UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2016
Commission File Number 1-4949
CUMMINS INC.
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $2.50 par value
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
__________________________________________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
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
No
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 (§ 229.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value of the voting stock held by non-affiliates was approximately $19.0 billion at July 3, 2016. This value includes all
shares of the registrant's common stock, except for treasury shares.
As of February 3, 2017, there were 168,155,330 shares outstanding of $2.50 par value common stock.
Documents Incorporated by Reference
Portions of the registrant's definitive Proxy Statement for its 2017 annual meeting of shareholders, which will be filed with the Securities and
Exchange Commission on Schedule 14A within 120 days after the end of 2016, will be incorporated by reference in Part III of this Form 10-K to
the extent indicated therein upon such filing.
We maintain an internet website at www.cummins.com. Investors may obtain copies of our filings from this website free of charge as soon as
reasonable practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission. We are not including
the information provided on the website as part of, or incorporating such information by reference into, this Annual Report on Form 10-K.
Website Access to Company's Reports
Table of Contents
CUMMINS INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART ITEM
PAGE
Cautionary Statements Regarding Forward-Looking Information
I
1 Business
Overview
Operating Segments
Engine Segment
Distribution Segment
Components Segment
Power Systems Segment
Joint Ventures, Alliances and Non-Wholly-Owned Subsidiaries
Supply
Patents and Trademarks
Seasonality
Largest Customers
Backlog
Research and Development
Environmental Sustainability
Environmental Compliance
Employees
Available Information
Executive Officers of the Registrant
1A Risk Factors
1B Unresolved Staff Comments
2 Properties
3 Legal Proceedings
4 Mine Safety Disclosures
II
5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
6 Selected Financial Data
7 Management's Discussion and Analysis of Financial Condition and Results of Operations
7A Quantitative and Qualitative Disclosures About Market Risk
8 Financial Statements and Supplementary Data
Index to Financial Statements
9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
9A Controls and Procedures
9B Other Information
III
10 Directors, Executive Officers and Corporate Governance
11 Executive Compensation
12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
13 Certain Relationships, Related Transactions and Director Independence
14 Principal Accounting Fees and Services
15 Exhibits and Financial Statement Schedules
16 Form 10-K Summary (optional)
IV
Signatures
Cummins Inc. Exhibit Index
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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 annual 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:
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a sustained slowdown or significant downturn in our markets;
changes in the engine outsourcing practices of significant customers;
a major customer experiencing financial distress;
lower than expected acceptance of new or existing products or services;
any significant problems in our new engine platforms;
a further slowdown in infrastructure development and/or continuing depressed commodity prices;
unpredictability in the adoption, implementation and enforcement of emission standards around the world;
foreign currency exchange rate changes;
the actions of, and income from, joint ventures and other investees that we do not directly control;
the integration of our previously partially-owned United States and Canadian distributors;
our plan to 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;
increasing competition, including increased global competition among our customers in emerging markets;
exposure to potential security breaches or other disruptions to our information technology systems and data security;
political, economic and other risks from operations in numerous countries;
changes in taxation;
global legal and ethical compliance costs and risks;
aligning our capacity and production with our demand;
product liability claims;
increasingly stringent environmental laws and regulations;
the price and availability of energy;
the performance of our pension plan assets and volatility of discount rates;
labor relations;
changes in accounting standards;
future bans or limitations on the use of diesel-powered vehicles;
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•
•
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•
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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 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 annual report and we undertake no obligation to publicly update
any forward-looking statements, whether as a result of new information, future events or otherwise.
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ITEM 1. Business
OVERVIEW
PART I
We were founded in 1919 as Cummins Engine Company, a corporation in Columbus, Indiana. We were one of the first diesel
engine manufacturers. We changed our name to Cummins Inc. in 2001. We are a global power leader that designs,
manufactures, distributes and services diesel and natural gas engines and engine-related component products, including
filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems and electric power generation
systems. We sell our products to original equipment manufacturers (OEMs), distributors and other customers worldwide. We
serve our customers through a network of approximately 600 wholly-owned and independent distributor locations and over
7,400 dealer locations in more than 190 countries and territories.
OPERATING SEGMENTS
As previously announced, beginning with the second quarter of 2016, we realigned certain of our reportable segments to be
consistent with changes to our organizational structure and how the Chief Operating Decision Maker (CODM) monitors the
performance of our segments. We reorganized our business to combine our Power Generation segment and our high-
horsepower engine business to create the new Power Systems segment. Our reportable operating segments consist of Engine,
Distribution, Components and Power Systems. We began to report results for our new reporting structure in the second quarter
of 2016 and also reflected this change for historical periods. The formation of the Power Systems segment combined two
businesses that were already strongly interdependent, which will allow us to streamline business and technical processes to
accelerate innovation, grow market share and more efficiently manage our supply chain and manufacturing operations.
Our segments share technology, customers, strategic partners, brand recognition and our distribution network in order to
compete more efficiently and effectively in their respective markets. In each of our operating segments, we compete worldwide
with a number of other manufacturers and distributors that produce and sell similar products. Our products compete primarily
on the basis of performance, fuel economy, speed of delivery, quality, customer support and price. Financial information about
our operating segments, including geographic information, is incorporated by reference from Note 21, "OPERATING
SEGMENTS," to our Consolidated Financial Statements.
Engine Segment
Engine segment sales and earnings before interest and taxes (EBIT) as a percentage of consolidated results were:
Percent of consolidated net sales(1)
Percent of consolidated EBIT(1)
___________________________________________________________
(1) Measured before intersegment eliminations
Years ended December 31,
2016
2015
2014
35%
35%
36%
30%
38%
40%
Our Engine segment manufactures and markets a broad range of diesel and natural gas powered engines under the Cummins
brand name, as well as certain customer brand names, for the heavy- and medium-duty truck, bus, recreational vehicle (RV),
light-duty automotive, construction, mining, marine, rail, oil and gas, defense and agricultural markets. We manufacture a wide
variety of engine products including:
• Engines with a displacement range of 2.8 to 15 liters and horsepower ranging from 48 to 715 and
• New parts and service, as well as remanufactured parts and engines, through our extensive distribution network.
In the second quarter of 2016, in conjunction with the reorganization of our segments, our Engine segment reorganized its
reporting structure as follows:
• Heavy-duty truck - We manufacture diesel and natural gas engines that range from 310 to 605 horsepower serving
global heavy-duty truck customers worldwide, primarily in North America, Latin America and Australia.
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• Medium-duty truck and bus - We manufacture diesel and natural gas engines ranging from 130 to 450 horsepower
serving medium-duty truck and bus customers worldwide, with key markets including North America, Latin America,
China, Europe and India. Applications include pickup and delivery trucks, vocational truck, school bus, transit bus and
shuttle bus. We also provide diesel engines for Class A motor homes (RVs), primarily in North America.
• Light-duty automotive (Pickup and Light Commercial Vehicle (LCV)) - We manufacture 105 to 385 horsepower
diesel engines, including engines for the pickup truck market for Chrysler and Nissan in North America, and LCV
markets in Europe, Latin America and Asia.
• Off-highway - We manufacture diesel engines that range from 48 to 715 horsepower to key global markets including
mining, marine, rail, oil and gas, defense, agriculture and construction equipment and also to the power generation
business for standby, mobile and distributed power generation solutions throughout the world.
The principal customers of our heavy-duty truck engines include truck manufacturers such as PACCAR Inc. (PACCAR),
Daimler Trucks North America (Daimler) and Navistar International Corporation (Navistar). The principal customers of our
medium-duty truck engines include truck manufacturers such as Daimler, PACCAR and Navistar. We sell our industrial engines
to manufacturers of construction, agricultural and marine equipment, including Komatsu, Belaz, Hyundai, Hitachi and JLG.
The principal customers of our light-duty on-highway engines are Fiat Chrysler Automobiles (Fiat Chrysler), Nissan and
manufacturers of RVs.
In the markets served by our Engine segment, we compete with independent engine manufacturers as well as OEMs who
manufacture engines for their own products. Our primary competitors in North America are Daimler, Caterpillar Inc. (CAT),
Volvo Powertrain, Ford Motor Company (Ford) and Hino Power. Our primary competitors in international markets vary from
country to country, with local manufacturers generally predominant in each geographic market. Other engine manufacturers in
international markets include Weichai Power Co. Ltd., MAN Nutzfahrzeuge AG (MAN), Fiat Power Systems, Guangxi Yuchai
Group, GE Jenbacher, Tognum AG, CAT, Volvo AB (Volvo), Yanmar Co., Ltd. and Deutz AG.
Distribution Segment
Distribution segment sales and EBIT as a percentage of consolidated results were:
Percent of consolidated net sales(1)
Percent of consolidated EBIT(1)
___________________________________________________________
(1) Measured before intersegment eliminations
Years ended December 31,
2016
2015
2014
28%
20%
26%
20%
22%
19%
Our Distribution segment consists of 36 wholly-owned and 6 joint venture distributors that service and distribute the full range
of our products and services to end-users at approximately 450 locations in over 80 distribution territories. Our wholly-owned
distributors are located in key markets, including North America, Australia, Europe, the Middle East, China, Africa, Russia,
Japan, Brazil, Singapore and Central America, while our joint venture distributors are located in key markets, including South
America, India, Thailand and Singapore.
The Distribution segment consists of the following product lines which service and/or distribute the full range of our products
and services:
•
Parts;
• Engines;
•
•
Power generation; and
Service.
The Distribution segment is organized into seven primary geographic regions:
• North and Central America;
• Asia Pacific;
• Europe, Commonwealth of Independent States (CIS) and China;
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• Africa;
• Middle East;
•
•
India; and
South America.
Asia Pacific is composed of six smaller regional distributor organizations (South Pacific, Korea, Japan, Philippines, Malaysia
and Singapore) which allow us to better manage these vast geographic territories.
Our distribution network consists of independent, partially-owned and wholly-owned distributors which provide parts and
service to our customers. These full-service solutions include maintenance contracts, engineering services and integrated
products, where we customize our products to cater to specific needs of end-users. Our distributors also serve and develop
dealers, predominantly OEM dealers, in their territories by providing new products, technical support, tools, training, parts and
product information.
In addition to managing our involvement with our wholly-owned and partially-owned distributors, our Distribution segment is
responsible for managing the performance and capabilities of our independent distributors. Our Distribution segment serves a
highly diverse customer base with approximately 38 percent of its 2016 sales being generated from new engines and power
generation equipment, compared to 41 percent in 2015, with its remaining sales generated by parts and service revenue.
Our distributors compete with distributors or dealers that offer similar products. In many cases, these competing distributors or
dealers are owned by, or affiliated with the companies that are listed as competitors of our Engine, Components or Power
Systems segments. These competitors vary by geographical location.
During 2016, we paid $109 million to acquire the remaining interest in the last two partially owned North American
distributors, including the related debt retirements. See Note 18, "ACQUISITIONS," to our Consolidated Financial Statements
for additional information.
Components Segment
Components segment sales and EBIT as a percentage of consolidated results were:
Percent of consolidated net sales(1)
Percent of consolidated EBIT(1)
___________________________________________________________
(1) Measured before intersegment eliminations
Years ended December 31,
2016
2015
2014
21%
32%
21%
34%
21%
27%
Our Components segment supplies products which complement our Engine and Power Systems segments, including
aftertreatment systems, turbochargers, filtration products and fuel systems for commercial diesel applications. We manufacture
filtration systems for on- and off-highway heavy-duty and mid-range equipment, and we are a supplier of filtration products for
industrial car applications. In addition, we develop aftertreatment systems and turbochargers to help our customers meet
increasingly stringent emission standards and fuel systems which have primarily supplied our Engine segment and our joint
venture partner Scania.
Our Components segment is organized around the following businesses:
• Emission solutions - Our emission solutions business is a global leader in designing, manufacturing and integrating
aftertreatment technology and solutions for the commercial on- and off-highway light, medium, heavy-duty and high-
horsepower engine markets. Aftertreatment is the mechanism used to convert engine emissions of criteria pollutants,
such as particulate matter (PM), nitrogen oxides (NOx), carbon monoxide (CO) and unburned hydrocarbons (HC) into
harmless emissions. Our products include custom engineering systems and integrated controls, oxidation catalysts,
particulate filters, selective catalytic reduction systems and engineered components, including dosers and sensors. Our
emission solutions business primarily serves markets in North America, Europe, China, Brazil, Russia, Australia and
India. We serve both OEM first fit and retrofit customers.
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• Turbo technologies - Our turbo technologies business designs, manufactures and markets turbochargers for light-duty,
mid-range, heavy-duty and high-horsepower diesel markets with manufacturing facilities in five countries and sales
and distribution worldwide. Our turbo technologies business provides critical air handling technologies for engines,
including variable geometry turbochargers, to meet challenging performance requirements and worldwide emission
standards. Our turbo technologies business primarily serves markets in North America, Europe, Asia and Brazil.
• Filtration - Our filtration business designs, manufactures and sells filters, coolant and chemical products. Our
filtration business offers over 8,300 products for first fit and aftermarket applications including air filters, fuel filters,
fuel water separators, lube filters, hydraulic filters, coolants, fuel additives and other filtration systems to OEMs,
dealers/distributors and end users. Our filtration business supports a wide customer base in a diverse range of markets
including on-highway, off-highway segments such as oil and gas, agriculture, mining, construction, power generation,
marine and industrial markets. We produce and sell globally recognized Fleetguard® branded products in over 160
countries including countries in North America, Europe, South America, Asia, Australia and Africa. Fleetguard
products are available through thousands of distribution points worldwide.
