject to similar degradation issues.  At this point in time, we have not yet determined the impact to other model years and engine systems or the percentage of the engine system populations affected.
Because this remains under review with a number of yet unresolved variables, we are not yet able to estimate the outcome for these matters. It is possible, however, that they could have a material effect on our results of operations in the periods in which the uncertainties are resolved.
We do not currently expect any fines or penalties from the EPA or CARB related to this matter.


Guarantees and Commitments
Periodically, we enter into guarantee arrangements, including guarantees of non-U.S. distributor financings, residual value guarantees on equipment under operating leases and other miscellaneous guarantees of joint ventures or third-party obligations. At April 2,October 1, 2017, the maximum potential loss related to these guarantees was $43$50 million.
We have arrangements with certain suppliers that require us to purchase minimum volumes or be subject to monetary penalties. At April 2,October 1, 2017, if we were to stop purchasing from each of these suppliers, the aggregate amount of the penalty would be approximately $119$101 million, of which $41$29 million relates to a contract with a components supplier that extends to 2018 and $35$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 two2 years. At April 2,October 1, 2017, the total commitments under these contracts were $24$23 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 $83$104 million at April 2,October 1, 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
•
product liability and license, patent or trademark indemnifications;
•
asset sale agreements where we agree to indemnify the purchaser against future environmental exposures related to the asset sold; and
any contractual agreement where we agree to indemnify the counterparty for losses suffered as a result of a misrepresentation in the contract.
We regularly evaluate the probability of having to incur costs associated with these indemnities and accrue for expected losses that are probable. Because the indemnifications are not related to specified known liabilities and due to their uncertain nature, we are unable to estimate the maximum amount of the potential loss associated with these indemnifications.

NOTE 10. ACCUMULATED OTHER COMPREHENSIVE LOSS
Following are the changes in accumulated other comprehensive income (loss) by component:component for the three months ended:
 Three months ended Three months ended
In millions Change in
pensions and
other
postretirement
defined benefit
plans		 Foreign
currency
translation
adjustment		 Unrealized gain
(loss) on
marketable
securities		 Unrealized gain
(loss) on
derivatives		 Total
attributable to
Cummins Inc.		 Noncontrolling
interests		 Total other comprehensive income (loss) Change in
pensions and
other
postretirement
defined benefit
plans		 Foreign
currency
translation
adjustment		 Unrealized gain
(loss) on
marketable
securities		 Unrealized gain
(loss) on
derivatives		 Total
attributable to
Cummins Inc.		 Noncontrolling
interests		 Total other comprehensive income (loss)
Balance at December 31, 2015 $(654) $(696) $(2) $4
 $(1,348)  
  
Balance at July 3, 2016 $(636) $(960) $(1) $(23) $(1,620)  
  
Other comprehensive income before reclassifications  
  
  
  
  
  
  
  
  
  
  
  
  
  
Before tax amount —
 (58) —
 (26) (84) $—
 $(84) 5
 (51) —
 (4) (50) $3
 $(47)
Tax benefit (expense) —
 1
 —
 4
 5
 —
 5
 (1) 19
 —
 1
 19
 —
 19
After tax amount —
 (57) —
 (22) (79) —
 (79) 4
 (32) —
 (3) (31) 3
 (28)
Amounts reclassified from accumulated other comprehensive loss(1)(2)
 9
 —
 —
 1
 10
 —
 10
 9
 —
 —
 10
 19
 —
 19
Net current period other comprehensive income (loss) 9
 (57) —
 (21) (69) $—
 $(69) 13
 (32) —
 7
 (12) $3
 $(9)
Balance at April 3, 2016 $(645) $(753) $(2) $(17) $(1,417)  
  
Balance at October 2, 2016 $(623) $(992) $(1) $(16) $(1,632)  
  
                            
Balance at December 31, 2016 $(685) $(1,127) $(1) $(8) $(1,821)  
  
Balance at July 2, 2017 $(649) $(959) $—
 $(7) $(1,615)  
  
Other comprehensive income before reclassifications  
  
  
  
  
  
  
  
  
  
  
  
  
  
Before tax amount 8
 75
 1
 (6) 78
 $13
 $91
 —
 106
 —
 (6) 100
 $(2) $98
Tax benefit (expense) (3) (8) —
 2
 (9) —
 (9) —
 (10) 1
 2
 (7) —
 (7)
After tax amount 5
 67
 1
 (4) 69
 13
 82
 —
 96
 1
 (4) 93
 (2) 91
Amounts reclassified from accumulated other comprehensive loss(1)(2)
 16
 —
 (1) 5
 20
 —
 20
 16
 —
 (1) 3
 18
 —
 18
Net current period other comprehensive income (loss) 21
 67
 —
 1
 89
 $13
 $102
 16
 96
 —
 (1) 111
 $(2) $109
Balance at April 2, 2017 $(664) $(1,060) $(1) $(7) $(1,732)  
  
Balance at October 1, 2017 $(633) $(863) $—
 $(8) $(1,504)  
  

(1) Amounts are net of tax.  
(2) Reclassifications out of accumulated other comprehensive income (loss) and the related tax effects are immaterial for separate disclosure.














Following are the changes in accumulated other comprehensive income (loss) by component for the nine months ended:
 
  Nine months ended
In millions Change in
pensions and
other
postretirement
defined benefit
plans		 Foreign
currency
translation
adjustment		 Unrealized gain
(loss) on
marketable
securities		 Unrealized gain
(loss) on
derivatives		 Total
attributable to
Cummins Inc.		 Noncontrolling
interests		 Total other comprehensive income (loss)
Balance at December 31, 2015 $(654) $(696) $(2) $4
 $(1,348)  
  
Other comprehensive income before reclassifications  
  
  
  
  
  
  
Before tax amount 5
 (316) 1
 (40) (350) $(3) $(353)
Tax benefit (expense) (1) 20
 —
 7
 26
 —
 26
After tax amount 4
 (296) 1
 (33) (324) (3) (327)
Amounts reclassified from accumulated other comprehensive loss(1)(2)
 27
 —
 —
 13
 40
 —
 40
Net current period other comprehensive income (loss) 31
 (296) 1
 (20) (284) $(3) $(287)
Balance at October 2, 2016 $(623) $(992) $(1) $(16) $(1,632)  
  
               
Balance at December 31, 2016 $(685) $(1,127) $(1) $(8) $(1,821)  
  
Other comprehensive income before reclassifications  
  
  
  
  
  
  
Before tax amount 8
 286
 2
 (14) 282
 $12
 $294
Tax benefit (expense) (3) (22) —
 5
 (20) —
 (20)
After tax amount 5
 264
 2
 (9) 262
 12
 274
Amounts reclassified from accumulated other comprehensive loss(1)(2)
 47
 —
 (1) 9
 55
 —
 55
Net current period other comprehensive income (loss) 52
 264
 1
 —
 317
 $12
 $329
Balance at October 1, 2017 $(633) $(863) $—
 $(8) $(1,504)  
  

(1) Amounts are net of tax.
(2) Reclassifications out of accumulated other comprehensive income (loss) and the related tax effects are immaterial for separate disclosure.

NOTE 11. ACQUISITION

In April 2017, we entered into an agreement to form a joint venture with Eaton Corporation PLC (Eaton), which closed on July 31, 2017 (the acquisition date). We purchased a 50 percent interest in the new venture named Eaton Cummins Automated Transmission Technologies for $600 million in cash. In addition, each partner contributed $20 million for working capital. The joint venture will design, assemble, sell and support medium-duty and heavy-duty automated transmissions for the commercial vehicle market, including new product launches. The new generation products (Procision and Endurant) were launched in 2016 and 2017, respectively, and are owned by the joint venture. Eaton will continue to manufacture and sell the old generation products to the joint venture which will be marked up and sold to end customers. Eaton will also sell certain transmission components to the joint venture at prices approximating market rates. In addition, Eaton will provide certain manufacturing and administrative services to the joint venture, including but not limited to manufacturing labor in Mexico, information technology services, accounting services and purchasing services, at prices approximating market rates. Pro forma financial information was not provided as historical activity related to the products contributed to the joint venture was not material.

We consolidated 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 joint venture's board of directors. The joint venture had an enterprise value at inception of $1.2 billion. Due to the structure of the joint venture and equal sharing of economic benefits, we did not apply a discount for lack of control to the noncontrolling interests. The preliminary purchase price allocation was as follows:

In millions 
Inventory3
Fixed assets57
Intangible assets 
      Customer relationships424
      Technology172
Goodwill545
Liabilities(1)
      Total business valuation1,200
  
Less: Noncontrolling interest600
Total purchase consideration$600


Customer relationship assets represent the value of the long-term strategic relationship the business has with its significant customers, which we are amortizing over 25 years. The assets were valued using an income approach, specifically the "multi-period excess earnings" method, which identifies an estimated stream of revenues and expenses for a particular group of assets from which deductions of portions of the projected economic benefits, attributable to assets other than the subject asset (contributory assets), are deducted in order to isolate the prospective earnings of the subject asset. This value is considered a level 3 measurement under the GAAP fair value hierarchy. Key assumptions used in the valuation of customer relationships include: (1) a rate of return of 10 percent and (2) an attrition rate of 3 percent. Technology assets primarily represent the associated patents and know how related to the Endurant and Procision next generation automated transmissions, which we are amortizing over 15 years. These assets were valued using the "relief-from-royalty" method, which is a combination of both the income approach and market approach that values a subject asset based on an estimate of the "relief" from the royalty expense that would be incurred if the subject asset were licensed from a third party. Key assumptions impacting this value include: (1) a market royalty rate of 5 percent, (2) a rate of return of 10 percent and (3) an economic depreciation rate of 7.5 percent. This value is considered a level 3 measurement under GAAP fair value hierarchy. Annual amortization of the intangible assets for the next 5 years is expected to approximate $28 million.

Goodwill was determined based on the residual difference between the fair value of consideration transferred and the value assigned to tangible and intangible assets and liabilities. Approximately $31 million of the goodwill is deductible for tax purposes. Among the factors contributing to a purchase price resulting in the recognition of goodwill is the ability to integrate and optimize the engine and transmission development to deliver the world’s best power train, to realize synergies in service and aftermarket growth and to utilize our strength in international markets where automated transmission adoption rates are very low. Included in our third quarter results were revenues of $69 million and a net loss of $5 million related to this joint venture.

NOTE 11.12. 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.
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, fuel systems and fuel systems.transmissions. The Power Systems segment is an integrated power provider, which designs, manufactures and sells engines (16 liters and larger) for industrial applications (including mining, oil and gas, marine and rail), standby and prime power generator sets, alternators and other power components.
We 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.
The accounting policies of our operating segments are the same as those applied in our Condensed Consolidated Financial Statements. We prepared the financial results of our operating segments on a basis that is consistent with the manner in which we internally disaggregate financial information to assist in making internal operating decisions. We allocate certain common costs and expenses, primarily corporate functions, among segments differently than we would for stand-alone financial information prepared in accordance with GAAP. These include certain costs and expenses of shared services, such as information technology, human resources, legal, finance and supply chain management. We do not allocate debt-related items, actuarial gains or losses, prior service costs or credits, changes in cash surrender value of corporate owned life insurance or income taxes to individual segments. Segment EBIT may not be consistent with measures used by other companies.