• Fuel systems - Our fuel systems business designs and manufactures new and replacement fuel systems primarily for
heavy-duty on-highway diesel engine applications and also remanufactures fuel systems.
Customers of our Components segment generally include our Engine and Distribution segments, truck manufacturers and other
OEMs, many of which are also customers of our Engine segment, such as PACCAR, Daimler, Navistar, Volvo, Scania, Fiat
Chrysler, Komatsu and other manufacturers that use our components in their product platforms.
Our Components segment competes with other manufacturers of aftertreatment systems, filtration, turbochargers and fuel
systems. Our primary competitors in these markets include Robert Bosch GmbH, Donaldson Company, Inc., Clarcor Inc.,
Mann+Hummel Group, Honeywell International, Borg-Warner, Tenneco Inc., Eberspacher Holding GmbH & Co. KG and
Denso Corporation.
Power Systems Segment
Power Systems segment sales and EBIT as a percentage of consolidated results were:
Percent of consolidated net sales(1)
Percent of consolidated EBIT(1)
___________________________________________________________
(1) Measured before intersegment eliminations
Years ended December 31,
2016
2015
2014
16%
13%
17%
16%
19%
14%
In the second quarter of 2016, in conjunction with the reorganization of our segments, our Power Systems segment reorganized
its reporting structure as follows:
• Power generation - We design, manufacture, sell and support back-up and prime power generators ranging from 2
kilowatts to 3.5 megawatts, as well as controls, paralleling systems and transfer switches, for applications such as
consumer, commercial, industrial, data centers, health care, telecommunications and waste water treatment plants. We
also provide turnkey solutions for distributed generation and energy management applications using natural gas or
biogas as a fuel. We also serve global rental accounts for diesel and gas generator sets.
•
Industrial - We design, manufacture, sell and support diesel and natural gas high-horsepower engines up to 5,500
horsepower for a wide variety of equipment in the mining, rail, defense, oil and gas, and commercial marine
applications throughout the world. Across these markets, we have major customers in North America, Europe, the
Middle East, Africa, China, Korea, Japan, Latin America, India, Russia, Southeast Asia, South Pacific and Mexico.
• Generator technologies - We design, manufacture, sell and support A/C generator/alternator products for internal
consumption and for external generator set assemblers. Our products are sold under the Stamford, AVK and Markon
brands and range in output from 3 kilovolt-amperes (kVA) to 12,000 kVA.
This segment continuously explores emerging technologies and provides integrated power generation products using
technologies other than reciprocating engines. We use our own research and development capabilities as well as those of our
business partnerships to develop cost-effective and environmentally sound power solutions.
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Our customer base for our Power Systems offerings is highly diversified, with customer groups varying based on their power
needs. India, China, the U.K., Western Europe, Latin America and the Middle East are our largest geographic markets outside
of North America.
In the markets served by our Power Systems segment, we compete with independent engine manufacturers as well as
OEMs who manufacture engines for their own products. We compete with a variety of engine manufacturers and generator set
assemblers across the world. Our primary competitors are CAT, MTU Friedrichshafen GmbH (MTU) and Kohler/SDMO
(Kohler Group), but we also compete with GE Jenbacher, FG Wilson (CAT group), Tognum (MTU group), Generac, Mitsubishi
(MHI) and numerous regional generator set assemblers. Our alternators business competes globally with Marathon Electric and
Meccalte, among others.
JOINT VENTURES, ALLIANCES AND NON-WHOLLY-OWNED SUBSIDIARIES
We have entered into a number of joint venture agreements and alliances with business partners around the world. Our joint
ventures are either distribution or manufacturing entities. We also own controlling interests in non-wholly-owned
manufacturing and distribution subsidiaries.
In the event of a change of control of either party to certain of these joint ventures and other strategic alliances, certain
consequences may result including automatic termination and liquidation of the venture, exercise of "put" or "call" rights of
ownership by the non-acquired partner, termination or transfer of technology license rights to the non-acquired partner and
increases in component transfer prices to the acquired partner. We will continue to evaluate joint venture and partnership
opportunities in order to penetrate new markets, develop new products and generate manufacturing and operational efficiencies.
Financial information about our investments in joint ventures and alliances is incorporated by reference from Note 2,
"INVESTMENTS IN EQUITY INVESTEES," to the Consolidated Financial Statements.
Our equity income from these investees was as follows:
In millions
Distribution entities
Komatsu Cummins Chile, Ltda.
North American distributors
All other distributors
Manufacturing entities
Beijing Foton Cummins Engine Co., Ltd.
Dongfeng Cummins Engine Company, Ltd.
Chongqing Cummins Engine Company, Ltd.
All other manufacturers
Cummins share of net income(1)
Years ended December 31,
2016
2015
2014
$
34
21
—
52
46
38
13% $
8%
—%
20%
18%
15%
31
33
3
62
51
41
11% $
12%
1%
23%
19%
15%
29
107
4
(2)
67
51
69
260
$
26%
100% $
52
273
19%
100% $
74
330
9 %
32 %
1 %
(1)%
20 %
16 %
23 %
100 %
___________________________________________________________
(1) This total represents our share of net income of our equity investees and is exclusive of royalties and interest income from our equity investees. To see
how this amount reconciles to "Equity, royalty and interest income from investees" in the Consolidated Statements of Income, see Note 2,
"INVESTMENTS IN EQUITY INVESTEES," to our Consolidated Financial Statements for additional information.
Distribution Entities
• Komatsu Cummins Chile, Ltda. - Komatsu Cummins Chile, Ltda. is a joint venture with Komatsu America
Corporation. The joint venture is a distributor that offers the full range of our products and services to customers and
end-users in the Chilean and Peruvian markets.
• North American Distributors - During 2016, we acquired the remaining interest in the final unconsolidated North
American distributor joint venture.
See further discussion of our distribution network under the Distribution segment section above.
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Manufacturing Entities
Our manufacturing joint ventures have generally been formed with customers and generally are intended to allow us to increase
our market penetration in geographic regions, reduce capital spending, streamline our supply chain management and develop
technologies. Our largest manufacturing joint ventures are based in China and are included in the list below. Our engine
manufacturing joint ventures are supplied by our Components segment in the same manner as it supplies our wholly-owned
Engine segment and Power Systems segment manufacturing facilities. Our Components segment joint ventures and wholly
owned entities provide fuel systems, filtration, aftertreatment systems and turbocharger products that are used in our engines as
well as some competitors' products. The results and investments in our joint ventures in which we have 50 percent or less
ownership interest are included in “Equity, royalty and interest income from investees” and “Investments and advances related
to equity method investees” in our Consolidated Statements of Income and Consolidated Balance Sheets, respectively.
• Beijing Foton Cummins Engine Co., Ltd. - Beijing Foton Cummins Engine Co., Ltd. is a joint venture in China with
Beiqi Foton Motor Co., Ltd., a commercial vehicle manufacturer, which consists of two distinct lines of business, a
light-duty business and a heavy-duty business. The light-duty business produces ISF 2.8 liter and ISF 3.8 liter families
of our high performance light-duty diesel engines in Beijing. These engines are used in light-duty commercial trucks,
pickup trucks, buses, multipurpose and sport utility vehicles with main markets in China, Brazil and Russia. Certain
types of marine, small construction equipment and industrial applications are also served by these engine families. The
heavy-duty business produces ISG 10.5 liter and ISG 11.8 liter families of our high performance heavy-duty diesel
engines in Beijing. These engines are used in heavy-duty commercial trucks in China and will be used in world wide
markets. Certain types of construction equipment and industrial applications are also served by these engine families.
• Dongfeng Cummins Engine Company, Ltd. - Dongfeng Cummins Engine Company, Ltd. (DCEC) is a joint venture
in China with Dongfeng Automotive Co. Ltd., a subsidiary of Dongfeng Motor Corporation, one of the largest
medium-duty and heavy-duty truck manufacturers in China. DCEC produces Cummins 4- to 13-liter mechanical
engines, full-electric diesel engines, with a power range from 125 to 545 horsepower, and natural gas engines.
• Chongqing Cummins Engine Company, Ltd. - Chongqing Cummins Engine Company, Ltd. is a joint venture in
China with Chongqing Machinery and Electric Co. Ltd. This joint venture manufactures several models of our heavy-
duty and high-horsepower diesel engines, primarily serving the industrial and stationary power markets in China.
Non-Wholly-Owned Subsidiary
We have a controlling interest in Cummins India Ltd. (CIL), which is a publicly listed company on various stock exchanges in
India. CIL produces mid-range, heavy-duty and high-horsepower engines, generators for the Indian and export markets and
natural gas spark-ignited engines for power generation, automotive and industrial applications. CIL also has distribution and
power generation operations.
SUPPLY
The performance of the end-to-end supply chain, extending through to our suppliers, is foundational to our ability to meet
customers' expectations and support long-term growth. We are committed to having a robust strategy for how we select and
manage our suppliers to enable a market focused supply chain. This requires us to continuously evaluate and upgrade our
supply base, as necessary, to ensure we are meeting the needs of our customers.
We use a category strategy process (a process designed to create the most value for the company) that reviews our long-term
needs and guides decisions on what we make internally and what we purchase externally. For the items we decide to purchase
externally, the strategies also identify the suppliers we should partner with long-term to provide the best technology, the lowest
total cost and highest supply chain performance. We design and/or manufacture our strategic components used in or with our
engines and power generation units, including cylinder blocks and heads, turbochargers, connecting rods, camshafts,
crankshafts, filters, alternators, electronic and emissions controls, and fuel systems. We source externally purchased material
and manufactured components from leading global suppliers. Many key suppliers are managed through long-term supply
agreements that assure capacity, delivery, quality and cost requirements are met over an extended period. Approximately 20
percent of the direct material in our product designs are single sourced to external suppliers. We have an established sourcing
strategy and supplier management process to evaluate and mitigate risk. These processes are leading us to determine our need
for dual sourcing and increase our use of dual and parallel sources to minimize risk and increase supply chain responsiveness.
Our current target for dual and parallel sourcing is approximately 90 percent of our direct material spend. As of December 31,
2016, our analysis indicates that we have approximately 80 percent of direct material spend with dual or parallel sources or 89
percent of our target.
Other important elements of our sourcing strategy include:
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• working with suppliers to measure and improve their environmental footprint;
•
•
selecting and managing suppliers to comply with our supplier code of conduct; and
assuring our suppliers comply with Cummins' prohibited and restricted materials policy.
PATENTS AND TRADEMARKS
We own or control a significant number of patents and trademarks relating to the products we manufacture. These patents and
trademarks were granted and registered over a period of years. Although these patents and trademarks are generally considered
beneficial to our operations, we do not believe any patent, group of patents or trademark (other than our leading brand house
trademarks) is significant to our business.
SEASONALITY
While individual product lines may experience modest seasonal variation in production, there is no material effect on the
demand for the majority of our products on a quarterly basis with the exceptions that our Power Systems segment normally
experiences seasonal declines in the first quarter due to general declines in construction spending during this period and our
Distribution segment normally experiences seasonal declines in its first quarter business activity due to holiday periods in Asia
and Australia.
LARGEST CUSTOMERS
We have thousands of customers around the world and have developed long-standing business relationships with many of them.
PACCAR is our largest customer, accounting for 13 percent of our consolidated net sales in 2016, 15 percent in 2015 and 14
percent in 2014. We have long-term supply agreements with PACCAR for our heavy-duty ISX 15 liter and ISX 11.9 liter
engines and our mid-range ISL 9 liter engine. While a significant number of our sales to PACCAR are under long-term supply
agreements, these agreements provide for particular engine requirements for specific vehicle models and not a specific volume
of engines. PACCAR is our only customer accounting for more than 10 percent of our net sales in 2016. The loss of this
customer or a significant decline in the production level of PACCAR vehicles that use our engines would have an adverse
effect on our results of operations and financial condition. We have been an engine supplier to PACCAR for 72 years. A
summary of principal customers for each operating segment is included in our segment discussion.
In addition to our agreement with PACCAR, we have long-term heavy-duty engine supply agreements with Daimler and
Navistar and a long-term mid-range supply agreement with Daimler. We also have an agreement with Fiat Chrysler to supply
engines for its Ram trucks. Collectively, our net sales to these four customers, including PACCAR, were 33 percent of our
consolidated net sales in 2016, 36 percent in 2015 and 32 percent in 2014. Excluding PACCAR, net sales to any single
customer were less than 7 percent of our consolidated net sales in 2016, less than 9 percent in 2015 and less than 8 percent in
2014. These agreements contain standard purchase and sale agreement terms covering engine and engine parts pricing, quality
and delivery commitments, as well as engineering product support obligations. The basic nature of our agreements with OEM
customers is that they are long-term price and operations agreements that help assure the availability of our products to each
customer through the duration of the respective agreements. Agreements with most OEMs contain bilateral termination
provisions giving either party the right to terminate in the event of a material breach, change of control or insolvency or
bankruptcy of the other party.
BACKLOG
We have supply agreements with some truck and off-highway equipment OEMs, however most of our business is transacted
through open purchase orders. These open orders are historically subject to month-to-month releases and are subject to
cancellation on reasonable notice without cancellation charges and therefore are not considered firm. At December 31, 2016,
we did not have any significant backlogs.
RESEARCH AND DEVELOPMENT
In 2016, we continued to invest in future critical technologies and products. We will continue to make investments to improve
our current technologies, meet the future emission requirements around the world and improve fuel economy.
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Our research and development program is focused on product improvements, product extensions, innovations and cost
reductions for our customers. Research and development expenditures include salaries, contractor fees, building costs, utilities,
testing, technical IT, administrative expenses and allocation of corporate costs and are expensed, net of contract
reimbursements, when incurred. From time to time, we enter into agreements with customers and government agencies to fund
a portion of the research and development costs of a particular project. We generally account for these reimbursements as an
offset to the related research and development expenditure. Research and development expenses, net of contract
reimbursements, were $616 million in 2016, $718 million in 2015 and $737 million in 2014. Contract reimbursements were
$131 million in 2016, $98 million in 2015 and $121 million in 2014.
For 2016, 2015 and 2014, approximately $77 million, $90 million and $60 million, or 13 percent, 13 percent and 8 percent,
respectively, of our research and development expenditures were directly related to compliance with 2017 U.S. Environmental
Protection Agency (EPA) emission standards.
ENVIRONMENTAL SUSTAINABILITY
We adopted our first ever comprehensive environmental sustainability plan in 2014 after examining our entire environmental
footprint, focusing on the key areas of water, waste, energy and greenhouse gases (GHG). As the concept and scope of
environmental sustainability has matured and broadened, leaders have moved from initially working on environmental impacts
within our direct control to an expanded view of fuel and raw materials that reaches across the entire product life-cycle.
"Envolve Cummins" is the comprehensive lens through which we view environmental sustainability, from design to
manufacture to end of life. Our environmental sustainability plan is the way we carry out our priorities, goals and initiatives in
our action areas, including reducing our carbon footprint, using fewer natural resources and partnering to solve complex
problems.
We currently have the following environmental sustainability goals and commitments:
•
•
•
•
•
•
a new product vision statement — "powering the future through product innovation that makes people's lives better
and reduces our environmental footprint;"
partnering with customers to improve the fuel efficiency of our products in use, targeting an annual run-rate reduction
of 3.5 million metric tons of carbon dioxide and saving 350 million gallons of fuel by 2020;
achieving a 32 percent energy intensity reduction from company facilities by 2020 (using a baseline year of 2010) and
increasing the portion of electricity we use derived from renewable sources;
reducing direct water use by 50 percent adjusted for hours worked and achieving water neutrality at 15 sites by 2020;
increasing our recycling rate from 88 percent to 95 percent and achieving zero disposal at 30 sites by 2020; and
utilizing the most efficient methods and modes to move goods across our network to reduce carbon dioxide per
kilogram of goods moved by 10 percent by 2020.
In 2016, we announced that we exceeded our second energy and GHG emission goal of a 25 percent and 27 percent reduction,
respectively, by achieving intensity reductions of 33 and 36 percent, respectively.
We continue to articulate our positions on key public policy issues and on a wide range of environmental issues. We are
actively engaged with regulatory, industry and other stakeholder groups around the world as GHG and fuel efficiency standards
become more prevalent globally. We were named to the Dow Jones North American Sustainability Index for the eleventh
consecutive year in 2016, included in the “Disclosure Leadership Index” of the Carbon Disclosure Project’s climate report in
2015 and we were identified as a “Natural Capital Decoupling Leader” by Green Biz Group and Trucost for reductions in
environmental footprint amid company growth in 2014. Our Sustainability Report for 2015/2016 and prior reports as well as a
Data Book of more detailed environmental data in accordance with the Global Reporting Initiative's G4 core designation are
available on our website at www.cummins.com, although such reports and data book are not incorporated into this Form 10-K.
ENVIRONMENTAL COMPLIANCE
Product Certification and Compliance
We strive to have robust certification and compliance processes, adhering to all emissions regulations worldwide, including
prohibiting the use of defeat devices in all of our products. We are transparent with all governing bodies in these processes,
from disclosure of the design and operation of the emission control system, to test processes and results, and later to any
necessary reporting and corrective action processes if required.
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We work collaboratively and proactively with emission regulators globally to ensure emission standards are clear, appropriately
stringent and enforceable, in an effort to ensure our products deliver on our commitments to our customers and the environment
in real world use every day.
Our engines are subject to extensive statutory and regulatory requirements that directly or indirectly impose standards
governing emission and noise. We have substantially increased our global environmental compliance presence and expertise to
understand and meet emerging product environmental regulations around the world. Our ability to comply with these and future
emission standards is an essential element in maintaining our leadership position in regulated markets. We have made, and will
continue to make, significant capital and research expenditures to comply with these standards. Our failure to comply with
these standards could result in adverse effects on our future financial results.
EU and EPA Engine Certifications
The current on-highway NOx and PM emission standards came into effect in the European Union (EU) on January 1, 2013,
(Euro VI) and on January 1, 2010, for the EPA. To meet the more stringent heavy-duty on-highway emission standards, we
used an evolution of our proven selective catalytic reduction (SCR) and exhaust gas recirculation (EGR) technology solutions
and refined them for the EU and EPA certified engines to maintain power and torque with substantial fuel economy
improvement and maintenance intervals comparable with our previous compliant engines. We offer a complete lineup of on-
highway engines to meet the near-zero emission standards. Mid-range and heavy-duty engines for EU and EPA require NOx
aftertreatment. NOx reduction is achieved by an integrated technology solution comprised of the XPI High Pressure Common
Rail fuel system, SCR technology, next-generation cooled EGR, advanced electronic controls, proven air handling and the
Cummins Diesel Particulate Filter (DPF). The EU, EPA and California Air Resources Board (CARB) have certified that our
engines meet the current emission requirements. Emission standards in international markets, including Japan, Mexico,
Australia, Brazil, Russia, India and China are becoming more stringent. We believe that our experience in meeting the EU and
EPA emission standards leaves us well positioned to take advantage of opportunities in these markets as the need for emission
control capability grows.
In 2013, we certified to EPA's first ever GHG regulations for on-highway medium- and heavy-duty engines. Additionally, the
EPA 2013 regulations added the requirement of on-board diagnostics, which were introduced on the ISX15 in 2010, across the
full on-highway product line while maintaining the same near-zero emission levels of NOx and particulate matter required in
2010. On-board diagnostics provide enhanced service capability with standardized diagnostic trouble codes, service tool
interface, in-cab warning lamp and service information availability. The new GHG and fuel-efficiency regulations were
required for all heavy-duty diesel and natural gas engines beginning in January 2014. Our GHG certification was the first
engine certificate issued by the EPA and uses the same proven base engine with the XPI fuel system, variable geometry
turbocharger (VGTTM), Cummins aftertreatment system with DPF and SCR technology. Application of these engines and
aftertreatment technologies continues in our products that comply with the 2017 GHG regulations.
The current off-highway emission standards for EPA and EU came into effect between the 2013 - 2015 timeframe for all power
categories. These engines were designed for Tier 4 / Stage 4 standards and were based on our extensive on-highway experience
developing SCR, high pressure fuel systems, DPF and VGTTM. Our products offer low fuel consumption, high torque rise and
power output, extended maintenance intervals, reliable and durable operation and a long life to overhaul period, all while
meeting the most stringent emission standards in the industrial market. Our off-highway products power multiple applications
including construction, mining, marine, agriculture, rail, defense and oil and gas and serves a global customer base.
In 2016, the EPA certified our locomotive engine as the first to meet the Tier 4 standards and will enter the market as the
propulsion prime mover for Siemens' new Charger passenger locomotive, serving multiple routes in major U.S. cities. The 95
liter QSK95 engine provides over 4,000 horsepower and is the U.S.'s first low emission Tier 4 engine to power the passenger
train service market.
Other Environmental Statutes and Regulations
Expenditures for environmental control activities and environmental remediation projects at our facilities in the U.S. have not
been a substantial portion of our annual expenses and are not expected to be material in 2017. We believe we are in compliance
in all material respects with laws and regulations applicable to our plants and operations.
In the U.S., pursuant to notices received from federal and state agencies and/or defendant parties in site environmental
contribution actions, we have been identified as a potentially responsible party under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended or similar state laws, at fewer than 20 waste disposal sites.
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Based upon our experiences at similar sites we believe that our aggregate future remediation costs will not be material. We have
established accruals that we believe are adequate for our expected future liability with respect to these sites. In addition, we
have several other sites where we are working with governmental authorities on remediation projects. The costs for these
remediation projects are not expected to be material.
EMPLOYEES
At December 31, 2016, we employed approximately 55,400 persons worldwide. Approximately 18,340 of our employees
worldwide are represented by various unions under collective bargaining agreements that expire between 2017 and 2021.
AVAILABLE INFORMATION
We file annual, quarterly and current reports, proxy statements and other information electronically with the Securities and
Exchange Commission (SEC). You may read and copy any document we file with the SEC at the SEC's public reference room
at 100 F Street, N.E., Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference
room. The SEC maintains an internet site that contains annual, quarterly and current reports, proxy and information statements
and other information that issuers (including Cummins) file electronically with the SEC. The SEC's internet site is
www.sec.gov.
Our internet site is www.cummins.com. You can access our Investors and Media webpage through our internet site, by clicking
on the heading "Investors and Media" followed by the "Investor Relations" link. We make available, free of charge, on or
through our Investors and Media webpage, our proxy statements, annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to the Securities Exchange
Act of 1934 or the Securities Act of 1933, as amended, as soon as reasonably practicable after such material is electronically
filed with, or furnished to, the SEC.
We also have a Corporate Governance webpage. You can access our Governance Documents webpage through our internet site,
www.cummins.com, by clicking on the heading "Investors and Media," followed by the "Investor Relations" link and then the
topic heading of "Governance Documents" within the "Corporate Governance" heading. Code of Conduct, Committee Charters
and other governance documents are included at this site. Our Code of Conduct applies to all employees, regardless of their
position or the country in which they work. It also applies to the employees of any entity owned or controlled by us. We will
post any amendments to the Code of Conduct and any waivers that are required to be disclosed by the rules of either the SEC or
the New York Stock Exchange LLC (NYSE), on our internet site. The information on our internet site is not incorporated by
reference into this report.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Following are the names and ages of our executive officers, their positions with us at January 31, 2017 and summaries of their
backgrounds and business experience:
Name and Age
N. Thomas Linebarger (54)
Richard J. Freeland (59)
Sherry A. Aaholm (54)
Sharon R. Barner (59)
Steven M. Chapman (62)
Jill E. Cook (53)
Tracy A. Embree (43)
Thaddeaus B. Ewald (49)
Marsha L. Hunt (53)
Donald G. Jackson (47)
Norbert Nusterer (48)
Mark J. Osowick (49)
Srikanth Padmanabhan (52)
Marya M. Rose (54)
Jennifer Rumsey (43)
Present Cummins Inc. position and
year appointed to position
Chairman of the Board of
Directors and Chief Executive
Officer (2012)
President and Chief Operating
Officer (2014)
Vice President—Chief
Information Officer (2013)
Principal position during the past
five years other than Cummins Inc.
position currently held
Vice President and President—
Engine Business (2010-2014)
Executive Vice President,
Information Technology, FedEx
Services (2006-2013)
Vice President—General Counsel
(2012)
Partner—Law firm of Foley &
Lardner (2011-2012)
Group Vice President—China and
Russia (2009)
Vice President—Chief Human
Resources Officer (2003)
Vice President and President—
Components Group (2015)
Vice President—Corporate
Strategy and Business
Development (2010)
Vice President—Corporate
Controller (2003)
Vice President—Treasurer (2015)
Vice President and President—
Power Systems (2016)
Vice President—Human
Resources Operations (2014)
Vice President and President—
Engine Business (2016)
Vice President—Chief
Administrative Officer (2011)
Vice President—Chief Technical
Officer (2015)
Vice President and President—
Turbo Technologies (2012-2014)
General Manager, Turbo
Technologies—Asia (2011-2012)
Executive Director—Assistant
Treasurer (2013-2015)
Vice President—Americas
Finance, Hewlett-Packard Co.
(2010-2013)
Vice President—New and ReCon
Parts (2011-2016)
Executive Director—Human
Resources, Components Segment
& India ABO (2010-2014)
Vice President—Engine (HMLD)
Business (2014-2016)
Vice President and General
Manager—Cummins Emission
Solutions (2008-2014)
Vice President—Engineering,
Engine Business (2014-2015)
Vice President—Heavy, Medium
and Light Duty Engineering
(2013-2014)
Executive Director—HD
Engineering (2010-2013)
Livingston L. Satterthwaite (56)
Vice President and President—
Distribution Business (2015)
Vice President and President—
Power Generation (2008-2015)
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Mark A. Smith (49)
Anant J. Talaulicar (55)
Patrick J. Ward (53)
Vice President—Financial
Operations (2016)
Vice President, and Chairman and
Managing Director—Cummins
India Area Business Organization
(2003)
Vice President—Chief Financial
Officer (2008)
Vice President—Investor
Relations and Business Planning
and Analysis (2014-2016)
Executive Director—Investor
Relations (2011-2014)
Vice President and President—
Components Group (2010-2014)
Our Chairman and Chief Executive Officer is elected annually by our Board of Directors and holds office until the meeting of
the Board of Directors at which his election is next considered. Other officers are appointed by the Chairman and Chief
Executive Officer, are ratified by our Board of Directors and hold office for such period as the Chairman and Chief Executive
Officer or the Board of Directors may prescribe.
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ITEM 1A. Risk Factors
Set forth below and elsewhere in this Annual Report on Form 10-K are some of the principal risks and uncertainties that could
cause our actual business results to differ materially from any forward-looking statements contained in this Report and could
individually, or in combination, have a material adverse effect on our results of operations, financial position or cash flows.
These risk factors should be considered in addition to our cautionary comments concerning forward-looking statements in this
Report, including statements related to markets for our products and trends in our business that involve a number of risks and
uncertainties. Our separate section above, "CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING
INFORMATION," should be considered in addition to the following statements.
A sustained slowdown or more significant downturn in our markets could materially and adversely affect our results of
operations, financial condition or cash flows.