Summarized financial information regarding our reportable operating segments is shown in the table below:
In millions Engine Distribution Components Power Systems 
Non-segment
Items (1)
 Total Engine Distribution 
Components(1)
 Power Systems Total Segment 
Intersegment Eliminations (2)
 Total
Three months ended April 2, 2017  
    
  
  
  
Three months ended October 1, 2017  
    
  
    
  
External sales $1,457
 $1,637
 $980
 $515
 $—
 $4,589
 $1,783
 $1,748
 $1,139
 $615
 $5,285
 $—
 $5,285
Intersegment sales 566
 8
 364
 367
 (1,305) —
 553
 5
 394
 441
 1,393
 (1,393) —
Total sales 2,023
 1,645
 1,344
 882
 (1,305) 4,589
 2,336
 1,753
 1,533
 1,056
 6,678
 (1,393) 5,285
Depreciation and amortization (2)
 44
 30
 37
 28
 —
 139
Depreciation and amortization (3)
 47
 29
 42
 30
 148
 —
 148
Research, development and engineering expenses 54
 4
 50
 50
 —
 158
 83
 6
 63
 61
 213
 —
 213
Equity, royalty and interest income from investees 72
 11
 13
 12
 —
 108
 58
 11
 12
 14
 95
 —
 95
Interest income 1
 1
 —
 —
 —
 2
 1
 2
 —
 1
 4
 —
 4
Segment EBIT 229
 100
 179
 57
 1
 566
EBIT 229
 91
 217
 81
 618
 22
 640
                          
Three months ended April 3, 2016 (3)
            
Three months ended October 2, 2016              
External sales $1,489
 $1,458
 $897
 $447
 $—
 $4,291
 $1,357
 $1,497
 $824
 $509
 $4,187
 $—
 $4,187
Intersegment sales 487
 5
 340
 361
 (1,193) —
 502
 7
 319
 347
 1,175
 (1,175) —
Total sales 1,976
 1,463
 1,237
 808
 (1,193) 4,291
 1,859
 1,504
 1,143
 856
 5,362
 (1,175) 4,187
Depreciation and amortization (2)
 39
 28
 31
 29
 —
 127
Depreciation and amortization (3)
 42
 28
 32
 29
 131
 —
 131
Research, development and engineering expenses 56
 3
 54
 44
 157
 —
 157
Equity, royalty and interest income from investees 38
 19
 9
 8
 74
 —
 74
Loss contingency (4)
 99
 —
 —
 —
 99
 —
 99
Interest income 3
 1
 1
 1
 6
 —
 6
EBIT 89
 96
 148
 59
 392
 6
 398
              
Nine months ended October 1, 2017  
  
  
  
    
  
External sales $4,951
 $5,101
 $3,183
 $1,717
 $14,952
 $—
 $14,952
Intersegment sales 1,715
 19
 1,148
 1,238
 4,120
 (4,120) —
Total sales 6,666
 5,120
 4,331
 2,955
 19,072
 (4,120) 14,952
Depreciation and amortization(3)
 137
 90
 117
 87
 431
 —
 431
Research, development and engineering expenses 57
 4
 56
 49
 —
 166
 200
 14
 170
 161
 545
 —
 545
Equity, royalty and interest income from investees 36
 18
 8
 10
 —
 72
 186
 35
 40
 40
 301
 —
 301
Interest income 2
 1
 1
 2
 —
 6
 4
 4
 1
 2
 11
 —
 11
Segment EBIT 197
 87
 163
 46
 (9) 484
EBIT 735
 287
 586
 199
 1,807
 19
 1,826
              
Nine months ended October 2, 2016  
  
  
  
    
  
External sales $4,350
 $4,493
 $2,654
 $1,509
 $13,006
 $—
 $13,006
Intersegment sales 1,487
 18
 1,005
 1,076
 3,586
 (3,586) —
Total sales 5,837
 4,511
 3,659
 2,585
 16,592
 (3,586) 13,006
Depreciation and amortization(3)
 122
 85
 95
 87
 389
 —
 389
Research, development and engineering expenses 166
 10
 161
 141
 478
 —
 478
Equity, royalty and interest income from investees 120
 56
 29
 29
 234
 —
 234
Loss contingency (4)
 138
 —
 —
 —
 138
 —
 138
Interest income 8
 3
 3
 4
 18
 —
 18
EBIT 492
 270
 501
 195
 1,458
 15
 1,473

(1) The 2017 disclosures include Eaton Cummins Automated Transmission Technologies joint venture results consolidated during the third quarter of 2017. See Note 11 , "ACQUISITION," for additional information.
(2) Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three and nine months ended April 2,October 1, 2017 and April 3,October 2, 2016.

(2)(3) Depreciation and amortization as shown on a segment basis excludes the amortization of debt discount and deferred costs included in the Condensed Consolidated Statements of Income as "Interest expense." The amortization of debt discount and deferred costs were less than $1$2 million and $1$2 million for the threenine months ended April 2,October 1, 2017 and April 3,October 2, 2016, respectively.
(3)(4) In the second quarter of 2016, we realigned our reportable operating segments. The three months ended April 3, 2016, were revised retrospectively to conform with these changes.See Note 9, "COMMITMENTS AND CONTINGENCIES,"for additional information.

A reconciliation of our segment information to the corresponding amounts in the Condensed Consolidated Statements of Income is shown in the table below:
  Three months ended Nine months ended
In millions October 1,
2017		 October 2,
2016		 October 1,
2017		 October 2,
2016
Total EBIT $640
 $398
 $1,826
 $1,473
Less: Interest expense 18
 16
 57
 51
Income before income taxes $622
 $382
 $1,769
 $1,422
  Three months ended
In millions April 2,
2017		 April 3,
2016
Total segment EBIT $566
 $484
Less: Interest expense 18
 19
Income before income taxes $548
 $465

NOTE 12.13. RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Accounting Pronouncements Recently Adopted
In March 2016, the Financial Accounting Standards Board (FASB) amended its standards related to the accounting for stock compensation, which became effective for us beginning January 1, 2017. We adopted certain provisions prospectively in accordance with the standard, while others were required to be adopted retrospectively. The amendment replaced the requirement to record excess tax benefits and certain tax deficiencies in additional paid-in capital (APIC) with prospectivelyby recording all excess tax benefits and tax deficiencies as income tax expense / benefit in the income statement.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 nine months ended April 2,October 1, 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 (we elected a retrospective presentation) and the cash paid to tax authorities when shares are withheld to satisfy the employer's statutory income tax withholding obligation areis required to be presented as a financing activity (requiring retrospective presentation).activity. This resulted in a net reclassification of $4 million from operating to financing activities for the threenine months ended April 3,October 2, 2016. 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 August 2017, the FASB amended its standards related to accounting for derivatives and hedging. These amendments allow the initial hedge effectiveness assessment to be performed by the end of the first quarter in which the hedge is designated rather than concurrently with entering into the hedge transaction. The changes also expand the use of a periodic qualitative hedge effectiveness assessment in lieu of an ongoing quantitative assessment performed throughout the life of the hedge. The revision removes the requirement to record ineffectiveness on cash flow hedges through the income statement when a hedge is considered highly effective, instead deferring all related hedge gains and losses in "Other comprehensive income" until the hedged item impacts earnings. The modifications permit hedging the contractually-specified price of a component of a commodity purchase and revises certain disclosure requirements. The amendments are effective January 1, 2019 and early adoption is permitted in any interim period or fiscal year prior to the effective date. The revised standard is required to be adopted on a modified retrospective basis for any cash flow or net investment hedge relationships that exist on the date of adoption and prospectively for disclosures. We do not expect the amendments to have a material effect on our Consolidated Financial Statements and are still evaluating early adoption.
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 effects of 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 processdo not expect adoption of evaluating the impact this standard willto have a material impact 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 processdo not expect adoption of evaluating thethis standard to have a material impact the amendment will have on our Consolidated Financial Statements.
In February 2016, the FASB amended its standards related to the accounting for leases. Under the new standard, lessees will now be required to recognize substantially all leases on the balance sheet as both a right-of-use-asset and a liability. The standard will continue to have two types of leases for income statement recognition purposes: operating leases and finance leases. Operating leases will result in the recognition of a single lease expense on a straight-line basis over the lease term similar to the treatment for operating leases under today's standards. Finance leases will result in an accelerated expense similar to the accounting for capital leases under today's standards. The determination of a lease classification as operating or finance will occur in a manner similar to today's standard. The new standard also contains amended guidance regarding the identification of embedded leases in service contracts and the identification of lease and non-lease components of an arrangement. The new standard is effective on January 1, 2019, with early adoption permitted. 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 amendmentrecognition which replaces all existing revenue recognition guidance and provides a single, comprehensive revenue recognition model for all contracts with customers. The revised 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 depictsto depict the transfer of goods or services to customers at an amount that we expect to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of the time value of money in the transaction price and allowing estimatesestimation 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 andas well as assets recognized from costs incurred to fulfill a contract. these contracts.

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. We expect to adopt the standard using the modified retrospective approach. While we have not yet completed our evaluation process, we have

We identified that a change in the manner in which we will be required relatedaccount for certain license income. We license certain technology to our accountingunconsolidated joint ventures that meet the definition of functional under the standard, which requires that revenue be recognized at a point in time rather than the current requirement of recognizing it over the license term. Using the modified retrospective adoption method, we will record an adjustment to our opening equity balance at January 1, 2018, to account 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. Underdifferences between existing revenue recorded and what would have been recorded under the new standard for contracts which we started recognizing revenue prior to 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.adoption date. We are still quantifying the potential amount of this adjustment, but we expect to record a credit to equity of between $30 million and $35 million for the licensing change. We havedo not expect a material impact on any individual year from this change.

We 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 beenbe delayed under the current guidance. We do not expect the impact of this change to be material, but we are still quantifying the impact.impact which will depend on the contracts in progress at the time of adoption.

We are still in the process of evaluating the impact the amendment will have on our Consolidated Financial Statements, including our internal controls over financial reporting. The revenue recognition disclosures will significantly expand under the new standard, specifically around the quantitative and qualitative information about performance obligations, changes in contract assets and liabilities and disaggregation of revenue.

NOTE 13.14. SUBSEQUENT EVENT
On April 10,October 12, 2017, we entered into an asset purchase agreement with Brammo Inc., an engineer and manufacturer of lithium ion batteries primarily related to form a joint venture with Eaton Corporation PLC, subject to regulatory approvals. We will purchase a 50 percent interest in the new venture named Eaton Cummins Automated Transmission Technologies,utility vehicle markets, for approximately $600$70 million to be paid in cash.cash at closing. In addition to the closing consideration, the agreement contains an earnout based on future results of the acquired business, which could result in a maximum additional $100 million payment to the former owners. The joint venturemajority of the purchase price will design, assemble, selllikely be assigned to intangible assets and support medium-duty and heavy-duty automated transmissions for the commercial vehicle market, including new product launches.goodwill. We expect the transaction to close in the thirdfourth quarter of 2017, at which time we will consolidate the results of the joint venture in our Components segment as we have a majority voting interest in the venture by virtue of a tie-breaking vote on the board of directors.2017. 



ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cummins Inc. and its consolidated subsidiaries are hereinafter sometimes referred to as “Cummins,” “we,” “our” or “us.”
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
Certain parts of this quarterly report contain forward-looking statements intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include those that are based on current expectations, estimates and projections about the industries in which we operate and management’s beliefs and assumptions. Forward-looking statements are generally accompanied by words such as "anticipates," "expects," "forecasts," "intends," "plans," "believes," "seeks," "estimates," "could," "should" or words of similar meaning. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which we refer to as "future factors," which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Some future factors that could cause our results to differ materially from the results discussed in such forward-looking statements are discussed below and shareholders, potential investors and other readers are urged to consider these future factors carefully in evaluating forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. Future factors that could affect the outcome of forward-looking statements include the following:
a sustained slowdown or significant downturn in our markets;
changes in the engine outsourcing practices of significant customers;
•
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;
•
any significant problems in our new engine platforms;
a further slowdown in infrastructure development and/or continuing depressed commodity prices;
unpredictability in the adoption, implementation and enforcement of emission standards around the world;
foreign currency exchange rate changes;
the actions of, and income from, joint ventures and other investees that we do not directly control;
the integration of our previously partially-owned United States and Canadian distributors;
•
the integration of our previously partially-owned United States and Canadian distributors;
our plan to reposition our portfolio of product offerings through exploring strategic acquisitions and divestitures and related uncertainties of entering such transactions;
supply shortages and supplier financial risk, particularly from any of our single-sourced suppliers;
variability in material and commodity costs;
product recalls;
competitor activity;
•
supply shortages and supplier financial risk, particularly from any of our single-sourced suppliers;
•
variability in material and commodity costs;
•
product recalls;
•
competitor 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;
•
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;
•
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 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 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.”
changes in 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 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 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 2016 Form 10-K. Our MD&A is presented in the following sections:
•Executive Summary and Financial Highlights
•Outlook
•Results of Operations
•Operating Segment Results
•Liquidity and Capital Resources
•Application of Critical Accounting Estimates
•Recently Adopted and Recently Issued Accounting Pronouncements

EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS
We are a global power leader that designs, manufactures, distributes and services diesel and natural gas engines and engine-related component products, including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems, transmissions 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. We serve our customers through a network of approximately 600 wholly-owned and independent distributor locations and over 7,400 dealer locations in more than 190 countries and territories.
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, fuel systems and fuel systems.transmissions. The Power Systems segment is an integrated power provider, which designs, manufactures and sells engines (16 liters and larger) for industrial applications (including mining, oil and gas, marine and rail), standby and prime power generator sets, alternators and other power components.
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 increased 726 percent in the three months ended April 2,October 1, 2017, as compared to the same period in 2016, with all operating segments reporting higher revenue. Revenue in the U.S. and Canada improved by 25 percent primarily due to higher demand in most global industrial markets, increased demand in all Components businesses,the North American on-highway markets, organic growth and higher sales growth in our Distribution segment andrelated to the consolidationacquisition of North American distributors since December 31, 2015, partially offset by unfavorable foreign currency fluctuationsin the distribution business, increased industrial demand (especially in the oil and decreased demand in most on-highway markets.gas market) and sales related to the acquisition of the automated transmission business. International demand growth (excludes the U.S. and Canada) in the first quarter of 2017 improved revenues by 1728 percent, with sales up in most of our markets, especially in China, India, Russia, U.K. and the U.K.India. The increase in international sales was primarily due to increased demand in industrial markets (especially construction markets in China and mining markets in Eastern Europe) and increased demand in all Components businesses (especially on-highway truck demand in China)China and product sales to meet new emission requirements for trucks in India).
Worldwide revenues increased 15 percent in the first nine months of 2017 as compared to the same period in 2016, with all operating segments reporting higher revenue. Revenue in the U.S. and Canada improved by 13 percent primarily due to increased demand in the North American on-highway markets, organic growth and higher sales related to the acquisition of North American distributors since December 31, 2015, in our distribution business and increased industrial demand (especially in the oil and gas, construction and mining markets). International demand growth (excludes the U.S. and Canada) in 2017 improved revenues by 18 percent, with sales up in most of our markets, especially in China, Russia, India and the U.K. The increase in international sales was primarily due to increased demand in the truck market in China, new emission regulations in India and increased demand in industrial markets (especially construction markets in China and mining markets in Europe), partially offset by unfavorable foreign currency impacts of 31 percent (primarily in the British pound and Chinese renminbi). Revenue in the U.S. and Canada improved by 1 percent primarily due to increased Distribution segment sales related to organic growth and the consolidation of North American distributors, partially offset by decreased demand in the North American on-highway markets.
The following tables contain sales and earnings before interest expense, income tax expense and noncontrolling interests (EBIT) by operating segment for the three and nine months ended April 2,October 1, 2017 and April 3,October 2, 2016. Refer to the section titled “OPERATING SEGMENT RESULTS” for a more detailed discussion of sales and EBIT by operating segment, including the reconciliation of segment EBIT to net income attributable to Cummins Inc.

 Three months ended Three months ended
Operating Segments April 2, 2017 April 3, 2016 Percent change October 1, 2017 October 2, 2016 Percent change
   Percent     Percent   2017 vs. 2016   Percent     Percent   2017 vs. 2016
In millions Sales of Total EBIT Sales of Total EBIT Sales EBIT Sales of Total EBIT Sales of Total EBIT Sales EBIT
Engine $2,023
 44 % $229
 $1,976
 46 % $197
 2% 16% $2,336
 44 % $229
 $1,859
 44 % $89
 26% NM
Distribution 1,645
 36 % 100
 1,463
 34 % 87
 12% 15% 1,753
 33 % 91
 1,504
 36 % 96
 17% (5)%
Components(1) 1,344
 29 % 179
 1,237
 29 % 163
 9% 10% 1,533
 29 % 217
 1,143
 27 % 148
 34% 47 %
Power Systems 882
 19 % 57
 808
 19 % 46
 9% 24% 1,056
 20 % 81
 856
 21 % 59
 23% 37 %
Intersegment eliminations (1,305) (28)% —
 (1,193) (28)% —
 9% —
 (1,393) (26)% —
 (1,175) (28)% —
 19% —
Non-segment —
 —
 1
 —
 —
 (9) —
 NM
 —
 —
 22
 —
 —
 6
 —
 NM
Total $4,589
 100 % $566
 $4,291
 100 % $484
 7% 17% $5,285
 100 % $640
 $4,187
 100 % $398
 26% 61 %

"NM" - not meaningful information
(1) The 2017 disclosures include Eaton Cummins Automated Transmission Technologies joint venture results consolidated during the third quarter. See Note 11 , "ACQUISITION," to the Condensed Consolidated Financial Statements for additional information.
Net income attributable to Cummins was $396$453 million, or $2.36$2.71 per diluted share, on sales of $4.6$5.3 billion for the three months ended April 2,October 1, 2017, versus the comparable prior year period net income attributable to Cummins of $321$289 million, or $1.87$1.72 per diluted share, on sales of $4.3$4.2 billion. The increase in net income and earnings per diluted share was driven by significantly higher net sales and gross margin, the absence of an accrual for a loss contingency recorded in the third quarter of 2016 and higher equity, royalty and interest income from investees, partially offset by increased selling, general and administrative expenses, higher research, development and engineering expenses and a higher effective tax rate. The increase in gross margin was primarily due to higher volumes, improved leverage and lower material costs, partially offset by higher warranty costs ($105 million primarily due to campaigns in the Engine and Components segments) and increased variable compensation expense of $59 million. Diluted earnings per share for the three months ended October 1, 2017, benefited $0.01 from fewer weighted average shares outstanding due to the stock repurchase program.
 
  Nine months ended
Operating Segments October 1, 2017 October 2, 2016 Percent change
    Percent     Percent   2017 vs. 2016
In millions Sales of Total EBIT Sales of Total EBIT Sales EBIT
Engine $6,666
 45 % $735
 $5,837
 45 % $492
 14% 49%
Distribution 5,120
 34 % 287
 4,511
 35 % 270
 14% 6%
Components(1)
 4,331
 29 % 586
 3,659
 28 % 501
 18% 17%
Power Systems 2,955
 20 % 199
 2,585
 20 % 195
 14% 2%
Intersegment eliminations (4,120) (28)% —
 (3,586) (28)% —
 15% —
Non-segment —
 —
 19
 —
 —
 15
 —
 27%
Total $14,952
 100 % $1,826
 $13,006
 100 % $1,473
 15% 24%

(1) The 2017 disclosures include Eaton Cummins Automated Transmission Technologies joint venture results consolidated during the third quarter of 2017. See Note 11 , "ACQUISITION," to the Condensed Consolidated Financial Statements for additional information.

Net income attributable to Cummins was $1.3 billion, or $7.60 per diluted share, on sales of $15.0 billion for the nine months ended October 1, 2017, versus the comparable prior year period net income attributable to Cummins of $1.0 billion, or $5.99 per diluted share, on sales of $13.0 billion. The increase in net income and earnings per diluted share was driven by higher net sales and gross margin, improvedthe absence of an accrual for a loss contingency recorded in the second and third quarters of 2016 and higher equity, royalty and interest income from investees, and a lower effective tax rate, partially offset by increased selling, general and administrative expenses.expenses and higher research, development and engineering expenses and a higher effective tax rate. The increase in gross margin was primarily due to higher volumes, improved leverage and favorable pricing,lower material costs, partially offset by higher warranty costs of $34($234 million primarily due to a change in estimatecampaigns in the first quarterEngine, Components and Power Systems segments and changes in estimates in the Engine and Components segments) and increased variable compensation expense of 2017 driven by higher claims for certain 2013 and 2014 engines in our Engine Segment.$101 million. Diluted earnings per share for the threenine months ended April 2,October 1, 2017, benefited $0.01$0.04 from fewer weighted average shares outstanding, primarily due to purchases under the stock repurchase programs.program.

We generated $379 million$1.5 billion of operating cash flows for the threenine months ended April 2,October 1, 2017, compared to $267 million$1.3 billion for the comparable period in 2016. Refer to the section titled "Cash Flows" in the "LIQUIDITY AND CAPITAL RESOURCES" section for a discussion of items impacting cash flows.

During the first threenine months of 2017, we repurchased $51$391 million, or 0.32.5 million shares of common stock.
On September 5, 2017, we entered into a 364-day credit facility that allows us to borrow up to $1 billion of additional unsecured funds at any time through September 2018. Revolving credit facilities are maintained primarily to provide backup liquidity for our commercial paper borrowings, letters of credit and general corporate purposes.
Our debt to capital ratio (total capital defined as debt plus equity) at April 2,October 1, 2017, was flat at20.8 percent, compared to 20.6 percent compared toat December 31, 2016. At April 2,October 1, 2017, we had $1.5$1.4 billion in cash and marketable securities on hand and access to our $2.75 billion credit facilities, if necessary, to meet currently anticipated investment and funding needs.
Our global pension plans, including our unfunded and non-qualified plans, were 110 percent funded at December 31, 2016. Our U.S. qualified plans, which represent approximately 56 percent of the worldwide pension obligation, were 118 percent funded and our U.K. plans were 121 percent funded. We expect to contribute $134 million to our U.S. and U.K. pension plans in 2017. In addition, we expect our 2017 net periodic pension cost to approximate $83 million. See Note 3, "PENSION AND OTHER POSTRETIREMENT BENEFITS," to the Condensed Consolidated Financial Statements for additional information.
We expect our effective tax rate for the full year of 2017 to approximate 26.0 percent, excluding any one-time tax items.
OnIn April 10, 2017, we entered into an agreement to form a joint venture with Eaton Corporation PLC subject to regulatory approvals.(Eaton), which closed on July 31, 2017 (the acquisition date). We will purchasepurchased a 50 percent interest in the new venture named Eaton Cummins Automated Transmission Technologies for approximately $600 million in cash. In addition, each partner contributed $20 million for working capital. The joint venture will design, assemble, sell and support medium-duty and heavy-duty automated transmissions for the commercial vehicle market, including new product launches. We expect the transaction to close in the third quarter of 2017, at which time we will consolidateconsolidated 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 joint venture's board of directors. We do not expect this new venture to have a significant impact on our consolidated results in 2017. See Note 11 "ACQUISITION," to the Condensed Consolidated Financial Statements for additional information.
On October 12, 2017, we entered into an asset purchase agreement with Brammo Inc., an engineer and manufacturer of lithium ion batteries primarily related to the utility vehicle markets, for approximately $70 million to be paid in cash at closing. In addition to the closing consideration, the agreement contains an earnout based on future results of the acquired business, which could result in a maximum additional $100 million payment to the former owners. The majority of the purchase price will likely be assigned to intangible assets and goodwill. We expect the transaction to close in the fourth quarter of 2017.

OUTLOOK
Our outlook reflects the following positive trends and challenges to our business that we expect could impact our revenue and earnings potential for the remainder of 2017.
Positive Trends
North American heavy-duty truck demand will remain strong.
Demand for pick-up trucks in North America remainswill remain strong.
Market demand in truck and off-highway markets in China and India may continue to improve.will remain strong.
Industry production of medium-duty trucks in North America shouldwill remain strong.
North American construction markets may begin to show improvement.will remain strong.
Market demand may continue to improve in global mining and North American oil and gas markets.
North American heavy-duty truck demand may begin to increase from first quarter levels.mining.
Challenges
Power generation markets may remain soft.
Weak economic conditions in Brazil may continue to negatively impact demand across our businesses.
Foreign currency could continueMarine markets are expected to put pressure on our results.remain weak.
Demand is starting to improvehas improved in certain markets and we expect demand will continue to improve over time, as in prior economic cycles. We are well-positionedwell positioned to benefit as market conditions improve.

RESULTS OF OPERATIONS
 Three months ended Favorable/ Three months ended Favorable/ Nine months ended Favorable/
 April 2,
2017		 April 3,
2016		 (Unfavorable) October 1,
2017		 October 2,
2016		 (Unfavorable) October 1,
2017		 October 2,
2016		 (Unfavorable)
In millions, except per share amountsIn millions, except per share amounts Amount PercentIn millions, except per share amounts Amount Percent Amount Percent
NET SALESNET SALES$4,589
 $4,291
 $298
 7 %NET SALES$5,285
 $4,187
 $1,098
 26 % $14,952
 $13,006
 $1,946
 15 %
Cost of salesCost of sales3,461
 3,235
 (226) (7)%Cost of sales3,946
 3,108
 (838) (27)% 11,236
 9,674
 (1,562) (16)%
GROSS MARGINGROSS MARGIN1,128
 1,056
 72
 7 %GROSS MARGIN1,339
 1,079
 260
 24 % 3,716
 3,332
 384
 12 %
OPERATING EXPENSES AND INCOMEOPERATING EXPENSES AND INCOME 
  
  
 

OPERATING EXPENSES AND INCOME 
  
  
 

  
  
  
 

Selling, general and administrative expensesSelling, general and administrative expenses537
 490
 (47) (10)%Selling, general and administrative expenses624
 513
 (111) (22)% 1,757
 1,527
 (230) (15)%
Research, development and engineering expensesResearch, development and engineering expenses158
 166
 8
 5 %Research, development and engineering expenses213
 157
 (56) (36)% 545
 478
 (67) (14)%
Equity, royalty and interest income from investeesEquity, royalty and interest income from investees108
 72
 36
 50 %Equity, royalty and interest income from investees95
 74
 21
 28 % 301
 234
 67
 29 %
Loss contingencyLoss contingency—
 99
 99
 100 % —
 138
 138
 100 %
Other operating income (expense), netOther operating income (expense), net5
 (2) 7
 NM
Other operating income (expense), net32
 —
 32
 NM
 55
 (2) 57
 NM
OPERATING INCOMEOPERATING INCOME546
 470
 76
 16 %OPERATING INCOME629
 384
 245
 64 % 1,770
 1,421
 349
 25 %
Interest incomeInterest income2
 6
 (4) (67)%Interest income4
 6
 (2) (33)% 11
 18
 (7) (39)%
Interest expenseInterest expense18
 19
 1
 5 %Interest expense18
 16
 (2) (13)% 57
 51
 (6) (12)%
Other income (expense), netOther income (expense), net18
 8
 10
 NM
Other income (expense), net7
 8
 (1) (13)% 45
 34
 11
 32 %
INCOME BEFORE INCOME TAXESINCOME BEFORE INCOME TAXES548
 465
 83
 18 %INCOME BEFORE INCOME TAXES622
 382
 240
 63 % 1,769
 1,422
 347
 24 %
Income tax expenseIncome tax expense143
 132
 (11) (8)%Income tax expense165
 82
 (83) NM
 466
 362
 (104) (29)%
CONSOLIDATED NET INCOMECONSOLIDATED NET INCOME405
 333
 72
 22 %CONSOLIDATED NET INCOME457
 300
 157
 52 % 1,303
 1,060
 243
 23 %
Less: Net income attributable to noncontrolling interestsLess: Net income attributable to noncontrolling interests9
 12
 3
 25 %Less: Net income attributable to noncontrolling interests4
 11
 7
 64 % 30
 44
 14
 32 %
NET INCOME ATTRIBUTABLE TO CUMMINS INC.NET INCOME ATTRIBUTABLE TO CUMMINS INC.$396
 $321
 $75
 23 %NET INCOME ATTRIBUTABLE TO CUMMINS INC.$453
 $289
 $164
 57 % $1,273
 $1,016
 $257
 25 %
Diluted Earnings Per Common Share Attributable to Cummins Inc.Diluted Earnings Per Common Share Attributable to Cummins Inc.$2.36
 $1.87
 $0.49
 26 %Diluted Earnings Per Common Share Attributable to Cummins Inc.$2.71
 $1.72
 $0.99
 58 % $7.60
 $5.99
 $1.61
 27 %

"NM" - not meaningful information
 Three months ended 
Favorable/
(Unfavorable)
 Three months ended 
Favorable/
(Unfavorable)
 Nine months ended Favorable/
(Unfavorable)
 April 2,
2017		 April 3,
2016		  October 1,
2017		 October 2,
2016		 October 1,
2017		 October 2,
2016		 
Percent of sales Percentage Points Percentage Points Percentage Points
Gross margin 24.6% 24.6% —
 25.3% 25.8% (0.5) 24.9% 25.6% (0.7)
Selling, general and administrative expenses 11.7% 11.4% (0.3) 11.8% 12.3% 0.5
 11.8% 11.7% (0.1)
Research, development and engineering expenses 3.4% 3.9% 0.5
 4.0% 3.7% (0.3) 3.6% 3.7% 0.1
Net Sales
Net sales for the three months ended April 2,October 1, 2017, increased by $298 million$1.1 billionversus the comparable period in 2016. The primary drivers were as follows:
Engine segment sales increased 26 percent primarily due to higher demand in most North American on-highway markets and improved demand in global construction markets.
Components segment sales increased 34 percent due to higher demand across all businesses, especially the emission solutions business, due to strong on-highway sales in North America, India and China and sales related to the acquisition of the automated transmissions business.
Distribution segment sales increased 1217 percent primarily due to an increase in organic sales and higher sales related to the acquisition of North American distributors since December 31, 2015.
Components segment sales increased 9 percent primarily due to higher demand across all lines of businesses, primarily in China.
Power Systems segment sales increased 923 percent acrossdue to higher demand for all product lines, primarilyespecially in industrial markets, due to higher demand in industrialNorth America oil and gas markets especially Europeanand international mining and North American rail markets.


Net sales for the nine months ended October 1, 2017, increased $1.9 billionversus the comparable period in 2016. The primary drivers were as follows:
Engine segment sales increased 214 percent primarily due to higher demand in off-highwaymost North American on-highway markets partially offset by lowerand improved demand in heavy-duty truckglobal industrial markets, especially international construction markets.
Components segment sales increased 18 percent due to higher demand across all businesses, especially the emission solutions business, due to strong on-highway sales in China, India and light-duty automotive markets.North America and sales related to the acquisition of the automated transmissions business.
These increases were unfavorably impacted by foreign currency fluctuations of approximately 1Distribution segment sales increased 14 percent primarily due to an increase in organic sales and higher sales related to the British poundacquisition of North American distributors since December 31, 2015.
Power Systems segment sales increased 14 percent primarily due to higher demand for all product lines, especially in industrial markets, due to higher demand in global mining and Chinese renminbi.North American oil and gas markets.
Sales to international markets (excluding the U.S. and Canada), based on location of customers, for the three and nine months months ended April 2,October 1, 2017, were 4341 percent and 42 percent of total net sales, respectively, compared with 3941 percent and 41 percent of total net sales for the comparable periodperiods in 2016. A more detailed discussion of sales by segment is presented in the “OPERATING SEGMENT RESULTS” section.

Gross Margin
Gross margin increased $72$260 million for the three months ended April 2,October 1, 2017,, versus the comparable period in 2016 and remained flatdecreased 0.5 points as a percentage of sales. The increase in gross margin dollars was primarily due to higher volumes, improved leverage and favorable pricing,lower material costs, partially offset by higher warranty costs of $34($105 million primarily due to a change in estimatecampaigns in the first quarterEngine and Components segments) and increased variable compensation expense of $59 million.
Gross margin increased $384 million for the nine months ended October 1, 2017, drivenversus the comparable period in 2016 and decreased 0.7 points as a percentage of sales. The increase in gross margin dollars was primarily due to higher volumes, improved leverage and lower material costs, partially offset by higher claims for certain 2013warranty costs ($234 million primarily due to campaigns in the Engine, Components and 2014 enginesPower Systems segments and changes in ourestimates in the Engine Segment.and Components segments) and increased variable compensation expense of $101 million.
The provision for base warranties issued, excluding campaigns, as a percent of sales for the three and nine months ended April 2,October 1, 2017, was 1.9 percent and 1.9 percent, respectively, compared to 2.01.5 percent and 1.7 percent for the comparable periodperiods in 2016. A detailed discussion of margin by segment is presented in the “OPERATING SEGMENT RESULTS” section.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $47$111 million for the three months ended April 2,October 1, 2017, versus the comparable period in 2016, primarily due to higher compensation expenses ($94 million), especially variable compensation, and higher consulting expenses ($20 million) and higher compensation expenses ($199 million). Compensation and related expenses include salaries, fringe benefits and variable compensation. Overall, selling, general and administrative expenses, as a percentage of sales, increaseddecreased to 11.711.8 percent in the three months ended April 2,October 1, 2017, from 11.412.3 percent in the comparable period in 2016.
Selling, general and administrative expenses increased $230 million for the nine months ended October 1, 2017, versus the comparable period in 2016, primarily due to higher compensation expenses ($162 million), especially variable compensation, and higher consulting expenses ($39 million).Overall, selling, general and administrative expenses, as a percentage of sales, increased to 11.8 percent in the nine months ended October 1, 2017, from 11.7 percent in the comparable period in 2016.
Research, Development and Engineering Expenses
Research, development and engineering expenses decreased $8increased $56 million for the three months ended April 2,October 1, 2017, versus the comparable period in 2016, primarily due to increased compensation expenses ($29 million), especially variable compensation, and higher consulting expenses ($9 million). Overall, research, development and engineering expenses as a percentage of sales increased to 4.0 percent in the three months ended October 1, 2017, from 3.7 percent in the comparable period in 2016 .
Research, development and engineering expenses increased $67 million for the nine months ended October 1, 2017, versus the comparable period in 2016, primarily due to increased compensation expense recovery from customers($45 million), especially variable compensation, and external partieshigher consulting expenses ($711 million). Overall, research, development and engineering expenses, as a percentage of sales, decreased to 3.43.6 percent in the threenine months ended April 2,October 1, 2017, from 3.93.7 percent in the comparable period in 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 of diesel and natural gas powered engines.
Equity, Royalty and Interest Income from Investees
Equity, royalty and interest income from investees increased $36$21 million for the three months ended April 2,October 1, 2017, versus the comparable period in 2016, primarily due to higher earnings at Dongfeng Cummins Engine Company, Ltd. and Beijing Foton Cummins Engine Co., Ltd.
Equity, royalty and interest income from investees increased $67 million for the nine months ended October 1, 2017, versus the comparable period in 2016, primarily due to higher earnings at Dongfeng Cummins Engine Company, Ltd. and Beijing Foton Cummins Engine Co.
     
Loss Contingency
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 9, "COMMITMENTS AND CONTINGENCIES," to the Condensed Consolidated Financial Statements for additional information.

Other Operating Income (Expense), Net
Other operating income (expense), net was as follows:
 Three months ended Three months ended Nine months ended
In millions April 2,
2017		 April 3,
2016		 October 1,
2017		 October 2,
2016		 October 1,
2017		 October 2,
2016
Royalty income, net $9
 $7
 $18
 $7
 $38
 $20
Gain (loss) on sale of assets, net 15
 —
 20
 (1)
Amortization of intangible assets (4) (2) (7) (7)
Loss on write off of assets (1) (5) —
 (5) (2) (14)
Amortization of intangible assets (2) (3)
Other, net (1) (1) 3
 —
 6
 —
Total other operating income (expense), net $5
 $(2) $32
 $—
 $55
 $(2)
Interest Income
Interest income for the three months ended April 2,October 1, 2017, decreased $4$2 million versus the comparable period in 2016, primarily due to lower short-term investments duringinvestment balances in China and Brazil. Interest income for the current quarter.nine months ended October 1, 2017, decreased $7 million versus the comparable period in 2016, primarily due to lower investment balances in China and Brazil.
Interest Expense
Interest expense for the three months ended April 2,October 1, 2017, remained relatively flatincreased $2 million versus the comparable period in 2016.