Many of our on- and off-highway markets are cyclical in nature and experience volatility in demand throughout these cycles as
experienced in 2016 with downward market pressure both domestically and internationally. While North American on-highway
markets remained strong for several years, in 2016, these markets began to decline as they transitioned to a lower demand cycle
as evidenced by the slowing demand for heavy-duty trucks as a result of lower capital spending by truck fleets in response to
weak growth in the economy. Most international markets in 2016 continued to experience weak demand consistent with the last
several years, especially in South America, the Middle East, U.K., Singapore and Mexico. If the North American markets suffer
a further significant downturn or if the slower pace of economic growth and weaker demand in our significant international
markets were to persist or worsen, depending upon the length, duration and severity of the slowdown, our results of operations,
financial condition or cash flows would likely be materially adversely affected. Specifically, our revenues would likely
decrease, we may need to realign capacity with demand, we may need to increase our allowance for doubtful accounts, our
days sales outstanding may increase and we could experience impairments to assets of certain businesses.
Our truck manufacturers and OEM customers may discontinue outsourcing their engine supply needs.
Several of our engine customers, including PACCAR, Volvo AB, Navistar, Fiat Chrysler, Daimler and Dongfeng Cummins
Engine Company, Ltd., are truck manufacturers or OEMs that manufacture engines for some of their own vehicles. Despite
their own engine manufacturing abilities, these customers have historically chosen to outsource certain types of engine
production to us due to the quality of our engine products, our emission compliance capabilities, our systems integration, their
customers' preferences, their desire for cost reductions, their desire for eliminating production risks and their desire to maintain
company focus. However, there can be no assurance that these customers will continue to outsource, or outsource as much of,
their engine production in the future. In fact, several of these customers have expressed their intention to significantly increase
their own engine production and to decrease engine purchases from us. In addition, increased levels of OEM vertical
integration could result from a number of factors, such as shifts in our customers' business strategies, acquisition by a customer
of another engine manufacturer, the inability of third-party suppliers to meet product specifications and the emergence of low-
cost production opportunities in foreign countries. Any significant reduction in the level of engine production outsourcing from
our truck manufacturer or OEM customers could have a material adverse effect on our results of operations.
Financial distress of one of our large truck OEM customers could materially adversely impact our results of operations.
We recognize significant sales of engines and components to a few large on-highway truck OEM customers in North America
which have been an integral part of our positive business results for several years. If one of our large truck OEM customers
experiences financial distress or bankruptcy, such circumstance would likely lead to significant reductions in our revenues and
earnings, commercial disputes, receivable collection issues, and other negative consequences that could have a material adverse
impact on our results of operations.
Lower-than-anticipated market acceptance of our new or existing products or services.
Although we conduct market research before launching new or refreshed engines and introducing new services, many factors
both within and outside our control affect the success of new or existing products and services in the marketplace. Offering
engines and services that customers desire and value can mitigate the risks of increasing price competition and declining
demand, but products and services that are perceived to be less than desirable (whether in terms of price, quality, overall value,
fuel efficiency or other attributes) can exacerbate these risks. With increased consumer interconnectedness through the internet,
social media and other media, mere allegations relating to poor quality, safety, fuel efficiency, corporate responsibility or other
key attributes can negatively impact our reputation or market acceptance of our products or services, even if such allegations
prove to be inaccurate or unfounded.
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The discovery of any significant problems with our recently-introduced engine platforms in North America could materially
adversely impact our results of operations, financial condition and cash flow.
The EPA and CARB have certified all of our 2017 on-highway engines, which utilize SCR technology to meet requisite
emission and GHG levels. The effective performance of SCR technology and the overall performance of our engine platforms
impacts a number of our operating segments and remains crucial to our success in North America. The discovery of any
significant problems in these platforms could result in recall campaigns, increased warranty costs, reputational risk and brand
risk, and could materially adversely impact our results of operations, financial condition or cash flows.
Further slowdown in infrastructure development and/or continuing depressed commodity prices could adversely affect our
business.
Infrastructure development and strong commodity prices have been significant drivers of our historical growth, but as the pace
of investment in infrastructure has slowed (especially in China and Brazil), commodity prices have been significantly lower in
recent years and demand for our products in off-highway markets has remained weak for several years. Weakness in
commodities, such as oil, gas and coal, has adversely impacted mining industry participants’ demand for vehicles and
equipment that contain our engines and other products. Further deterioration, or continued weakness, in infrastructure and
commodities markets will continue to adversely affect our customers’ demand for vehicles and equipment and will adversely
affect our business.
Unpredictability in the adoption, implementation and enforcement of increasingly stringent emission standards by multiple
jurisdictions around the world could adversely affect our business.
Our engines are subject to extensive statutory and regulatory requirements governing emission and noise, including standards
imposed by the EPA, the EU, state regulatory agencies (such as the CARB) and other regulatory agencies around the world. We
have made, and will be required to continue to make, significant capital and research expenditures to ensure our engines
comply with these emission standards. Developing engines and components to meet numerous changing government regulatory
requirements, with different implementation timelines and emission requirements, makes developing engines efficiently for
multiple markets complicated and could result in substantial additional costs that may be difficult to recover in certain markets.
In some cases, we are required to develop new products to comply with new regulations, particularly those relating to air
emissions. While we have met previous deadlines, our ability to comply with other existing and future regulatory standards will
be essential for us to maintain our competitive advantage in the engine markets we serve. The successful development and
introduction of new and enhanced products in order to comply with new regulatory requirements are subject to other risks, such
as delays in product development, cost over-runs and unanticipated technical and manufacturing difficulties.
In addition to these risks, the nature and timing of government implementation and enforcement of increasingly stringent
emission standards in emerging markets are unpredictable and subject to change. Any delays in implementation or enforcement
could result in the products we developed or modified to comply with these standards becoming unnecessary or becoming
necessary later than expected thereby, in some cases, negating our competitive advantage. This in turn can delay, diminish or
eliminate the expected return on capital and research expenditures that we have invested in such products and may adversely
affect our perceived competitive advantage in being an early, advanced developer of compliant engines.
We are subject to foreign currency exchange rate and other related risks.
We conduct operations in many areas of the world involving transactions denominated in a variety of currencies. We are subject
to foreign currency exchange rate risk to the extent that our costs are denominated in currencies other than those in which we
earn revenues. In addition, since our financial statements are denominated in U.S. dollars, changes in foreign currency
exchange rates between the U.S. dollar and other currencies have had, and will continue to have, an impact on our results of
operations. The U.S. dollar has strengthened in recent years and has resulted in material unfavorable impacts on our revenues.
If the U.S. dollar continues to strengthen against other currencies, we will continue to experience additional volatility in our
financial statements.
While we customarily enter into financial transactions that attempt to address these risks and many of our supply agreements
with customers include foreign currency exchange rate adjustment provisions, there can be no assurance that foreign currency
exchange rate fluctuations will not adversely affect our future results of operations. In addition, while the use of currency
hedging instruments may provide us with some protection from adverse fluctuations in foreign currency exchange rates, by
utilizing these instruments we potentially forego the benefits that might result from favorable fluctuations in foreign currency
exchange rates.
We also face risks arising from the imposition of foreign exchange controls and currency devaluations. Foreign exchange
controls may limit our ability to convert foreign currencies into U.S. dollars or to remit dividends and other payments by our
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foreign subsidiaries or businesses located in or conducted within a country imposing controls. Currency devaluations result in a
diminished value of funds denominated in the currency of the country instituting the devaluation. See Management's
Discussion and Analysis for additional information.
We derive significant earnings from investees that we do not directly control, with more than 50 percent of these earnings
from our China-based investees.
For 2016, we recognized $301 million of equity, royalty and interest income from investees, compared to $315 million in 2015.
More than half of our equity, royalty and interest income from investees is from three of our 50 percent owned joint ventures in
China, Beijing Foton Cummins Engine Co., Ltd., Dongfeng Cummins Engine Company, Ltd. and Chongqing Cummins Engine
Company, Ltd. As a result, although a significant percentage of our net income is derived from these unconsolidated entities,
we do not unilaterally control their management or their operations, which puts a substantial portion of our net income at risk
from the actions or inactions of these entities. A significant reduction in the level of contribution by these entities to our net
income would likely have a material adverse effect on our results of operations and cash flows.
We may fail to realize all of the expected enhanced revenue, earnings, cash flow, cost savings and other benefits from the
acquisition and integration of our partially-owned United States and Canadian distributors.
Our ability to realize all of the expected enhanced revenue, earnings, cash flow, cost savings and other benefits from our recent
distributor acquisitions will depend, in substantial part, on our ability to successfully complete the integration of the acquired
distributors with our other businesses. While we believe we will ultimately achieve these expected benefits, it is possible that
we will be unable to achieve all of the objectives within our anticipated time frame or in the anticipated amounts. The expected
benefits from integration also may not be fully realized or may be delayed due to certain prohibitions in applicable state
franchise and distributor laws. If we are not able to successfully complete our integration strategy, the anticipated enhanced
revenue, earnings, cash flow, cost savings and other benefits resulting from our distributor acquisitions may not be realized
fully or may take longer to realize than expected.
Delays encountered or increased costs incurred in completing the integration of these acquisitions could negatively impact our
revenues, expenses, operating results, cash flow and financial condition, including the loss of current customers or suppliers,
increased exposure to legal claims and other liabilities and the distraction or departure of key managers and employees.
Our plan to reposition our portfolio of product offerings through exploring strategic acquisitions and divestitures may
expose us to additional costs and risks.
Part of our strategic plan is to improve our gross margins and earnings by exploring the repositioning of our portfolio of
product line offerings through the pursuit of potential strategic acquisitions and/or divestitures to provide future strategic,
financial and operational benefits and improve shareholder value. There can be no assurance that we will be able to identify
suitable candidates or consummate these transactions on favorable terms. The successful identification and completion of any
strategic transaction depends on a number of factors that are not entirely within our control, including the availability of
suitable candidates and our ability to negotiate terms acceptable to all parties involved, conclude satisfactory agreements and
obtain all necessary regulatory approvals. Accordingly, we may not be able to successfully negotiate and complete specific
transactions. The exploration, negotiation and consummation of strategic transactions may involve significant expenditures by
us, which may adversely affect our results of operations at the time such expenses are incurred, and may divert management’s
attention from our existing business. Strategic transactions also may have adverse effects on our existing business relationships
with suppliers and customers.
If required, the financing for strategic acquisitions could result in an increase in our indebtedness, dilute the interests of our
shareholders or both. Any acquisition may not be accretive to us for a significant period of time following the completion of
such acquisition. Also, our ability to effectively integrate any potential acquisition into our existing business and culture may
not be successful, which could jeopardize future financial and operational performance for the combined businesses. In
addition, if an acquisition results in any additional goodwill or increase in other intangible assets on our balance sheet and
subsequently becomes impaired, we would be required to record a non-cash impairment charge, which could result in a
material adverse effect on our financial condition and results of operations.
Similarly, any strategic divestiture of a product line or business may reduce our revenue and earnings, reduce the diversity of
our business, result in substantial costs and expenses and cause disruption to our employees, customers, vendors and
communities in which we operate.
We are vulnerable to supply shortages from single-sourced suppliers.
During 2016, we single sourced approximately 20 percent of the total types of parts in our product designs, compared to
approximately 56 percent in 2015. Any delay in our suppliers' deliveries may adversely affect our operations at multiple
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manufacturing locations, forcing us to seek alternative supply sources to avoid serious disruptions. Delays may be caused by
factors affecting our suppliers, including capacity constraints, labor disputes, economic downturns, availability of credit, the
impaired financial condition of a particular supplier, suppliers' allocations to other purchasers, weather emergencies, natural
disasters or acts of war or terrorism. Any extended delay in receiving critical supplies could impair our ability to deliver
products to our customers and our results of operations.
Our products are exposed to variability in material and commodity costs.
Our businesses establish prices with our customers in accordance with contractual time frames; however, the timing of material
and commodity market price increases may prevent us from passing these additional costs on to our customers through timely
pricing actions. Additionally, higher material and commodity costs around the world may offset our efforts to reduce our cost
structure. While we customarily enter into financial transactions and contractual pricing adjustment provisions with our
customers that attempt to address some of these risks (notably with respect to copper, platinum and palladium), there can be no
assurance that commodity price fluctuations will not adversely affect our results of operations. In addition, while the use of
commodity price hedging instruments and contractual pricing adjustments may provide us with some protection from adverse
fluctuations in commodity prices, by utilizing these instruments we potentially forego the benefits that might result from
favorable fluctuations in price. As a result, higher material and commodity costs, as well as hedging these commodity costs
during periods of decreasing prices, could result in declining margins.
Our products are subject to recall for performance or safety-related issues.
Our products may be subject to recall for performance or safety-related issues. Product recalls subject us to harm to our
reputation, loss of current and future customers, reduced revenue and product recall costs. Product recall costs are incurred
when we decide, either voluntarily or involuntarily, to recall a product through a formal campaign to solicit the return of
specific products due to a known or suspected performance issue. Any significant product recalls could have a material adverse
effect on our results of operations, financial condition and cash flows. See Note 12, "COMMITMENTS AND
CONTINGENCIES" to the Consolidated Financial Statements for additional information.
We face significant competition in the markets we serve.
The markets in which we operate are highly competitive. We compete worldwide with a number of other manufacturers and
distributors that produce and sell similar products. We primarily compete in the market with diesel engines and related diesel
products; however, new technologies continue to be developed for gasoline, natural gas and other technologies and we will
continue to face new competition from these expanding technologies. Our products primarily compete on the basis of price,
performance, fuel economy, speed of delivery, quality and customer support. We also face competitors in some emerging
markets who have established local practices and long standing relationships with participants in these markets. There can be
no assurance that our products will be able to compete successfully with the products of other companies and in other markets.
Increasing global competition among our customers may affect our existing customer relationships and restrict our ability
to benefit from some of our customers' growth.
As our customers in emerging markets continue to grow in size and scope, they are increasingly seeking to export their
products to other countries. This has meant greater demand for our advanced engine technologies to help these customers meet
the more stringent emissions requirements of developed markets, as well as greater demand for access to our distribution
systems for purposes of equipment servicing. As these emerging market customers enter into, and begin to compete in more
developed markets, they may increasingly begin to compete with our existing customers in these markets. Our further aid to
emerging market customers could adversely affect our relationships with developed market customers and, as a result, we may
be pressured to restrict the sale or support of some of our products in the areas of increased competition. In addition, to the
extent the competition does not correspond to overall growth in demand, we may see little or no benefit from this type of
expansion by our emerging market customers.
We are exposed to, and may be adversely affected by, potential security breaches or other disruptions to our information
technology systems and data security.
We rely on the capacity, reliability and security of our information technology systems and data security infrastructure in
connection with various aspects of our business activities. We also rely on our ability to expand and continually update these
systems and infrastructure in response to the changing needs of our business. As we implement new systems, they may not
perform as expected. We also face the challenge of supporting our older systems and implementing necessary upgrades. In
addition, some of these systems are managed by third party service providers and are not under our direct control. If we
experience a problem with an important information technology system, including during system upgrades and/or new system
implementations, the resulting disruptions could have an adverse effect on our business and reputation. As customers adopt and
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rely on the cloud-based digital technologies and services we offer, any disruption of the confidentiality, integrity or availability
of those services could have an adverse effect on our business and reputation.
The information handled by our information technology systems is vulnerable to security threats. Our operations routinely
involve receiving, storing, processing and transmitting sensitive information pertaining to our business, customers, dealers,
suppliers, employees and other sensitive matters. Information technology security threats, such as security breaches, computer
malware and other "cyber attacks," which are increasing in both frequency and sophistication, could result in unauthorized
disclosures of information and create financial liability, subject us to legal or regulatory sanctions, or damage our reputation
with customers, dealers, suppliers and other stakeholders. We continuously seek to maintain a robust program of information
security and controls, but the impact of a material information technology event could have a material adverse effect on our
competitive position, reputation, results of operations, financial condition and cash flow.
We are exposed to political, economic and other risks that arise from operating a multinational business.
Approximately 46 percent of our net sales for 2016 and 44 percent in 2015 were attributable to customers outside the U.S.
Accordingly, our business is subject to the political, economic and other risks that are inherent in operating in numerous
countries. These risks include:
•
•
•
•
•
•
•
the difficulty of enforcing agreements and collecting receivables through foreign legal systems;
trade protection measures and import or export licensing requirements;
the imposition of taxes on foreign income and tax rates in certain foreign countries that exceed those in the U.S.;
the imposition of tariffs, exchange controls or other restrictions;
difficulty in staffing and managing widespread operations and the application of foreign labor regulations;
required compliance with a variety of foreign laws and regulations; and
changes in general economic and political conditions in countries where we operate, particularly in emerging markets.
As we continue to operate our business globally, our success will depend, in part, on our ability to anticipate and effectively
manage these and other related risks. There can be no assurance that the consequences of these and other factors relating to our
multinational operations will not have a material adverse effect upon us.
Unanticipated changes in our effective tax rate, the adoption of new tax legislation or exposure to additional income tax
liabilities could adversely affect our profitability.
We are subject to income taxes in the U.S. and numerous international jurisdictions. Our income tax provision and cash tax
liability in the future could be adversely affected by changes in the distribution of earnings in countries with differing statutory
tax rates, changes in the valuation of deferred tax assets and liabilities, changes to our assertions regarding permanent
reinvestment of our foreign earnings, changes in tax laws and the discovery of new information in the course of our tax return
preparation process. The carrying value of deferred tax assets, which are predominantly in the U.S., is dependent on our ability
to generate future taxable income in the U.S. We are also subject to ongoing tax audits. These audits can involve complex
issues, which may require an extended period of time to resolve and can be highly judgmental. Tax authorities may disagree
with certain tax reporting positions taken by us and, as a result, assess additional taxes against us. We regularly assess the likely
outcomes of these audits in order to determine the appropriateness of our tax provision. The amounts ultimately paid upon
resolution of these or subsequent tax audits could be materially different from the amounts previously included in our income
tax provision and, therefore, could have a material impact on our tax provision.
Our global operations are subject to laws and regulations that impose significant compliance costs and create reputational
and legal risk.
Due to the international scope of our operations, we are subject to a complex system of commercial and trade regulations
around the world. Recent years have seen an increase in the development and enforcement of laws regarding trade compliance
and anti-corruption, such as the U.S. Foreign Corrupt Practices Act and similar laws from other countries. Our numerous
foreign subsidiaries, affiliates and joint venture partners are governed by laws, rules and business practices that differ from
those of the U.S. The activities of these entities may not comply with U.S. laws or business practices or our Code of Business
Conduct. Violations of these laws may result in severe criminal or civil sanctions, could disrupt our business, and result in an
adverse effect on our reputation, business and results of operations or financial condition. We cannot predict the nature, scope
or effect of future regulatory requirements to which our operations might be subject or the manner in which existing laws might
be administered or interpreted.
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We face the challenge of accurately aligning our capacity with our demand.
We can experience idle capacity as economies slow or demand for certain products decline. Accurately forecasting our
expected volumes and appropriately adjusting our capacity have been, and will continue to be, important factors in determining
our results of operations. If we overestimate our demand and overbuild our capacity, we may have significantly underutilized
assets and we may experience reduced margins. If we do not accurately align our manufacturing capabilities with demand it
could have a material adverse effect on our results of operations.
Our business is exposed to potential product liability claims.
We face an inherent business risk of exposure to product liability claims in the event that our products' failure to perform to
specification results, or is alleged to result, in property damage, bodily injury and/or death. At any given time, we are subject to
various and multiple product liability claims, any one of which, if decided adversely to us, may have a material adverse effect
on our reported results of operation in the period in which our liability with respect to any such claim is recognized. While we
maintain insurance coverage with respect to certain product liability claims, we may not be able to obtain such insurance on
acceptable terms in the future, if at all, and any such insurance may not provide adequate coverage against product liability
claims. In addition, product liability claims can be expensive to defend and can divert the attention of management and other
personnel for significant periods of time, regardless of the ultimate outcome. Furthermore, even if we are successful in
defending against a claim relating to our products, claims of this nature could cause our customers to lose confidence in our
products and us.
Our operations are subject to increasingly stringent environmental laws and regulations.
Our plants and operations are subject to increasingly stringent environmental laws and regulations in all of the countries in
which we operate, including laws and regulations governing air emission, discharges to water and the generation, handling,
storage, transportation, treatment and disposal of waste materials. While we believe that we are in compliance in all material
respects with these environmental laws and regulations, there can be no assurance that we will not be adversely impacted by
costs, liabilities or claims with respect to existing or subsequently acquired operations, under either present laws and
regulations or those that may be adopted or imposed in the future. We are also subject to laws requiring the cleanup of
contaminated property. If a release of hazardous substances occurs at or from any of our current or former properties or at a
landfill or another location where we have disposed of hazardous materials, we may be held liable for the contamination and
the amount of such liability could be material.
We are exposed to risks arising from the price and availability of energy.
The level of demand for our products and services is influenced in multiple ways by the price and availability of energy. High
energy costs generally drive greater demand for better fuel economy in almost all countries in which we operate. Some of our
engine products have been developed with a primary purpose of offering fuel economy improvements, and if energy costs
decrease or increase less than expected, demand for these products may likewise decrease. The relative unavailability of
electricity in some emerging market countries also influences demand for our electricity generating products, such as our diesel
generators. If these countries add energy capacity by expanding their power grids at a rate equal to or faster than the growth in
demand for energy, the demand for our generating products could also decrease or increase less than would otherwise be the
case.
Significant declines in future financial and stock market conditions could diminish our pension plan asset performance and
adversely impact our results of operations, financial condition and cash flow.
We sponsor both funded and unfunded domestic and foreign defined benefit pension and other retirement plans. Our pension
cost and the required contributions to our pension plans are directly affected by the value of plan assets, the projected and
actual rates of return on plan assets and the actuarial assumptions we use to measure our defined benefit pension plan
obligations, including the discount rate at which future projected and accumulated pension obligations are discounted to a
present value. We could experience increased pension cost due to a combination of factors, including the decreased investment
performance of pension plan assets, decreases in the discount rate and changes in our assumptions relating to the expected
return on plan assets.
Significant declines in future financial and stock market conditions could cause material losses in our pension plan assets,
which could result in increased pension cost in future years and adversely impact our results of operations, financial condition
and cash flow. Depending upon the severity of market declines and government regulatory changes, we may be legally
obligated to make pension payments in the U.S. and perhaps other countries and these contributions could be material.
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We may be adversely impacted by work stoppages and other labor matters.
At December 31, 2016, we employed approximately 55,400 persons worldwide. Approximately 18,340 of our employees
worldwide are represented by various unions under collective bargaining agreements that expire between 2017 and 2021. While
we have no reason to believe that we will be materially impacted by work stoppages or other labor matters, there can be no
assurance that future issues with our labor unions will be resolved favorably or that we will not encounter future strikes, work
stoppages, or other types of conflicts with labor unions or our employees. Any of these consequences may have an adverse
effect on us or may limit our flexibility in dealing with our workforce. In addition, many of our customers and suppliers have
unionized work forces. Work stoppages or slowdowns experienced by our customers or suppliers could result in slowdowns or
closures that would have a material adverse effect on our results of operations, financial condition and cash flow.
Our financial statements are subject to changes in accounting standards that could adversely impact our profitability or
financial position.
Our financial statements are subject to the application of generally accepted accounting principles (GAAP) in the United States
of America, which are periodically revised and/or expanded. Accordingly, from time to time, we are required to adopt new or
revised accounting standards issued by recognized authoritative bodies, including the Financial Accounting Standards Board.
Recently, accounting standard setters issued new guidance which further interprets or seeks to revise accounting
pronouncements related to revenue recognition and lease accounting as well as to issue new standards expanding disclosures.
The impact of accounting pronouncements that have been issued but not yet implemented is disclosed in our annual and
quarterly reports on Form 10-K and Form 10-Q. An assessment of proposed standards is not provided, as such proposals are
subject to change through the exposure process and, therefore, their effects on our financial statements cannot be meaningfully
assessed. It is possible that future accounting standards we are required to adopt could change the current accounting treatment
that we apply to our consolidated financial statements and that such changes could have a material adverse effect on our
reported results of operations and financial position.
Future bans or limitations on the use of diesel-powered vehicles could materially adversely affect our business over the long
term.
Mayors of several large international cities have announced that they plan to implement a ban on the use in their cities of
diesel-powered vehicles by 2025. Similarly, Germany adopted legislation to ban new internal combustion engine vehicles by
2030. To the extent that these types of bans are actually implemented in the future on a broad basis, or in one or more of our
key markets, our business over the long-term could be materially adversely affected.
ITEM 1B. Unresolved Staff Comments
None.
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ITEM 2. Properties
Manufacturing Facilities
Our principal manufacturing facilities include our plants used by the following segments in the following locations:
U.S. Facilities
Facilities Outside the U.S.
Segment
Engine
Components
Indiana: Columbus
New York: Lakewood
North Carolina: Whitakers
Indiana: Columbus
South Carolina: Charleston
Tennessee: Cookeville
Wisconsin: Mineral Point, Neillsville
Brazil: Sao Paulo
India: Phaltan
U.K.: Darlington
Australia: Kilsyth
Brazil: Sao Paulo
China: Beijing, Shanghai, Wuxi, Wuhan
France: Quimper
Germany: Marktheidenfeld
India: Pune, Dewas, Pithampur, Rudrapur
Mexico: Ciudad Juarez, San Luis Potosi
South Africa: Johannesburg
South Korea: Suwon
Turkey: Izmir
U.K.: Darlington, Huddersfield
Brazil: Sao Paulo
China: Wuxi, Wuhan
India: Pune, Ahmendnagar, Ranjangaon, Phaltan
Mexico: San Luis Potosi
Romania: Craiova
U.K.: Daventry, Margate, Manston, Stamford
Nigeria: Lagos
Power Systems
Indiana: Elkhart, Seymour
Minnesota: Fridley
New Mexico: Clovis
In addition, engines and engine components are manufactured by joint ventures or independent licensees at manufacturing
plants in the U.S., China and India.
Distribution Facilities
The principal distribution facilities that serve all of our segments are located in the following locations:
U.S. Facilities
Facilities Outside the U.S.
California: Irvine
Colorado: Henderson
Georgia: Atlanta
Kentucky: Walton
Michigan: New Hudson
Minnesota: White Bear Lake
Nebraska: Omaha
North Carolina: Charlotte
Pennsylvania: Bristol
Tennessee: Memphis
Texas: Dallas
Belgium: Rumst
Canada: Vancouver
China: Shanghai
Singapore: Singapore
South Africa: Johannesburg
United Arab Emirates: Dubai
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Headquarters and Other Offices
Our Corporate Headquarters are located in Columbus, Indiana. Additional marketing and operational headquarters are in the
following locations:
U.S. Facilities
Facilities Outside the U.S.
Indiana: Columbus, Indianapolis
Tennessee: Nashville
Washington, D.C.