2016, primarily due to hedge ineffectiveness on our interest rate swap. Interest expense for the nine months ended October 1, 2017, increased $6 million versus the comparable period in 2016, primarily due to hedge ineffectiveness on our interest rate swap.
Other Income (Expense), Net
Other income (expense), net was as follows:
 Three months ended Three months ended Nine months ended
In millions April 2,
2017		 April 3,
2016		 October 1,
2017		 October 2,
2016		 October 1,
2017		 October 2,
2016
Change in cash surrender value of corporate owned life insurance $13
 $8
 $9
 $10
 $38
 $33
Dividend income 1
 1
 4
 3
Foreign currency gain (loss), net 2
 (3) (5) —
 (2) (11)
Dividend income 1
 1
Bank charges (3) (3) (2) (3) (7) (7)
Other, net 5
 5
 4
 —
 12
 16
Total other income (expense), net $18
 $8
 $7
 $8
 $45
 $34

Income Tax Expense
Our effective tax rate for the year is expected to approximate 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 months ended October 1, 2017, was 26.5 percent and 26.3 percent, respectively, and contained only immaterial discrete items.
Our effective tax rate for the three and nine months ended AprilOctober 2, 2017,2016, was 26.121.5 percent and 25.5 percent, respectively, and contained only immaterial discrete items.
Our effective tax rate for the three months ended April 3, 2016, was 28.4 percent and did not include any discrete items.
The decreasechanges in the effective tax rate for the three and nine months ended April 2,October 1, 2017, versus the comparable periodperiods in 2016, waswere primarily due to favorable changesdifferences 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 April 2,October 1, 2017, decreased $3$7 million versus the comparable period in 2016, primarily due to the acquisition of the remaining interest in Wuxi Cummins Turbo Technologies Co. Ltd, in the fourth quarter of 2016.
Noncontrolling interests in income of consolidated subsidiaries for the nine months ended October 1, 2017, decreased $14 million versus the comparable period in 2016, primarily due to the acquisition of the remaining interest in Wuxi Cummins Turbo Technologies Co. Ltd, in the fourth quarter of 2016.
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 April 2,October 1, 2017, increased $75$164 million and $0.49$0.99 per share, respectively versus the comparable period in 2016, primarily due to significantly higher net sales and gross margin, the absence of an accrual for a loss contingency recorded in the third quarter of 2016 and higher equity, royalty and interest income from investees, partially offset by increased selling, general and administrative expenses, higher research, development and engineering expenses and a higher effective tax rate. Diluted earnings per share for the three months ended October 1, 2017, benefited $0.01 from fewer weighted average shares outstanding due to the stock repurchase program.
Net income and diluted earnings per share attributable to Cummins Inc. for the nine months ended October 1, 2017, increased $257 million and $1.61 per share, respectively versus the comparable period in 2016, primarily due to higher net sales and gross margin, improvedthe absence of an accrual for a loss contingency recorded in the second and third quarters of 2016 and higher equity, royalty and interest income from investees, and a lower effective tax rate, partially offset by increased selling, general and administrative expenses.expenses and higher research, development and engineering expenses and a higher effective tax rate. Diluted earnings per share for the threenine months ended April 2,October 1, 2017, benefited $0.01$0.04 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 gain of $80$94 million and $276 million, respectively, for the three and nine months ended April 2,October 1, 2017, compared to a net loss of $57$29 million and $299 million for the three and nine months ended April 3,October 2, 2016, and was driven by the following:
 Three months ended Three months ended
 April 2, 2017 April 3, 2016 October 1, 2017 October 2, 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 $57
 Indian rupee, British pound $(62) British pound offset by Brazilian real
Wholly-owned subsidiaries $86
 British pound, Chinese renminbi $(33) British pound, Brazilian real offset by Indian rupee
Equity method investments 10
 Indian rupee, Chinese renminbi 5
 
Mexican peso (1), Chinese renminbi
 10
 Chinese renminbi 1
 Indian rupee, Japanese yen offset by Chinese renminbi
Consolidated subsidiaries with a noncontrolling interest 13
 Indian rupee —
 Indian rupee offset by Chinese renminbi (2) Indian rupee 3
 Indian rupee
Total $80
 $(57)  $94
 $(29) 

(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.
         
  Nine months ended
  October 1, 2017 October 2, 2016
In millions Translation adjustment Primary currency driver vs. U.S. dollar Translation adjustment Primary currency driver vs. U.S. dollar
Wholly-owned subsidiaries $233
 
British pound, Chinese renminbi, Indian rupee

 $(288) British pound, Chinese renminbi offset by Brazilian real
Equity method investments 31
 Chinese renminbi, Indian rupee (8) Chinese renminbi offset by Japanese yen, Mexican peso
Consolidated subsidiaries with a noncontrolling interest 12
 Indian rupee (3) Indian rupee, Chinese renminbi
Total $276
   $(299)  





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 a primary basis for the CODMChief Operating Decision Maker to evaluate the performance of each of our operating segments. Segment amounts exclude certain expenses not specifically identifiable to segments. See Note 11,12, "OPERATING SEGMENTS," to the Condensed Consolidated Financial Statements for additional information.
Following is a discussion of results for each of our operating segments.
Engine Segment Results
Financial data for the Engine segment was as follows:
 Three months ended Favorable/ Three months ended Favorable/ Nine months ended Favorable/
 April 2, April 3, (Unfavorable) October 1, October 2, (Unfavorable) October 1, October 2, (Unfavorable)
In millions 2017 2016 Amount Percent 2017 2016 Amount Percent 2017 2016 Amount Percent
External sales (1)
 $1,457
 $1,489
 $(32) (2)% $1,783
 $1,357
 $426
 31 % $4,951
 $4,350
 $601
 14 %
Intersegment sales (1)
 566
 487
 79
 16 % 553
 502
 51
 10 % 1,715
 1,487
 228
 15 %
Total sales 2,023
 1,976
 47
 2 % 2,336
 1,859
 477
 26 % 6,666
 5,837
 829
 14 %
Depreciation and amortization 44
 39
 (5) (13)% 47
 42
 (5) (12)% 137
 122
 (15) (12)%
Research, development and engineering expenses 54
 57
 3
 5 % 83
 56
 (27) (48)% 200
 166
 (34) (20)%
Equity, royalty and interest income from investees 72
 36
 36
 100 % 58
 38
 20
 53 % 186
 120
 66
 55 %
Loss contingency —
 99
 99
 100 % —
 138
 138
 100 %
Interest income 1
 2
 (1) (50)% 1
 3
 (2) (67)% 4
 8
 (4) (50)%
Segment EBIT 229
 197
 32
 16 %
EBIT 229
 89
 140
 NM
 735
 492
 243
 49 %
                        
  
  
 Percentage Points  
  
 Percentage Points  
  
 Percentage Points
Segment EBIT as a percentage of total sales 11.3% 10.0%  
 1.3
EBIT as a percentage of total sales 9.8% 4.8%  
 5.0
 11.0% 8.4%  
 2.6

"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.


Sales for our Engine segment by market were as follows:
 Three months ended Favorable/ Three months ended Favorable/ Nine months ended Favorable/
 April 2, April 3, (Unfavorable) October 1, October 2, (Unfavorable) October 1, October 2, (Unfavorable)
In millions 2017 2016 Amount Percent 2017 2016 Amount Percent 2017 2016 Amount Percent
Heavy-duty truck $620
 $631
 $(11) (2)% $776
 $625
 $151
 24% $2,110
 $1,878
 $232
 12%
Medium-duty truck and bus 544
 549
 (5) (1)% 625
 517
 108
 21% 1,870
 1,666
 204
 12%
Light-duty automotive 423
 433
 (10) (2)% 452
 345
 107
 31% 1,304
 1,172
 132
 11%
Total on-highway 1,587
 1,613
 (26) (2)% 1,853
 1,487
 366
 25% 5,284
 4,716
 568
 12%
Off-highway 436
 363
 73
 20 % 483
 372
 111
 30% 1,382
 1,121
 261
 23%
Total sales $2,023
 $1,976
 $47
 2 % $2,336
 $1,859
 $477
 26% $6,666
 $5,837
 $829
 14%

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/ Three months ended Favorable/ Nine months ended Favorable/
 April 2, April 3, (Unfavorable) October 1, October 2, (Unfavorable) October 1, October 2, (Unfavorable)
 2017 2016 Amount Percent 2017 2016 Amount Percent 2017 2016 Amount Percent
Heavy-duty 19,200
 19,700
 (500) (3)% 28,100
 20,100
 8,000
 40% 71,400
 60,500
 10,900
 18%
Medium-duty 60,300
 55,400
 4,900
 9 % 68,500
 53,400
 15,100
 28% 200,400
 171,100
 29,300
 17%
Light-duty 63,100
 61,700
 1,400
 2 % 66,300
 49,800
 16,500
 33% 195,000
 168,600
 26,400
 16%
Total unit shipments 142,600
 136,800
 5,800
 4 % 162,900
 123,300
 39,600
 32% 466,800
 400,200
 66,600
 17%
Sales
Engine segment sales for the three months ended April 2,October 1, 2017, increased $47$477 million versus the comparable period in 2016, driven by higher off-highwayby:
•
Heavy-duty truck sales increased $151 million primarily due to higher demand in North American heavy-duty truck markets with increased shipments of 39 percent.
Off-highway sales of $73increased $111 million primarily due to improved demand in mostglobal construction markets, with increased international unit shipments of 48 percent primarily in China and Western Europe.
Medium-duty truck and bus sales increased $108 million primarily due to higher demand in North American medium-duty truck markets with increased engine shipments of 41 percent.
•
Light-duty automotive sales increased $107 million primarily due to higher sales to Chrysler and higher sales of light commercial vehicles.
Total on-highway-related sales for the three months ended October 1, 2017, were 79 percent of total engine segment sales, versus 80 percent for the comparable period in 2016.
Engine segment sales for the nine months ended October 1, 2017, increased $829 million versus the comparable period in 2016. The following were the primary drivers:
Off-highway sales increased $261 million primarily due to improved demand in global industrial markets, especially in international construction markets, with increased unit shipments of 6652 percent primarily in international construction markets.
The increase above was partially offset by the following:China and Australia.
Heavy-duty truck sales decreased $11increased $232 million primarily due to lowerhigher demand in the North American heavy-duty truck marketmarkets with decreased engineincreased shipments of 14 percent.
Light-duty automotiveMedium-duty truck and bus sales decreased $10increased $204 million primarily due to lowerhigher demand in North American medium-duty truck markets with increased engine shipments of 24 percent.
Light-duty automotive sales increased $132 million primarily due to higher sales to NissanChrysler and lowerhigher sales of light commercial vehicles, partially offset by higherlower sales to Chrysler.Nissan.
Total on-highway-related sales for the threenine months ended April 2,October 1, 2017, were 7879 percent of total engine segment sales, compared to 82versus 81 percent for the comparable period in 2016.
Segment EBIT
Engine segment EBIT for the three months ended April 2,October 1, 2017, increased $32$140 million versus the comparable period in 2016 primarily due to the absence of a loss contingency recorded in the third quarter of 2016 and higher gross margin, partially offset by higher research, development and engineering expenses and selling, general and administrative expenses.
Engine segment EBIT for the nine months ended October 1, 2017, increased $243 million versus the comparable period in 2016 primarily due to the absence of a loss contingency recorded in the second and third quarters of 2016, improved gross margin and increased equity, royalty and interest income from investees, partially offset by higher selling, general and administrative expenses and higher research, development and engineering expenses. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows:

 Three months ended Three months ended Nine months ended
 April 2, 2017 vs. April 3, 2016 October 1, 2017 vs. October 2, 2016 October 1, 2017 vs. October 2, 2016
 Favorable/(Unfavorable) Change Favorable/(Unfavorable) Change Favorable/(Unfavorable) Change
In millions Amount Percent Percentage point
change as a percent
of total sales		 Amount Percent Percentage point
change as a percent
of total sales		 Amount Percent Percentage point
change as a percent
of total sales
Gross margin $—
 — % (0.5) $77
 23 % (0.4) $121
 11 % (0.5)
Selling, general and administrative expenses (13) (10)% (0.5) (26) (18)% 0.5
 (58) (14)% 0.1
Research, development and engineering expenses 3
 5 % 0.2
 (27) (48)% (0.6) (34) (20)% (0.2)
Equity, royalty and interest income from investees 36
 100 % 1.8
 20
 53 % 0.5
 66
 55 % 0.7
Loss contingency (1)
 99
 100 % NM
 138
 100 % NM

"NM" - not meaningful information
Gross(1) See Note 9, "COMMITMENTS AND CONTINGENCIES," to the Condensed Consolidated Financial Statements for additional information.
The increase in gross margin was flatdollars for the three months ended April 2,October 1, 2017, versus the comparable period in 2016, as favorable pricing, increasedwas primarily due to higher volumes and lower material and commodity costs wereimproved leverage, partially offset by increased warranty costs due to a change in estimate in the first quarter of 2017 primarilyfor campaigns related to pre-2015 engines and higher claims for certain 2013 and 2014 engines.variable compensation expense. The increase in selling, general and administrative expenses was primarily due to higher consultingcompensation expense, especially variable compensation expense. The increase in research, development and engineering expenses was primarily due to higher compensation expense, especially variable compensation expense, and higher compensationconsulting expenses. 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., Ltd.
The increase in gross margin dollars for the nine months ended October 1, 2017, versus the comparable period in 2016, was primarily due to higher volumes, improved leverage, favorable pricing and mix and lower material costs, partially offset by increased warranty costs for campaigns related to pre-2015 engines and higher variable compensation expense. The increase in selling, general and administrative expenses was primarily due to higher compensation expense, especially variable compensation expense. The increase in research, development and engineering expenses was primarily due to higher compensation expense, especially 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 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/ Three months ended Favorable/ Nine months ended Favorable/
 April 2, April 3, (Unfavorable) October 1, October 2, (Unfavorable) October 1, October 2, (Unfavorable)
In millions 2017 2016 Amount Percent 2017 2016 Amount Percent 2017 2016 Amount Percent
External sales $1,637
 $1,458
 $179
 12 % $1,748
 $1,497
 $251
 17 % $5,101
 $4,493
 $608
 14 %
Intersegment sales 8
 5
 3
 60 % 5
 7
 (2) (29)% 19
 18
 1
 6 %
Total sales 1,645
 1,463
 182
 12 % 1,753
 1,504
 249
 17 % 5,120
 4,511
 609
 14 %
Depreciation and amortization 30
 28
 (2) (7)% 29
 28
 (1) (4)% 90
 85
 (5) (6)%
Research, development and engineering expenses 4
 4
 —
 — % 6
 3
 (3) (100)% 14
 10
 (4) (40)%
Equity, royalty and interest income from investees 11
 18
 (7) (39)% 11
 19
 (8) (42)% 35
 56
 (21) (38)%
Interest income 1
 1
 —
 — % 2
 1
 1
 100 % 4
 3
 1
 33 %
Segment EBIT 100
 87
 13
 15 %
EBIT 91
 96
 (5) (5)% 287
 270
 17
 6 %
                        
     Percentage Points     Percentage Points     Percentage Points
Segment EBIT as a percentage of total sales 6.1% 5.9%  
 0.2
EBIT as a percentage of total sales 5.2% 6.4%  
 (1.2) 5.6% 6.0%  
 (0.4)
In the first quarter of 2017, theour Distribution segment reorganized its regions to align with how the businesssegment 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/ Three months ended Favorable/ Nine months ended Favorable/
 April 2, April 3, (Unfavorable) October 1, October 2, (Unfavorable) October 1, October 2, (Unfavorable)
In millions 2017 2016 Amount Percent 2017 2016 Amount Percent 2017 2016 Amount Percent
North America $1,113
 $945
 $168
 18 % $1,188
 $979
 $209
 21 % $3,432
 $2,899
 $533
 18 %
Asia Pacific 170
 169
 1
 1 % 201
 175
 26
 15 % 558
 531
 27
 5 %
Europe 97
 101
 (4) (4)% 112
 103
 9
 9 % 316
 315
 1
 — %
China 66
 52
 14
 27 % 199
 166
 33
 20 %
Africa and Middle East 95
 89
 6
 7 % 58
 85
 (27) (32)% 239
 274
 (35) (13)%
China 58
 59
 (1) (2)%
Latin America 47
 36
 11
 31 % 125
 107
 18
 17 %
India 43
 41
 2
 5 % 41
 44
 (3) (7)% 136
 131
 5
 4 %
Latin America 35
 33
 2
 6 %
Russia 34
 26
 8
 31 % 40
 30
 10
 33 % 115
 88
 27
 31 %
Total sales $1,645
 $1,463
 $182
 12 % $1,753
 $1,504
 $249
 17 % $5,120
 $4,511
 $609
 14 %
Sales for our Distribution segment by product line were as follows:
 Three months ended Favorable/ Three months ended Favorable/ Nine months ended Favorable/
 April 2, April 3, (Unfavorable) October 1, October 2, (Unfavorable) October 1, October 2, (Unfavorable)
In millions 2017 2016 Amount Percent 2017 2016 Amount Percent 2017 2016 Amount Percent
Parts $745
 $648
 $97
 15% $768
 $643
 $125
 19% $2,272
 $1,933
 $339
 18%
Engines 342
 271
 71
 26% 931
 791
 140
 18%
Service 319
 299
 20
 7% 326
 299
 27
 9% 965
 895
 70
 8%
Power generation 306
 275
 31
 11% 317
 291
 26
 9% 952
 892
 60
 7%
Engines 275
 241
 34
 14%
Total sales $1,645
 $1,463
 $182
 12% $1,753
 $1,504
 $249
 17% $5,120
 $4,511
 $609
 14%
Sales
Distribution segment sales for the three months ended April 2,October 1, 2017, increased $182$249 million versus the comparable period in 2016 primarily due to an increase in organic sales of $101$185 million (primarily in North America) and $89 million of sales related to the acquisition of a North American distributors since December 31, 2015. distributor in the fourth quarter of 2016.
Distribution segment sales for the nine months ended October 1, 2017, increased $609 million versus the comparable period in 2016 primarily due to an increase in organic sales of $399 million (primarily in North America) and $266 million of sales related to the acquisition of a North American distributor in the fourth quarter of 2016.

Segment EBIT
Distribution segment EBIT for the three months ended April 2,October 1, 2017, decreased $5 million versus the comparable period in 2016 primarily due to higher selling, general and administrative expenses (mainly related to higher variable compensation expense) and lower equity, royalty and interest income from investees, offset by higher gross margin and a gain on the sale of assets.
Distribution segment EBIT for the nine months ended October 1, 2017, increased $13$17 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).higher variable compensation expense) and lower 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 1, 2017 vs. October 2, 2016 October 1, 2017 vs. October 2, 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 $25
 9 % (1.1) $93
 12 % (0.2)
Selling, general and administrative expenses (37) (20)% (0.3) (79) (14)% (0.1)
Equity, royalty and interest income from investees (8) (42)% (0.7) (21) (38)% (0.5)
Gain on sale of assets 15
 100 % NM
 15
 100 % NM
___________________________________
"NM" - not meaningful information
  Three months ended
  April 2, 2017 vs. April 3, 2016
  Favorable/(Unfavorable) Change
In millions Amount Percent Percentage point
change as a percent
of total sales
Gross margin $33
 13 % 0.1
Selling, general and administrative expenses (15) (8)% 0.4
Equity, royalty and interest income from investees (7) (39)% (0.5)
The increase in gross margin dollars for the three months ended April 2,October 1, 2017, versus the comparable period in 2016, was primarily due to improved pricing, higher organic volumes and the acquisition of a North American distributors since December 31, 2015,distributor in the fourth quarter of 2016, partially offset by unfavorable material costs.increased variable compensation expense. Gross margin as a percentage of sales declined primarily due to the increase in variable compensation expense. The increase in selling, general and administrative expenses was primarily due to higher variable compensation expensesexpense and increased compensation expense related to the acquisition of a North American distributorsdistributor. The decrease in equity, royalty and interest income from investees was primarily due to the acquisition of a North American distributor in the fourth quarter of 2016.
The increase in gross margin for the nine months ended October 1, 2017, versus the comparable period in 2016, was primarily due to higher organic volumes and the acquisition of a North American distributor in the fourth quarter of 2016, partially offset by increased variable compensation expense. Gross margin as a percentage of sales declined primarily due to the increase in variable compensation expense. The increase in selling, general and administrative expenses was primarily due to higher variable compensation expense, increased compensation expense related to the acquisition of a North American distributor and higher consulting expenses. The decrease in equity, royalty and interest income from investees was primarily relateddue to the acquisition of a North American distributors. distributor, in the fourth quarter of 2016.

Components Segment Results
Financial data for the Components segment was as follows:
 Three months ended Favorable/ Three months ended Favorable/ Nine months ended Favorable/
 April 2, April 3, (Unfavorable) October 1, October 2, (Unfavorable) October 1, October 2, (Unfavorable)
In millions 2017 2016 Amount Percent 2017 2016 Amount Percent 2017 2016 Amount Percent
External sales (1)
 $980
 $897
 $83
 9 % $1,139
 $824
 $315
 38 % $3,183
 $2,654
 $529
 20 %
Intersegment sales (1)
 364
 340
 24
 7 % 394
 319
 75
 24 % 1,148
 1,005
 143
 14 %
Total sales 1,344
 1,237
 107
 9 % 1,533
 1,143
 390
 34 % 4,331
 3,659
 672
 18 %
Depreciation and amortization 37
 31
 (6) (19)% 42
 32
 (10) (31)% 117
 95
 (22) (23)%
Research, development and engineering expenses 50
 56
 6
 11 % 63
 54
 (9) (17)% 170
 161
 (9) (6)%
Equity, royalty and interest income from investees 13
 8
 5
 63 % 12
 9
 3
 33 % 40
 29
 11
 38 %
Interest income —
 1
 (1) (100)% —
 1
 (1) (100)% 1
 3
 (2) (67)%
Segment EBIT 179
 163
 16
 10 %
EBIT 217
 148
 69
 47 % 586
 501
 85
 17 %
                        
     Percentage Points     Percentage Points     Percentage Points
Segment EBIT as a percentage of total sales 13.3% 13.2%  
 0.1
EBIT as a percentage of total sales 14.2% 12.9%  
 1.3
 13.5% 13.7%  
 (0.2)

(1)Due to the acquisitions of North American distributors, sales previously recognized as external sales are now included in intersegment sales.
In the first quarter of 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 balancessales were reclassified to conform with this change.
In the third quarter of 2017, we completed the Eaton Cummins Automated Transmission Technologies joint venture (ECJV), which was consolidated and included in our Components segment as the automated transmissions business. See Note 11, "ACQUISITION", in the Notes to Condensed Consolidated Financial Statements for additional information.
Sales for our Components segment by business were as follows:

 Three months ended Favorable/ Three months ended Favorable/ Nine months ended Favorable/
 April 2, April 3, (Unfavorable) October 1, October 2, (Unfavorable) October 1, October 2, (Unfavorable)
In millions 2017 2016 Amount Percent 2017 2016 Amount Percent 2017 2016 Amount Percent
Emission solutions $616
 $589
 $27
 5% $696
 $522
 $174
 33% $1,986
 $1,714
 $272
 16%
Turbo technologies 287
 265
 22
 8% 297
 241
 56
 23% 891
 782
 109
 14%
Filtration 277
 252
 25
 10% 287
 244
 43
 18% 855
 758
 97
 13%
Fuel systems 164
 131
 33
 25% 184
 136
 48
 35% 530
 405
 125
 31%
Automated transmissions 69
 —
 69
 NM
 69
 —
 69
 NM
Total sales $1,344
 $1,237
 $107
 9% $1,533
 $1,143
 $390
 34% $4,331
 $3,659
 $672
 18%