Brazil: Guarulhos
China: Beijing, Shanghai, Wuhan
India: Pune
Mexico: San Luis Potosi
Russia: Moscow
South Africa: Johannesburg
U.K.: Staines, Stockton
United Arab Emirates: Dubai
ITEM 3. 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 matters described under "Loss Contingency Charges" in Note 12, "COMMITMENTS AND CONTINGENCIES," to the
Consolidated Financial Statements are 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.
ITEM 4. Mine Safety Disclosures
Not Applicable.
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PART II
ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
(a) Our common stock is listed on the NYSE under the symbol "CMI." For information about the quoted market prices of our
common stock, information regarding dividend payments and the number of common stock shareholders, see "Selected
Quarterly Financial Data" in this report. For other matters related to our common stock and shareholders' equity, see Note 13,
"SHAREHOLDERS' EQUITY," to the Consolidated Financial Statements.
(b) Use of proceeds—not applicable.
(c) The following information is provided pursuant to Item 703 of Regulation S-K:
Period
October 3 - November 6
November 7 - December 4
December 5 - December 31
Total
Issuer Purchases of Equity Securities
(a) Total
Number of
Shares
Purchased(1)
1,335
269,459
4,654
275,448
$
(b) Average
Price Paid
per Share
129.78
131.37
142.10
131.55
(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)
—
246,478
—
246,478
90,937
68,106
62,953
_____________________________________________________________
(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 December 31, 2016, was $1.5 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 December
31, 2016, we repurchased $33 million of common stock under the 2015 Board of Directors authorized plan.
During the three months ended December 31, 2016, we repurchased 28,970 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.
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Performance Graph (Unaudited)
The following Performance Graph and related information shall not be deemed "soliciting material" or to be "filed" with the
SEC, nor shall such information be incorporated by reference into any of our future filings under the Securities Act of 1933 or
Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into
such filing.
The following graph compares the cumulative total shareholder return on our common stock for the last five years with the
cumulative total return on the S&P 500 Index and an index of peer companies selected by us. Our peer group includes
BorgWarner Inc, Caterpillar, Inc., Daimler AG, Danaher Corporation, Deere & Company, Donaldson Company Inc., Eaton
Corporation, Emerson Electric Co., W.W. Grainger Inc., Honeywell International, Illinois Tool Works Inc., Ingersoll-Rand
Company Ltd., Navistar, PACCAR, Parker-Hannifin Corporation, Textron Inc. and Volvo AB. Each of the measures of
cumulative total return assumes reinvestment of dividends. The comparisons in this table are required by the SEC and are not
intended to forecast or be indicative of possible future performance of our stock.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
AMONG CUMMINS INC., S&P 500 INDEX AND CUSTOM PEER GROUP
ASSUMES $100 INVESTED ON DEC. 31, 2011
ASSUMES DIVIDENDS REINVESTED
FISCAL YEAR ENDING DEC. 31, 2016
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ITEM 6. Selected Financial Data
The selected financial information presented below for each of the last five years ended December 31, beginning with 2016, was
derived from our Consolidated Financial Statements. This information should be read in conjunction with our Consolidated
Financial Statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
In millions, except per share amounts
For the years ended December 31,
Net sales
U.S. percentage of sales
Non-U.S. percentage of sales
Gross margin(1)
Research, development and engineering expenses
Equity, royalty and interest income from investees
Interest expense(2)
Net income attributable to Cummins Inc.(3)
Earnings per common share attributable to Cummins Inc.
Basic
Diluted
2016
2015
2014
2013
2012
$ 17,509
$ 19,110
$ 19,221
$ 17,301
$ 17,334
54%
46%
56%
44%
52%
48%
48%
52%
47%
53%
4,452
636
301
69
1,394
4,947
735
315
65
1,399
4,861
754
370
64
1,651
4,280
713
361
41
1,483
4,416
728
384
32
1,645
$
8.25
8.23
4.00
$ 1,935
531
$
$
$
$
7.86
7.84
3.51
2,059
744
9.04
9.02
2.81
2,266
743
7.93
7.91
2.25
2,089
676
8.69
8.67
1.80
1,532
690
$
Cash dividends declared per share
Net cash provided by operating activities
Capital expenditures
At December 31,
Cash and cash equivalents
Total assets
Long-term debt(2)
Total equity(4)
_____________________________________________________________
(1) We revised the classification of certain amounts for "Cost of sales" and "Selling, general and administrative expenses" for 2013 and 2012. Certain activities that
were previously classified in "Selling, general and administrative expenses" are now classified as "Cost of sales." The reclassifications for the years ended
December 31, 2013 and 2012, were $103 million and $92 million, respectively. The revision had no impact on reported net income, cash flows or the balance
sheet.
2,699
14,728
1,672
1,711
15,134
1,576
2,301
15,764
1,577
1,369
12,548
698
$ 1,120
15,011
1,568
7,174
7,750
8,093
7,870
6,974
$
$
$
$
$
$
$
(2) In 2015, we adopted new rules related to balance sheet debt issuance costs, which resulted in the reclassification of our December 31, 2014, debt balance, reducing
our long-term debt by $12 million. In September 2013, we issued $1 billion of senior unsecured debt.
(3) For the year ended December 31, 2016, consolidated net income included a $138 million charge for a loss contingency ($74 million net of favorable variable
compensation impact and after-tax). For the year ended December 31, 2015, consolidated net income included $211 million for an impairment of light-duty diesel
assets ($133 million after-tax), $90 million of restructuring actions and other charges ($61 million after-tax) and a $60 million charge for a loss contingency ($38
million after-tax). For the year ended December 31, 2014, consolidated net income included $32 million of restructuring and other charges ($21 million after-tax)
for operating actions related to the Power Systems segment. For the year ended December 31, 2012, consolidated net income included $52 million of restructuring
and other charges ($35 million after-tax) and a $20 million charge ($12 million after-tax) related to legal matters.
(4) For the years ended December 31, 2016, 2015, 2014, 2013 and 2012, we recorded non-cash charges (credits) to equity of $65 million, $63 million, $78 million,
$(102) million and $83 million, respectively, to record net actuarial losses (gains) associated with the valuation of our pension plans. These losses (gains) include
the effects of market conditions on our pension trust assets and the effects of economic factors on the valuation of the pension liability. For the years ended
December 31, 2016, 2015, 2014, 2013 and 2012, we recorded non-cash charges (credits) to equity of $431 million, $290 million, $227 million, $18 million and
$(37) million, respectively, to record unrealized losses (gains) associated with the foreign currency translation adjustments.
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ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 Consolidated Financial Statements and the accompanying notes to those financial statements. Our
MD&A is presented in the following sections:
• Executive Summary and Financial Highlights
•
2017 Outlook
• Results of Operations
• Operating Segment Results
• Liquidity and Capital Resources
• Contractual Obligations and Other Commercial Commitments
• Application of Critical Accounting Estimates
• Recently Issued Accounting Pronouncements
EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS
We are a global power leader that designs, manufactures, distributes and services diesel and natural gas engines and engine-
related component products, including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling
systems and electric power generation systems. We sell our products to original equipment manufacturers (OEMs), distributors
and other customers worldwide. We have long-standing relationships with many of the leading manufacturers in the markets we
serve, including PACCAR Inc, Daimler Trucks North America, Navistar International Corporation and Fiat Chrysler
Automobiles. 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 and fuel systems. The Power Systems
segment is an integrated power provider, which designs, manufactures and sells engines (16 liters and larger) for industrial
applications (including mining, oil and gas and marine), 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 declined 8 percent in 2016 compared to 2015, primarily due to lower demand in most global on-highway
markets, decreased demand in most global power generation markets, unfavorable foreign currency fluctuations and lower
demand in most global high-horsepower industrial markets, partially offset by sales increases related to the consolidation of
North American distributors since December 31, 2014 and an increase in light-duty automotive sales primarily due to new sales
for the Nissan pick-up platform launched in the second half of 2015. Revenue in the U.S. and Canada declined by 12 percent
29
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primarily due to decreased demand in the North American on-highway markets, lower organic sales in our distribution markets
and unfavorable demand in the industrial oil and gas and construction markets, partially offset by increased Distribution
segment sales related to the consolidation of North American distributors and an increase in light-duty automotive sales
primarily due to new sales for the Nissan pick-up platform launched in the second half of 2015. Continued global economic
weakness in 2016 negatively impacted our international revenues (excludes the U.S. and Canada), which declined by 2 percent,
with sales down in most of our markets, especially in South America, the Middle East, U.K., Singapore and Mexico. The
decline in international sales was primarily due to declines in most international power generation markets, unfavorable foreign
currency impacts of 4 percent of international sales (primarily in the British pound, Chinese renminbi, Indian rupee, Brazilian
real, South African rand and Australian dollar), decreased demand in high-horsepower industrial markets led by declines in
marine and mining, lower demand in distribution markets in Asia Pacific, Africa and the Middle East and lower demand in the
on-highway markets in Brazil and Mexico.
The following table contains sales and earnings before interest expense, income tax expense and noncontrolling interests
(EBIT) results by operating segment for the years ended December 31, 2016 and 2015. See the section titled "Operating
Segment Results" for a more detailed discussion of net sales and EBIT by operating segment including the reconciliation of
segment EBIT to consolidated net income.
Operating Segments
In millions
Engine
Distribution
Components
Power Systems
2016
Percent
of Total
45 % $
35 %
28 %
20 %
Sales
$ 7,804
6,181
4,836
3,517
Intersegment eliminations
(4,829)
(28)%
EBIT
686
392
641
263
—
17
(2)
Sales (1)
$ 8,670
6,229
5,172
4,067
(5,028)
—
2015
Percent
of Total
EBIT (1)
45 % $
33 %
27 %
21 %
636
412
727
335
(26)%
—
(20)
100 % $ 2,090
—
(2)(3)(4)
(4)
(3)(4)
(4)
(4)
Percent change
2016 vs. 2015
Sales
EBIT
(10)%
(1)%
8 %
(5)%
(6)% (12)%
(14)% (21)%
(4)% —
—
(8)%
NM
(4)%
Non-segment
Total
—
—
$ 17,509
100 % $ 1,999
$ 19,110
_____________________________________________________
"NM" - not meaningful information
(1) Sales and EBIT numbers were adjusted for the segment reorganization. See Note 21, "OPERATING SEGMENTS," to the Consolidated Financial Statements
for additional information.
(2) The years ended December 31, 2016 and 2015, included $138 million and $60 million for loss contingency charges, respectively. See the "Results of
Operations" section for additional information.
(3) The year ended December 31, 2015, included an impairment of light-duty diesel assets for the Engine and Components segments of $202 million and $9
million, respectively. See the "Results of Operations" section for additional information.
(4) The year ended December 31, 2015, included $90 million of restructuring actions and other charges which were re-allocated in conjunction with our
segment realignment. Restructuring actions and other charges for the Engine, Distribution, Components, Power Systems and Non-segment segments were
$17 million, $23 million, $13 million, $26 million and $11 million, respectively. See the "Results of Operations" section for additional information.
Net income attributable to Cummins Inc. for 2016 was $1.39 billion, or $8.23 per diluted share, on sales of $17.5 billion,
compared to 2015 net income attributable to Cummins Inc. of $1.40 billion, or $7.84 per diluted share, on sales of $19.1
billion. Net income was relatively flat as significantly lower gross margin and higher loss contingency charges were mostly
offset by the absence of 2015 impairment and restructuring charges, in addition to lower research, development and engineering
expenses, a lower effective tax rate, lower selling, general and administrative expenses and favorable changes to corporate
owned life insurance. The decrease in gross margin was primarily due to lower volumes, unfavorable mix and unfavorable
foreign currency fluctuations (primarily in the Brazilian real, South African rand and Canadian dollar), partially offset by lower
material and commodity costs, improved Distribution segment margins related to the acquisition of North American distributors
since December 31, 2014 and lower warranty expense. Diluted earnings per share for 2016 benefited $0.26 per share from
lower shares outstanding, primarily due to purchases under the stock repurchase program.
We generated $1,935 million of operating cash flows in 2016, compared to $2,059 million in 2015. See the section titled "Cash
Flows" in the "Liquidity and Capital Resources" section for a discussion of items impacting cash flows.
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. During 2016, we repurchased $778 million, or 7.3 million shares of common stock. In
2016, we entered into an accelerated share repurchase agreement with a third party financial institution to repurchase $500
million of our common stock under our previously announced share repurchase plans and received 4.7 million shares at an
average purchase price of $105.50 per share. See Note 13, "SHAREHOLDERS' EQUITY," to the Consolidated Financial
Statements for additional information.
30
Table of Contents
During 2016, we paid $109 million to acquire the remaining interest in the last two partially owned North American
distributors, including the related debt retirements, and recognized a total gain of $15 million on the fair value adjustment
resulting from the acquisition of the controlling interest in the previously unconsolidated entity. See Note 18,
"ACQUISITIONS," to the Consolidated Financial Statements for additional information.
Our debt to capital ratio (total capital defined as debt plus equity) at December 31, 2016, was 20.6 percent, compared to 17.5
percent at December 31, 2015. The increase was due to higher total debt, as a result of the commercial paper program added in
2016, and a net decrease in shareholders' equity. At December 31, 2016, we had $1.4 billion in cash and marketable securities
on hand and access to our credit facilities, if necessary, to meet currently anticipated investment and funding needs. As of the
date of filing this Annual Report on Form 10-K, our credit ratings were as follows:
Credit Rating Agency
Standard & Poor’s Rating Services
Fitch Ratings
Moody’s Investors Service, Inc.
Long-Term
Short-Term
Senior Debt
Rating
A+
A
A2
Debt Rating
A1
F1
P1
Outlook
Stable
Stable
Stable
In July 2016, our Board of Directors authorized an increase to our quarterly dividend of 5.1 percent from $0.975 per share to
$1.025 per share.
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 approximately $134 million to our global pension plans
in 2017. See application of critical accounting estimates within MD&A and Note 8, "PENSION AND OTHER
POSTRETIREMENT BENEFITS," to the Consolidated Financial Statements, for additional information concerning our
pension and other post-retirement benefit plans.
In 2016, we recorded additional charges of $138 million for an existing loss contingency. See Note 12, "COMMITMENTS
AND CONTINGENCIES," to the Consolidated Financial Statements for additional information.
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2017 OUTLOOK
Our outlook reflects the following positive trends and challenges to our business that we expect could impact our revenue and
earnings potential in 2017:
• Demand for pick-up trucks in North America may remain strong.
• On-highway markets in India may improve.
•
•
•
Industry production of heavy-duty trucks in North America may decline.
Power generation markets may remain weak.
Industry production of medium-duty trucks in North America may decline.
• North American construction markets may weaken.
• Weak economic conditions in Brazil may continue to negatively impact demand across our businesses.
•
Foreign currency volatility could continue to put pressure on our results.
• Market demand may remain weak in industrial engine and global mining markets.
Demand in a number of important markets has been weak or declining for a number of years, below replacement levels, and we
expect that demand will improve over time, as in prior economic cycles. We are well-positioned to benefit when market
conditions improve.
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Table of Contents
RESULTS OF OPERATIONS
In millions (except per share amounts)
2016
2015
2014
Amount
Percent
Amount
Percent
Years ended December 31,
2016 vs. 2015
2015 vs. 2014
Favorable/(Unfavorable)
NET SALES
Cost of sales
GROSS MARGIN
$ 17,509
$ 19,110
$ 19,221
$ (1,601)
(8)% $
(111)
13,057
4,452
14,163
4,947
14,360
4,861
1,106
(495)
8 %
(10)%
OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses
2,046
2,092
2,095
Research, development and engineering expenses
Equity, royalty and interest income from investees
Loss contingency charges
Impairment of light-duty diesel assets
Restructuring actions and other charges
Other operating expense, net
OPERATING INCOME
Interest income
Interest expense
Other income, net
INCOME BEFORE INCOME TAXES
Income tax expense
CONSOLIDATED NET INCOME
Less: Net income attributable to noncontrolling interests
NET INCOME ATTRIBUTABLE TO CUMMINS INC.
Diluted earnings per common share attributable to
Cummins Inc.
$
$
______________________________________
"NM" - not meaningful information
636
301
138
—
—
(5)
1,928
23
69
48
1,930
474
1,456
62
1,394
8.23
$
$
735
315
60
211
90
(17)
2,057
24
65
9
2,025
555
1,470
71
1,399
7.84
$
$
754
370
—
—
—
(17)
2,365
23
64
110
2,434
698
1,736
85
1,651
9.02
$
$
46
99
(14)
(78)
211
90
12
(129)
(1)
(4)
39
(95)
81
(14)
9
(5)
197
86
3
19
(55)
(60)
(211)
(90)
—
(308)
1
(1)
(101)
(409)
143
(266)
14
(1)%
1 %
2 %
— %
3 %
(15)%
NM
NM
NM
— %
(13)%
4 %
(2)%
(92)%
(17)%
20 %
(15)%
16 %
(15)%
2 %
13 %
(4)%
NM
NM
NM
71 %
(6)%
(4)%
(6)%
NM
(5)%
15 %
(1)%
13 %
— % $
(252)
0.39
5 % $
(1.18)
(13)%
Percent of sales
Gross margin
Selling, general and administrative expenses
Research, development and engineering expenses
Favorable/(Unfavorable)
Percentage Points
2016
2015
2014
2016 vs. 2015
2015 vs. 2014
25.4%
11.7%
3.6%
25.9%
10.9%
3.8%
25.3%
10.9%
3.9%
(0.5)
(0.8)
0.2
0.6
—
0.1
2016 vs. 2015
Net Sales
Net sales decreased $1.6 billion versus 2015, primarily driven by the following:
• Engine segment sales decreased 10 percent primarily due to lower demand in North American heavy-duty and
medium-duty on-highway markets and lower demand in most North American off-highway markets, partially offset by
increased sales in the light-duty automotive market.
•
Power Systems segment sales decreased 14 percent primarily due to lower demand in all product lines and decreased
sales in most regions with the largest declines in North America, Asia, China, Latin America, the Middle East, Africa
and Western Europe.
• Components segment sales decreased 6 percent primarily due to lower demand in most lines of business, principally in
North American on-highway markets, partially offset by higher demand in China.
•
Foreign currency fluctuations unfavorably impacted sales by approximately 2 percent primarily in the British pound,
Chinese renminbi, Indian rupee, Brazilian real, South African rand, Canadian dollar and Australian dollar.
33
Table of Contents
Sales to international markets (excluding the U.S. and Canada), based on location of customers, were 42 percent of total net
sales in 2016, compared with 39 percent of total net sales in 2015.
A more detailed discussion of sales by segment is presented in the "Operating Segment Results" section.
Gross Margin
Gross margin decreased $495 million and 0.5 points as a percentage of sales, primarily due to lower volumes, unfavorable mix
and unfavorable foreign currency fluctuations (primarily in the Brazilian real, South African rand and Canadian dollar),
partially offset by lower material and commodity costs, improved Distribution segment margins related to the acquisition of
North American distributors since December 31, 2014 and lower warranty expense.
The provision for warranties issued, excluding campaigns, as a percentage of sales was 1.7 percent in 2016 and 1.8 percent in
2015. A more detailed discussion of margin by segment is presented in the "Operating Segment Results" section.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $46 million, primarily due to lower compensation expenses of $56
million as a result of restructuring actions taken in the fourth quarter of 2015. Compensation and related expenses include
salaries, fringe benefits and variable compensation. Overall, selling, general and administrative expenses, as a percentage of
sales, increased to 11.7 percent in 2016 from 10.9 percent in 2015.
Research, Development and Engineering Expenses
Research, development and engineering expenses decreased $99 million, primarily due to reduced project spending in most of
our segments, decreased compensation expenses as a result of restructuring actions taken in the fourth quarter of 2015, and
lower consulting expenses. Overall, research, development and engineering expenses, as a percentage of sales, decreased to 3.6
percent in 2016 from 3.8 percent in 2015. Research activities continue to focus on development of new products to meet future
emission standards around the world and improvements in fuel economy performance.
Equity, Royalty and Interest Income From Investees
Equity, royalty and interest income from investees decreased $14 million, primarily due to the consolidation of partially-owned
North American distributors of $12 million and lower earnings at Beijing Foton Cummins Engine Co., Ltd. of $10 million,
partially offset by higher earnings at other joint ventures.
Loss Contingency Charges
In 2016, we recorded charges of $138 million in addition to the 2015 charge of $60 million for a loss contingency. See Note 12,
"COMMITMENTS AND CONTINGENCIES," to the Consolidated Financial Statements for additional information.
Impairment of Light-duty Diesel Assets
In 2015, we recognized an impairment charge of $211 million on our light-duty assets. See Note 19, "IMPAIRMENT OF
LIGHT-DUTY DIESEL ASSETS," to the Consolidated Financial Statements for additional information.
Restructuring Actions and Other Charges
In 2015, we incurred a charge of $90 million which included $86 million for the severance costs related to both voluntary and
involuntary terminations and $4 million for asset impairments and other charges. See Note 20, "RESTRUCTURING ACTIONS
AND OTHER CHARGES," to the Consolidated Financial Statements for additional information.
Other Operating Expense, Net
Other operating expense, net was as follows:
In millions
Loss on write off of assets
Amortization of intangible assets
Royalty income, net
Other, net
Total other operating expense, net
Years ended December 31,
2016
2015
$
$
(18) $
(9)
28
(6)
(5) $
(15)
(18)
20
(4)
(17)
34
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Interest Income
Interest income was relatively flat compared to 2015.
Interest Expense
Interest expense increased $4 million versus the comparable period in 2015, primarily due to an increase in total weighted
average debt outstanding.
Other Income, Net
Other income, net was as follows:
In millions
Change in cash surrender value of corporate owned life insurance
Gain on sale of equity investee
Gains on fair value adjustment for consolidated investees (1)
Dividend income
Bank charges
Foreign currency loss, net
Other, net
Total other income, net
Years ended December 31,
2016
2015
$
$
18
17
15
5
(9)
(12)
14
48
$
$
(3)
—
18
3
(9)
(18)
18
9
____________________________________________________________
(1) See Note 18, "ACQUISITIONS," to the Consolidated Financial Statements for additional information.
Income Tax Expense
Our income tax rates are generally less than the 35 percent U.S. statutory income tax rate, primarily because of lower taxes on
foreign earnings and research tax credits. Our effective tax rate for 2016 was 24.6 percent compared to 27.4 percent for 2015.
The 2.8 percent decrease in our effective tax rate from 2015 to 2016 was primarily due to favorable changes in the
jurisdictional mix of pre-tax income.
We expect our 2017 effective tax rate to be 26 percent, excluding any discrete items that may arise.
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 decreased $9 million primarily due to lower earnings as
a result of the consolidation of North American distributors since December 31, 2014 and lower earnings at Cummins India
Ltd.
Net Income Attributable to Cummins Inc. and Diluted Earnings Per Common Share Attributable to Cummins Inc.
Net income was relatively flat as significantly lower gross margin and higher loss contingency charges were mostly offset by
the absence of 2015 impairment and restructuring charges, in addition to lower research, development and engineering
expenses, a lower effective tax rate, lower selling, general and administrative expenses and favorable changes to corporate
owned life insurance. Diluted earnings per share for 2016 benefited $0.26 per share from lower shares outstanding, primarily
due to purchases under the stock repurchase program.
2015 vs. 2014
Net Sales
Net sales decreased $111 million versus 2014, primarily driven by the following:
•
•
Foreign currency fluctuations unfavorably impacted sales approximately 4 percent (primarily in the euro, Brazilian
real, Australian dollar, Canadian dollar, British pound and Indian rupee).
Power Systems segment sales decreased 8 percent, due to lower demand in all lines of business and across most
markets.
35
Table of Contents
• Engine segment sales decreased 3 percent, primarily due to lower global demand in most industrial markets and lower
on-highway demand in international markets, especially Brazil, partially offset by higher demand in most North
American on-highway markets.
The decreases above were partially offset by the following:
• Distribution segment sales increased 20 percent, principally related to the acquisitions of North American distributors
since December 31, 2013.
• Components segment sales increased 1 percent, primarily due to higher demand in the emission solutions and fuel
systems businesses, partially offset by lower demand in the turbo technologies and filtration businesses.
Sales to international markets (excluding the U.S. and Canada), based on location of customers, were 39 percent of total net
sales in 2015, compared with 44 percent of total net sales in 2014.
A more detailed discussion of sales by segment is presented in the “OPERATING SEGMENT RESULTS” section.
Gross Margin
Gross margin increased $86 million and 0.6 points as a percentage of sales, primarily due to improved Distribution segment
sales from the consolidation of partially-owned North American distributors since December 31, 2013 and lower material and
commodity costs, partially offset by unfavorable foreign currency fluctuations (primarily in the Australian dollar, Canadian
dollar, Brazilian real and euro), unfavorable pricing, unfavorable mix and lower volumes.
The provision for warranties issued, excluding campaigns, as a percentage of sales was 1.8 percent in 2015 and 2.0 percent in
2014. A more detailed discussion of margin by segment is presented in the "OPERATING SEGMENT RESULTS" section.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $3 million, primarily due to lower consulting expenses of $41 million,
partially offset by higher compensation and related expenses of $19 million (largely due to the acquisition of partially-owned
North American distributors since December 31, 2013). Compensation and related expenses include salaries, fringe benefits
and variable compensation. Overall, selling, general and administrative expenses, as a percentage of sales, was 10.9 percent in
2015 and 2014.
Research, Development and Engineering Expenses
Research, development and engineering expenses decreased $19 million, primarily due to higher expense recovery of $12
million, partially offset by higher consulting expenses of $8 million. Overall, research, development and engineering expenses,
as a percentage of sales, decreased to 3.8 percent in 2015 from 3.9 percent in 2014. Research activities continue to focus on
development of new products to meet future emission standards around the world and improvements in fuel economy
performance.
Equity, Royalty and Interest Income From Investees
Equity, royalty and interest income from investees decreased $55 million, primarily due to the consolidation of partially-owned
North American distributors since December 31, 2013, of $74 million, lower earnings at Dongfeng Cummins Engine
Company, Ltd. of $16 million and Chongqing Cummins Engine Company, Ltd. of $10 million. These decreases were partially
offset by higher earnings at Beijing Foton Cummins Engine Co., Ltd. of $64 million as it continues to increase market share
with the new heavy-duty engine platform introduced in 2014.
Loss Contingency Charge
In 2015, we recorded a charge of $60 million for a loss contingency. See Note 12, "COMMITMENTS AND
CONTINGENCIES," to the Consolidated Financial Statements for additional information.
Impairment of Light-duty Diesel Assets
In 2015, we recognized an impairment charge of $211 million. See Note 19, "IMPAIRMENT OF LIGHT-DUTY DIESEL
ASSETS," to the Consolidated Financial Statements for additional information.
36
Table of Contents
Restructuring Actions and Other Charges
In 2015, we incurred a charge of $90 million which included $86 million for the severance costs related to both voluntary and
involuntary terminations and $4 million for asset impairments and other charges. See Note 20, "RESTRUCTURING ACTIONS
AND OTHER CHARGES," to the Consolidated Financial Statements for additional information.