"NM" - not meaningful information
Sales
Components segment sales for the three months ended April 2,October 1, 2017, increased $107$390 million, across all lines of business, versus the comparable period in 2016. The following were the primary drivers:
Fuel systemsEmission solutions sales increased $33$174 million primarily due to higherstronger market demand for trucks in China.North America and China and increased sales of products to meet new emission standards in India.
Emission solutionsAutomated transmissions had North American sales of $69 million following the consolidation of the ECJV during August and September.
Turbo technologies sales increased $27$56 million primarily due to higher demand in China Western Europe and India, partially offset by unfavorable pricing in North America.
Fuel systems sales increased $48 million primarily due to higher demand in China, North America and Mexico.
Filtration sales increased $25$43 million primarily due to higher demand in North America, Australia Southeast Asia and China.Eastern Europe.
Turbo technologies
Components segment sales for the nine months ended October 1, 2017, increased $672 million, across all lines of business, versus the comparable period in 2016. The following were the primary drivers:
Emission solutions sales increased $22$272 million primarily due to stronger market demand for trucks in North America and China and increased sales of products to meet new emission standards in India.
Fuel systems sales increased $125 million primarily due to higher demand in China.China and Mexico.
Turbo technologies sales increased $109 million primarily due to higher demand in China and North America.
Filtration sales increased $97 million primarily due to higher demand in North America, Australia, China and Eastern Europe.
Automated transmissions had North American sales of $69 million following consolidation of the ECJV during August and September.
These increases were partially offset by unfavorable foreign currency fluctuations primarily(primarily in the Chinese renminbi and British pound. pound).
Segment EBIT
Components segment EBIT for the three months ended April 2,October 1, 2017, increased $16$69 million versus the comparable period in 2016, as higher gross margin was partially offset by increased selling, general and administrative expenses and higher research, development and engineering expenses.
Components segment EBIT for the nine months ended October 1, 2017, increased $85 million versus the comparable period in 2016 primarily due to higher gross margin lower research, development and engineering expenses and higherincreased 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 Three months ended Nine months ended
 April 2, 2017 vs. April 3, 2016 October 1, 2017 vs. October 2, 2016 October 1, 2017 vs. October 2, 2016
 Favorable/(Unfavorable) Change Favorable/(Unfavorable) Change Favorable/(Unfavorable) Change
In millions Amount Percent Percentage point
change as a percent
of total sales		 Amount Percent Percentage point
change as a percent
of total sales		 Amount Percent Percentage point
change as a percent
of total sales
Gross margin $18
 6 % (0.5) $94
 34 % — $122
 14 % (0.9)
Selling, general and administrative expenses (16) (20)% (0.7) (30) (34)% — (64) (24)% (0.3)
Research, development and engineering expenses 6
 11 % 0.8
 (9) (17)% 0.6 (9) (6)% 0.5
Equity, royalty and interest income from investees 5
 63 % 0.3
 3
 33 % — 11
 38 % 0.1
The increase in gross margin for the three months ended April 2,October 1, 2017, versus the comparable period in 2016, was primarily due to higher volumes, and lower material costs and improved leverage, partially offset by unfavorable pricinghigher warranty costs driven by campaigns and mix.increased variable compensation expense. The increase in selling, general and administrative expenses was primarily due to higher consultingcompensation expense, especially variable compensation expense and compensation expenses.expenses related to the new ECJV. The decreaseincrease in research, development and engineering expenses was primarily due to higher variable compensation expense.
The increase in gross margin for the nine months ended October 1, 2017, versus the comparable period in 2016, was primarily due to higher volumes, lower material costs and improved leverage, partially offset by unfavorable pricing in North America, higher warranty costs driven by campaigns and changes in estimates and increased variable compensation expense. The increase in selling, general and administrative expenses was primarily due to higher compensation expense, recoveryespecially variable compensation expense, and expenses related to the new ECJV. 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 customersinvestees was primarily due to higher earnings at Dongfeng Cummins Emission Solutions Co., Ltd., Shanghai Fleetguard Filter Co. and external parties. Fleetguard Filtration Systems India Pvt.

Power Systems Segment Results
Financial data for the Power Systems segment was as follows:
 Three months ended Favorable/ Three months ended Favorable/ Nine months ended Favorable/
 April 2, April 3, (Unfavorable) October 1, October 2, (Unfavorable) October 1, October 2, (Unfavorable)
In millions 2017 2016 Amount Percent 2017 2016 Amount Percent 2017 2016 Amount Percent
External sales (1)
 $515
 $447
 $68
 15 % $615
 $509
 $106
 21 % $1,717
 $1,509
 $208
 14 %
Intersegment sales (1)
 367
 361
 6
 2 % 441
 347
 94
 27 % 1,238
 1,076
 162
 15 %
Total sales 882
 808
 74
 9 % 1,056
 856
 200
 23 % 2,955
 2,585
 370
 14 %
Depreciation and amortization 28
 29
 1
 3 % 30
 29
 (1) (3)% 87
 87
 —
 — %
Research, development and engineering expenses 50
 49
 (1) (2)% 61
 44
 (17) (39)% 161
 141
 (20) (14)%
Equity, royalty and interest income from investees 12
 10
 2
 20 % 14
 8
 6
 75 % 40
 29
 11
 38 %
Interest income —
 2
 (2) (100)% 1
 1
 —
 — % 2
 4
 (2) (50)%
Segment EBIT 57
 46
 11
 24 %
EBIT 81
 59
 22
 37 % 199
 195
 4
 2 %
                        
     Percentage Points     Percentage Points     Percentage Points
Segment EBIT as a percentage of total sales 6.5% 5.7%  
 0.8
EBIT as a percentage of total sales 7.7% 6.9%  
 0.8
 6.7% 7.5%  
 (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, theour Power Systems segment reorganized its product lines to better reflect how the businesssegment is managed. Prior year sales have beenwere reclassified to reflect these changes. Sales for our Power Systems segment by product line were as follows:
 Three months ended Favorable/ Three months ended Favorable/ Nine months ended Favorable/
 April 2, April 3, (Unfavorable) October 1, October 2, (Unfavorable) October 1, October 2, (Unfavorable)
In millions 2017 2016 Amount Percent 2017 2016 Amount Percent 2017 2016 Amount Percent
Power generation $526
 $518
 $8
 2% $580
 $543
 $37
 7% $1,676
 $1,663
 $13
 1%
Industrial 275
 215
 60
 28% 385
 235
 150
 64% 1,013
 686
 327
 48%
Generator technologies 81
 75
 6
 8% 91
 78
 13
 17% 266
 236
 30
 13%
Total sales $882
 $808
 $74
 9% $1,056
 $856
 $200
 23% $2,955
 $2,585
 $370
 14%
High-horsepower unit shipments by engine classification were as follows:
 Three months ended Favorable/ Three months ended Favorable/ Nine months ended Favorable/
 April 2, April 3, (Unfavorable) October 1, October 2, (Unfavorable) October 1, October 2, (Unfavorable)
Units 2017 2016 Amount Percent 2017 2016 Amount Percent 2017 2016 Amount Percent
Power generation 1,900
 1,800
 100
 6% 2,200
 2,000
 200
 10% 6,200
 6,000
 200
 3%
Industrial 1,300
 1,000
 300
 30% 1,600
 1,000
 600
 60% 4,600
 3,100
 1,500
 48%
Total engine shipments 3,200
 2,800
 400
 14% 3,800
 3,000
 800
 27% 10,800
 9,100
 1,700
 19%
Sales
Power Systems segment sales for the three months ended April 2,October 1, 2017, increased $74$200 million across all product lines, versus the comparable period in 2016. The following were the primary drivers:
Industrial sales increased $60$150 million principally due to higher demand in global mining markets, especially in North America, Europe and China, oil and gas markets in North America and marine markets in North America.
•
Power generation sales increased $37 million primarily due to higher demand in Western Europe, China and North America, partially offset by lower demand in the Middle East and Africa.
Power Systems segment sales for the nine months ended October 1, 2017, increased $370 million versus the comparable period in 2016. The following were the primary drivers:
Industrial sales increased $327 million primarily due to higher demand in internationalglobal mining markets in Europe, North America and China and oil and gas markets in North American rail markets.America.
Power generation
Generator technologies sales increased $8$30 million primarily due to higher demand in Western Europe partially offset by lower demand in the Middle East.and China.
These increases were partially offset by unfavorable foreign currency fluctuations primarilythat negatively impacted sales (primarily due to the British pound. pound).

Segment EBIT
Power Systems segment EBIT for the three months ended April 2,October 1, 2017, increased $11$22 million versus the comparable period in 2016 primarily due to higher gross margin and favorable foreign currency fluctuations (primarily in the British pound),equity, royalty and interest income from investees, partially offset by higherincreased selling, general and administrative expenses and higher research, development and engineering expenses.
Power Systems segment EBIT for the nine months ended October 1, 2017, increased $4 million versus the comparable period in 2016 primarily due to higher gross margin and equity, royalty and interest income from investees, partially offset by increased selling, general and administrative expenses and higher research, development and engineering expenses. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows:
 Three months ended Three months ended Nine months ended
 April 2, 2017 vs. April 3, 2016 October 1, 2017 vs. October 2, 2016 October 1, 2017 vs. October 2, 2016
 Favorable/(Unfavorable) Change Favorable/(Unfavorable) Change Favorable/(Unfavorable) Change
In millions Amount Percent Percentage point
change as a percent
of total sales		 Amount Percent Percentage point
change as a percent
of total sales		 Amount Percent Percentage point
change as a percent
of total sales
Gross margin $15
 8 % (0.2) $49
 25 % 0.3
 $49
 8 % (1.2)
Selling, general and administrative expenses (3) (3)% 0.7
 (18) (18)% 0.5
 (29) (10)% 0.4
Research, development and engineering expenses (1) (2)% 0.4
 (17) (39)% (0.7) (20) (14)% 0.1
Equity, royalty and interest income from investees 2
 20 % 0.2
 6
 75 % 0.4
 11
 38 % 0.3
The increase in gross margin for the three months ended April 2,October 1, 2017, versus the comparable period in 2016, was primarily due to higherincreased volumes, and favorable foreign currency fluctuations (primarily in the British pound), partially offset by unfavorable mix, higher variable compensation expense and higher commodityincreased material costs. The increase in selling, general and administrative expenses was primarily due to higher compensation expense, especially variable compensation expense. The increase in research, development and engineering expenses was primarily due to higher compensation expense, especially variable compensation expense, higher consulting expenses and lower expense recovery. The increase in equity, royalty and interest income from investees was primarily due to the absence of a joint venture asset impairment recorded in the third quarter of 2016.
The increase in gross margin for the nine months ended October 1, 2017, versus the comparable period in 2016, was primarily due to increased volumes and favorable foreign currency fluctuations (primarily the British pound), partially offset by unfavorable mix, higher warranty cost related to a campaign accrual, increased material costs 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, increased project spending and higher consulting expenses. The increase in equity, royalty and interest income from investees was primarily due to the absence of a joint venture asset impairment recorded in the third quarter of 2016.

Reconciliation of Segment EBIT to Net Income Attributable to Cummins Inc.
The table below reconciles the segment information to the corresponding amounts in the Condensed Consolidated Statements of Income:
 Three months ended Three months ended Nine months ended
In millions April 2,
2017		 April 3,
2016		 October 1,
2017		 October 2,
2016		 October 1,
2017		 October 2,
2016
TOTAL SEGMENT EBIT $565
 $493
 $618
 $392
 $1,807
 $1,458
Non-segment EBIT (1)
 1
 (9) 22
 6
 19
 15
TOTAL EBIT 566
 484
 640
 398
 1,826
 1,473
Less: Interest expense 18
 19
 18
 16
 57
 51
INCOME BEFORE INCOME TAXES 548
 465
 622
 382
 1,769
 1,422
Less: Income tax expense 143
 132
 165
 82
 466
 362
CONSOLIDATED NET INCOME 405
 333
 457
 300
 1,303
 1,060
Less: Net income attributable to noncontrolling interest 9
 12
 4
 11
 30
 44
NET INCOME ATTRIBUTABLE TO CUMMINS INC. $396
 $321
 $453
 $289
 $1,273
 $1,016

(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 months ended April 2,October 1, 2017 and April 3,October 2, 2016.

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 April 2,
2017		 December 31,
2016		 October 1,
2017		 December 31,
2016
Working capital (1)
 $3,497
 $3,382
 $3,298
 $3,382
Current ratio 1.75
 1.78
 1.57
 1.78
Accounts and notes receivable, net $3,247
 $3,025
 $3,810
 $3,025
Days’ sales in receivables 62
 61
 63
 61
Inventories $2,894
 $2,675
 $3,146
 $2,675
Inventory turnover 4.8
 4.7
 4.9
 4.7
Accounts payable (principally trade) $2,168
 $1,854
 $2,486
 $1,854
Days' payable outstanding 52
 51
 53
 51
Total debt $1,945
 $1,856
 $2,255
 $1,856
Total debt as a percent of total capital 20.6% 20.6% 20.8% 20.6%

(1) Working capital includes cash and cash equivalents.
Cash Flows
Cash and cash equivalents were impacted as follows:
 Three months ended   Nine months ended  
In millions April 2,
2017		 April 3,
2016		 Change October 1,
2017		 October 2,
2016		 Change
Net cash provided by operating activities $379
 $267
 $112
 $1,471
 $1,314
 $157
Net cash used in investing activities (27) (388) 361
 (786) (590) (196)
Net cash used in financing activities (164) (636) 472
 (600) (1,045) 445
Effect of exchange rate changes on cash and cash equivalents 14
 (39) 53
 85
 (139) 224
Net increase (decrease) in cash and cash equivalents $202
 $(796) $998
 $170
 $(460) $630
Net cash provided by operating activities increased $112$157 million for the threenine months ended April 2,October 1, 2017, versus the comparable period in 2016, primarily due to higher consolidated net income, the absence of restructuring paymentsfavorable translation and hedging activities and lower working capital levels.levels, partially offset by higher equity in income of investees. During the first threenine months of 2017, the lower working capital requirements resulted in a cash outflow of $128$215 million compared to a cash outflow of $140$302 million in the comparable period in 2016. 
Net cash used in investing activities decreased $361increased $196 million for the threenine months ended April 2,October 1, 2017, versus the comparable period in 2016, primarily due to the acquisition of Eaton Cummins Automated Transmission Technologies for $600 million, partially offset by lower net investments in marketable securities of $377$268 million, higher proceeds from the disposal of property, plant and equipment of $93 million and higher cash flows from derivatives not designated as hedges of $73 million.
Net cash used in financing activities decreased $472$445 million for the threenine months ended April 2,October 1, 2017, versus the comparable period in 2016, primarily due to lower repurchases of common stock of $524$354 million and higherlower payments on borrowings and capital lease obligations of commercial paper of $12$118 million, partially offset by lower proceeds from borrowings of $105$107 million.
The effect of exchange rate changes on cash and cash equivalents for the threenine months ended April 2,October 1, 2017, versus the comparable period in 2016, increased $53$224 million primarily due to the British pound, which increased cash and cash equivalents by $46$198 million.

Sources of Liquidity 
We generate significant ongoing cash flow. Cash provided by operations is our principal source of liquidity with $379 million$1.5 billion provided in the threenine months ended April 2,October 1, 2017.

At April 2,October 1, 2017, our other sources of liquidity included:
 April 2, 2017 October 1, 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 $1,322
 $438
 $884
 U.K., Singapore, China, Australia, Canada $1,290
 $297
 $993
 U.K., Singapore, China, Canada, Belgium, Australia
Marketable securities (1)
 145
 40
 105
 India 154
 42
 112
 India
Total $1,467
 $478
 $989
  $1,444
 $339
 $1,105
 
Available credit capacity 
      
     
Revolving credit facility (2)
 $1,476
      $2,236
     
International and other uncommitted domestic credit facilities (3)
 153
      $188
     

(1) The majority of marketable securities could be liquidated into cash within a few days.
(2) The revolvingfive-year credit facility isfor $1.75 billion and the 364-day credit facility for $1.0 billion, maturing November 2020 and September 2018 respectively, are maintained primarily to provide backup liquidity for our commercial paper borrowings and general corporate purposes. At April 2,October 1, 2017, we had $274$514 million of commercial paper outstanding, which effectively reduced the available capacity under our revolving credit facility to $1.48$2.24 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.
Debt Facilities and Other Sources of Liquidity
On September 5, 2017, we entered into a 364-day credit facility that allows us to borrow up to $1 billion of additional unsecured funds at any time through September 2018.
We have access to credit facilities that total $2.75 billion, including the new 364-day facility and the $1.75 billion facility that expires on November 13, 2020. We intend to maintain credit facilities of a similar aggregate amount by renewing or replacing these facilities before expiration. Revolving credit facilities are maintained primarily to provide backup liquidity for our commercial paper borrowings, letters of credit and general corporate purposes.
We can issue up to $1.75 billion of unsecured short-term promissory notes ("commercial paper") pursuant to aour board authorized commercial paper program.programs. The program facilitatesprograms facilitate the private placement of unsecured short-term debt through third party brokers. We intend to use the net proceeds from the commercial paper programborrowings for general corporate purposes.
We have a $1.75 billion revolving credit facility, the proceeds of which can be used for general corporate purposes. This facility expires on November 13, 2020. The revolving credit facility is maintained primarily to provide backup liquidity for our commercial paper borrowings, letters of credit and general corporate purposes. The total combined borrowing capacity under the revolving credit facility and commercial paper program should not exceed $1.75 billion.
As a well-known seasoned issuer, we filed an automatic shelf registration for an undetermined amount of debt and equity securities with the Securities and Exchange Commission on February 16, 2016. Under this shelf registration we may offer, from time to time, debt securities, common stock, preferred and preference stock, depositary shares, warrants, stock purchase contracts and stock purchase units.
Uses of Cash
ShareStock Repurchases
In December 2016, our Board of Directors authorized the acquisition of up to $1 billion of additional common stock upon completion of the 2015 repurchase plan. In the first threenine months of 2017, we made the following purchases under the 2015 stock repurchase program:

In millions, except per share amounts Shares
Purchased		 Average Cost
Per Share		 Total Cost of
Repurchases		 
Remaining
Authorized
Capacity (1)
 Shares
Purchased		 Average Cost
Per Share		 Total Cost of
Repurchases		 
Remaining
Authorized
Capacity (1)
April 2 0.3
 $151.32
 $51
 $445
 0.3
 $151.32
 $51
 $445
July 2 0.5
 153.95
 69
 376
October 1 1.7
 155.05
 271
 105
Total 2.5
 154.36
 $391
  

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

plan.
We may continue to repurchase outstanding shares from time to time during 2017 to enhance shareholder value and to offset the dilutive impact of employee stock based compensation plans.
Dividends
In July 2016,2017, our Board of Directors authorized an increase to our quarterly dividend of 5.15.4 percent from $0.975$1.025 per share to $1.025$1.08 per share. We paid dividends of $171$522 million during the threenine months ended April 2,October 1, 2017.
Agreement to Form a Joint VentureAcquisition
OnIn April 10, 2017, we entered into an agreement to form a joint venture with Eaton Corporation PLC subject to regulatory approvals.(Eaton), which closed on July 31, 2017 (the acquisition date). We will purchasepurchased a 50 percent interest in the new venture named Eaton Cummins Automated Transmission Technologies for approximately $600 million whichin cash. In addition, each partner contributed $20 million for working capital. The joint venture will design, assemble, sell and support medium-duty and heavy-duty automated transmissions for the commercial vehicle market, including new product launches. We consolidated the results of the joint venture in our Components segment as we will fund withhave a combination of cash and short-term debt. We expect the transaction to closemajority voting interest in the third quarterventure by virtue of a tie-breaking vote on the joint venture's board of directors. We do not expect this new venture to have a significant impact on our consolidated results in 2017. See Note 11 "ACQUISITION," to the Condensed Consolidated Financial Statements for additional information.
Capital Expenditures
Capital expenditures, andincluding spending on internal use software, for the threenine months ended April 2,October 1, 2017, were $108$341 million compared to $84$354 million in the comparable period in 2016. We continue to invest in new product lines and targeted capacity expansions. We plan to spend between $500 million and $530 million in 2017 on capital expenditures as we continue with product launches and facility improvements. Approximately 50 percent of our capital expenditures are expected to be invested outside of the U.S. in 2017.
Pensions
Our global pension plans, including our unfunded and non-qualified plans, were 110 percent funded at December 31, 2016. Our U.S. qualified plans, which represent approximately 56 percent of the worldwide pension obligation, were 118 percent funded and our U.K. 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 threenine months of 2017, the investment return on our U.S. pension trust was 3.19.7 percent while our U.K. pension trust return was 2.70.2 percent. Approximately 7776 percent of our pension plan assets are held in highly liquid investments such as fixed income and equity securities. The remaining 2324 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 2017 of $91$10 million for our U.S. and U.KU.K. pension plans. Approximately $133$134 million of the estimated $134$135 million of U.S. and U.K. pension contributions for the full year are voluntary. These contributions may be made from trusts or company funds either to increase pension assets or to make direct benefit payments to plan participants. We expect our 2017 net periodic pension cost to approximate $83 million.
Current Maturities of Short and Long-Term Debt
We had $274$514 million of commercial paper outstanding at April 2,October 1, 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 $4$6 million to $45$59 million over the next five years (including the remainder of 2017). See Note 7 "DEBT," to the Condensed Consolidated Financial Statements for additional information.
Credit Ratings
Our ratings and outlook from each of the credit rating agencies as of the date of filing are shown in the table below.

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

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

Management's Assessment of Liquidity


Our financial condition and liquidity remain strong. Our solid balance sheet and credit ratings enable us to have ready access to credit and the capital markets. We assess our liquidity in terms of our ability to generate adequate cash to fund our operating, investing and financing activities. We believe our operating cash flow and liquidity 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 and maintain access to our revolving credit facility as noted above.



APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
A summary of our significant accounting policies is included in Note 1, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,” of the Notes to the Consolidated Financial Statements of our 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 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 threenine months of 2017.
RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 12,13, "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 2016 Form 10-K. There have been no material changes in this information since the filing of our 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 April 2,October 1, 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 9, "COMMITMENTS AND CONTINGENCIES," to the Condensed Consolidated Financial Statements is incorporated herein by reference.
We conduct significant business operations in Brazil that are subject to the Brazilian federal, state and local labor, social security, tax and customs laws. While we believe we comply with such laws, they are complex, subject to varying interpretations and we are often engaged in litigation regarding the application of these laws to particular circumstances.
The disclosure set forth under "Loss Contingency" in Note 9, "COMMITMENTS AND CONTINGENCIES," to the Condensed Consolidated Financial Statements is incorporated herein by reference.
ITEM 1A.  Risk Factors
In addition to other information set forth in this report, you should consider other risk factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2016, 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)
January 1 - February 5 950
 $147.01
 —
 61,703
February 6 - March 5 323,609
 151.60
 305,057
 43,132
March 6 - April 2 38,543
 149.66
 33,538
 38,727
Total 363,102
 151.38
 338,595
  
  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)
July 3 - August 6 —
 $—
 —
 37,707
August 7 - September 3 1,741,037
 155.07
 1,740,194
 41,303
September 4 - October 1 3,743
 158.81
 2,600
 40,360
Total 1,744,780
 155.08
 1,742,794
  

(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 April 2,October 1, 2017, was $1.4$1.1 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 April 2,October 1, 2017, we repurchased $51$271 million of common stock under the 2015 Board of Directors authorized plan.

During the three months ended April 2,October 1, 2017, we repurchased 24,5071,986 shares from employees in connection with the Key Employee Stock Investment Plan which allows certain employees, other than officers, to purchase shares of common stock on an installment basis up to an established credit limit. Loans are issued for five-year terms at a fixed interest rate established at the date of purchase and may be refinanced after their initial five-year period for an additional five-year period. Participants must hold shares for a minimum of six months from date of purchase. If the shares are sold before the loan is paid off, the employee must wait six months before another share purchase may be made. We hold participants’ shares as security for the loans and would, in effect repurchase shares if the participant defaulted in repayment of the loan. There is no maximum amount of shares that we may purchase under this plan.  
ITEM 3.  Defaults Upon Senior Securities
Not applicable. 
ITEM 4.  Mine Safety Disclosures
Not applicable. 
ITEM 5.  Other Information
Not applicable. 
ITEM 6. Exhibits
SeeThe exhibits listed in the following Exhibit Index at the endare filed as part of this Quarterly Report on Form 10-Q.
CUMMINS INC.
EXHIBIT INDEX
Exhibit No.Description of Exhibit
3.1
By-Laws, as amended and restated effective as of May 9, 2017 (filed herewith)
10.1
364-Day Credit Agreement, dated as of September 5, 2017, by and among Cummins Inc., the subsidiary borrowers referred to therein, the Lenders and Agents party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.1 to Cummins Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 6, 2017)(File No.001-04949)).
12
Calculation of Ratio of Earnings to Fixed Charges.
31(a)
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31(b)
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INSXBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. 
101.SCHXBRL Taxonomy Extension Schema Document.
101.CALXBRL Taxonomy Extension Calculation Linkbase Document.
101.DEFXBRL Taxonomy Extension Definition Linkbase Document.
101.LABXBRL Taxonomy Extension Label Linkbase Document.
101.PREXBRL Taxonomy Extension Presentation Linkbase Document.


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Cummins Inc.   
Date:May 2,October 31, 2017   
      
 By:/s/ PATRICK J. WARD By:/s/ CHRISTOPHER C. CLULOW
  Patrick J. Ward  Christopher C. Clulow
  Vice President and Chief Financial Officer  Vice President-Corporate Controller
  (Principal Financial Officer)  (Principal Accounting Officer)

CUMMINS INC.
EXHIBIT INDEX

53
Exhibit No.Description of Exhibit
12Calculation 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.
32Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INSXBRL Instance Document.
101.SCHXBRL Taxonomy Extension Schema Document.
101.CALXBRL Taxonomy Extension Calculation Linkbase Document.
101.DEFXBRL Taxonomy Extension Definition Linkbase Document.
101.LABXBRL Taxonomy Extension Label Linkbase Document.
101.PREXBRL Taxonomy Extension Presentation Linkbase Document.

44