Other Operating Expense, Net
Other operating expense, net was as follows:
In millions
Amortization of intangible assets
Loss on write off of assets
Royalty income, net
Other, net
Total other operating expense, net
Interest Income
Interest income was relatively flat compared to 2014.
Interest Expense
Interest expense was relatively flat compared to 2014.
Other Income, Net
Other income, net was as follows:
In millions
Gains on fair value adjustment for consolidated investees (1)
Dividend income
Gains on marketable securities, net
Change in cash surrender value of corporate owned life insurance
Bank charges
Foreign currency loss, net
Other, net
Total other income, net
Years ended December 31,
2015
2014
(18)
(15)
20
(4)
(17) $
(16)
(23)
27
(5)
(17)
Years ended December 31,
2015
2014
18
3
1
(3)
(9)
(18)
17
9
$
$
73
3
14
24
(12)
(6)
14
110
$
$
$
____________________________________________________________
(1) See Note 18, "ACQUISITIONS," to the Consolidated Financial Statements for additional information.
Income Tax Expense
Our income tax rates are generally less than the 35 percent U.S. statutory income tax rate, primarily because of lower taxes on
foreign earnings and research tax credits. Our effective tax rate for 2015 was 27.4 percent compared to 28.7 percent for 2014.
The 1.3 percent decrease in our effective tax rate from 2014 to 2015 was primarily due to the release of reserves for uncertain
tax positions related to a favorable audit settlement and favorable changes in the jurisdictional mix of pre-tax income.
Noncontrolling Interests
Noncontrolling interests in income of consolidated subsidiaries decreased $14 million, primarily due to lower earnings at Wuxi
Cummins Turbo Technologies Co. Ltd. and a decline from the acquisition of the remaining interest in previously consolidated
North American distributors since December 31, 2013.
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Table of Contents
Net Income Attributable to Cummins Inc. and Diluted Earnings Per Common Share Attributable to Cummins Inc.
Net income and diluted earnings per share attributable to Cummins Inc. decreased $252 million and $1.18 per share primarily
due to our impairment of light-duty diesel assets, unfavorable foreign currency fluctuations, restructuring actions, loss
contingency charge, lower other income as a result of larger gains recognized in 2014 from the acquisition of North American
distributors and lower equity, royalty and interest income from investees. These decreases were partially offset by improved
gross margin, lower research, development and engineering expenses and a lower effective tax rate of 27.4 percent in 2015
versus 28.7 percent in 2014. Diluted earnings per share for 2015 benefited $0.14 per share from lower shares outstanding,
primarily due to purchases under the stock repurchase program.
Comprehensive Income - Foreign Currency Translation Adjustment
The foreign currency translation adjustment was a net loss of $448 million, $305 million and $234 million for the years ended
2016, 2015 and 2014, respectively, and was driven by the following:
Years ended December 31,
In millions
Wholly owned subsidiaries
Equity method investments
Translation
adjustment
$
2016
Primary currency
driver vs. U.S.
dollar
(397) British pound,
Chinese renminbi,
offset by
Brazilian real
(34) Chinese renminbi,
Indian rupee,
offset by Mexican
peso (1)
Translation
adjustment
$
2015
Primary currency
driver vs. U.S.
dollar
(261) British pound,
Brazilian real,
Chinese renminbi
2014
Primary currency
driver vs. U.S.
dollar
(208) British pound,
Brazilian real
Translation
adjustment
$
(29) Chinese renminbi,
Indian rupee
(19) Russian rouble,
Chinese renminbi
Consolidated subsidiaries
with a noncontrolling interest
(17) Chinese renminbi,
Indian rupee
(15)
Indian rupee,
Chinese renminbi
(7)
Indian rupee,
Chinese renminbi
Total
$
(448)
$
(305)
$
(234)
____________________________________
(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.
38
Table of Contents
OPERATING SEGMENT RESULTS
Our reporting structure is organized according to the products and markets each segment serves. We use segment EBIT as the
primary basis for the Chief Operating Decision Maker (CODM) to evaluate the performance of each of our operating segments.
As previously announced, beginning with the second quarter of 2016, we realigned certain of our reportable segments to be
consistent with changes to our organizational structure and how the CODM monitors the performance of our segments. We
reorganized our business to combine our Power Generation segment and our high-horsepower engine business to create the
new Power Systems segment. Our reportable operating segments consist of Engine, Distribution, Components and Power
Systems. We began to report results for our new reporting structure in the second quarter of 2016 and also reflected this change
for historical periods. The formation of the Power Systems segment combined two businesses that were already strongly
interdependent, which will allow us to streamline business and technical processes to accelerate innovation, grow market share
and more efficiently manage our supply chain and manufacturing operations.
We allocate certain common costs and expenses, primarily corporate functions, among segments. These include certain costs
and expenses of shared services, such as information technology, human resources, legal, finance and supply chain
management. In addition to the reorganization noted above, we reevaluated the allocation of these costs, considering the new
segment structure created in April 2016 and adjusted our allocation methodology accordingly. The revised methodology, which
is based on a combination of relative segment sales and relative service usage levels, is effective for the periods beginning after
January 1, 2016 and resulted in the revision of our segment operating results, including segment EBIT, for all four segments for
the first quarter of 2016 with a greater share of costs allocated to the Distribution and Components segments than in previous
years. Prior periods were not revised for the new allocation methodology. These changes had no impact on our consolidated
results.
Following is a discussion of results for each of our operating segments.
Engine Segment Results
Financial data for the Engine segment was as follows:
Years ended December 31,
2016 vs. 2015
2015 vs. 2014
Favorable/(Unfavorable)
In millions
External sales (1)
Intersegment sales (1)
Total sales
2016
$ 5,774
2,030
7,804
2015
2014
$ 6,733
$ 7,462
1,937
8,670
1,505
8,967
Depreciation and amortization
Research, development and engineering expenses
Equity, royalty and interest income from investees
Interest income
Loss contingency charges (2)
Impairment of light-duty diesel assets (2)
Restructuring actions and other charges (2)
Segment EBIT
163
226
148
10
138
—
—
686
187
263
146
11
60
202
17
636
163
265
118
9
—
—
—
1,031
Amount
$ (959)
93
(866)
24
37
2
(1)
(78)
202
17
50
Percent
Amount
Percent
5 %
(14)% $ (729)
432
(297)
(24)
2
(10)%
13 %
14 %
1 %
(9)%
NM
NM
NM
8 %
28
2
(60)
(202)
(17)
(395)
(10)%
29 %
(3)%
(15)%
1 %
24 %
22 %
NM
NM
NM
(38)%
Segment EBIT as a percentage of total sales
8.8%
7.3%
11.5%
1.5
(4.2)
____________________________________
"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.
(2) See respective sections of "Results of Operations" for additional information.
Percentage Points
Percentage Points
In the second quarter of 2016, in conjunction with the reorganization of our segments, our Engine segment reorganized its
reporting structure as follows:
• Heavy-duty truck - We manufacture diesel and natural gas engines that range from 310 to 605 horsepower serving
global heavy-duty truck customers worldwide, primarily in North America, Latin America and Australia.
39
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• Medium-duty truck and bus - We manufacture diesel and natural gas engines ranging from 130 to 450 horsepower
serving medium-duty truck and bus customers worldwide, with key markets including North America, Latin America,
China, Europe and India. Applications include pickup and delivery trucks, vocational truck, school bus, transit bus and
shuttle bus. We also provide diesel engines for Class A motor homes (RVs), primarily in North America.
• Light-duty automotive (Pickup and Light Commercial Vehicle (LCV)) - We manufacture 105 to 385 horsepower
diesel engines, including engines for the pickup truck market for Chrysler and Nissan in North America, and LCV
markets in Europe, Latin America and Asia.
• Off-highway - We manufacture diesel engines that range from 48 to 715 horsepower to key global markets including
mining, marine, rail, oil and gas, defense, agriculture and construction equipment and also to the power generation
business for standby, mobile and distributed power generation solutions throughout the world.
Sales for our Engine segment by market were as follows:
In millions
Heavy-duty truck
Medium-duty truck and bus
Light-duty automotive
Total on-highway
Off-highway
Total sales
Favorable/(Unfavorable)
Years ended December 31,
2016 vs. 2015
2015 vs. 2014
2016
2015
2014
Amount
Percent
Amount
Percent
$
2,443
$
3,116
$
3,072
$
2,272
1,581
6,296
1,508
2,507
1,475
7,098
1,572
2,431
1,567
7,070
1,897
$
7,804
$
8,670
$
8,967
$
(673)
(235)
106
(802)
(64)
(866)
(22)% $
(9)%
7 %
(11)%
(4)%
(10)% $
44
76
(92)
28
(325)
(297)
1 %
3 %
(6)%
— %
(17)%
(3)%
Unit shipments by engine classification (including unit shipments to Power Systems and off-highway engine units included in
their respective classification) were as follows:
Favorable/(Unfavorable)
Years ended December 31,
2016 vs. 2015
2015 vs. 2014
2016
79,000
229,100
228,600
536,700
2015
114,400
247,100
209,300
570,800
2014
122,100
266,800
204,400
593,300
Amount
(35,400)
(18,000)
19,300
(34,100)
Percent
Amount
Percent
(7,700)
(31)%
(7)% (19,700)
4,900
9 %
(6)% (22,500)
(6)%
(7)%
2 %
(4)%
Heavy-duty
Medium-duty
Light-duty
Total unit shipments
2016 vs. 2015
Sales
Engine segment sales decreased $866 million versus 2015. The following were the primary drivers by market:
• Heavy-duty truck engine sales decreased $673 million primarily due to lower demand in the North American heavy-
duty truck market with decreased engine shipments of 38 percent.
• Medium-duty truck and bus sales decreased $235 million primarily due to lower demand in most global medium-duty
truck markets with decreased engine shipments of 17 percent, primarily in North America, Brazil and Mexico.
• Off-highway sales decreased $64 million primarily due to decreased engine shipments in several North American
industrial markets, partially offset by increased unit shipments of 25 percent in international construction markets.
The decreases above were partially offset by an increase in light-duty automotive sales of $106 million primarily due to new
sales for the Nissan pick-up truck platform launched in the second half of 2015.
Total on-highway-related sales for 2016 were 81 percent of total engine segment sales, compared to 82 percent in 2015.
40
Table of Contents
Segment EBIT
In 2016, we recorded additional charges of $138 million for an existing loss contingency in addition to the $60 million recorded
in 2015. In 2015, we also incurred an impairment charge of $202 million for our light-duty diesel assets and incurred a
restructuring charge of $17 million for actions primarily in the form of professional voluntary and involuntary employee
separation programs in response to the continued deterioration in our global markets.
Engine segment EBIT increased $50 million versus 2015, primarily due to an impairment of light-duty diesel assets in 2015,
lower selling, general and administrative expenses, lower research, development and engineering expenses and restructuring
actions and other charges in 2015, partially offset by lower gross margin and higher loss contingency charges in 2016. Major
components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows:
In millions
Gross margin
Selling, general and administrative expenses
Research, development and engineering expenses
Equity, royalty and interest income from investees
Impairment of light-duty diesel assets (1)
Restructuring actions and other charges (1)
Loss contingency charges (1)
__________________________________________________________________________
"NM" - not meaningful information
(1) See respective sections of Results of Operations for additional information.
Year ended December 31, 2016 vs. 2015
Favorable/(Unfavorable) Change
Amount
Percent
Percentage point change
as a percent of sales
$
(210)
72
37
2
202
17
(78)
(13)%
11 %
14 %
1 %
NM
NM
NM
(0.6)
0.1
0.1
0.2
2.3
0.2
1.1
The decrease in gross margin versus 2015 was primarily due to lower volumes and unfavorable mix, partially offset by lower
material and commodity costs and favorable product coverage. The decrease in selling, general and administrative expenses
was primarily due to lower compensation expenses as the result of restructuring actions taken in the fourth quarter of 2015, and
lower consulting expenses. The decrease in research, development and engineering expenses was primarily due to lower
compensation expenses as a result of restructuring actions taken in the fourth quarter of 2015 and higher expense recovery from
customers and external parties.
2015 vs. 2014
Sales
Engine segment sales decreased $297 million versus 2014. The following were the primary drivers:
• Off-highway sales decreased $325 million primarily due to decreased engine shipments to most global industrial
markets.
•
Foreign currency fluctuations unfavorably impacted sales results (primarily the Brazilian real, euro and British pound).
• Light-duty automotive sales decreased $92 million due to lower demand, primarily in Brazil.
The decreases above were partially offset by the following:
• Medium-duty truck and bus sales increased $76 million due to higher demand in the North American medium-duty
truck market with increased engine shipments of 14 percent and higher global bus demand with improved engine
shipments of 10 percent. These increases were partially offset by weaker medium-duty truck demand in Brazil.
• Heavy-duty truck engine sales increased $44 million due to improved demand in the North American heavy-duty truck
market, partially offset by weaker demand in China and Korea.
Total on-highway-related sales for 2015 were 82 percent of total engine segment sales, compared to 79 percent in 2014.
Segment EBIT
Engine segment EBIT decreased $395 million versus 2014, primarily due to an impairment of light-duty diesel assets, lower
gross margin, a loss contingency charge and restructuring actions and other charges, partially offset by favorable foreign
41
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currency fluctuations (primarily the Mexican peso), lower selling, general and administrative expenses and higher equity,
royalty and interest income from investees. Major components of EBIT and related changes to segment EBIT and EBIT as a
percentage of sales were as follows:
In millions
Gross margin
Selling, general and administrative expenses
Research, development and engineering expenses
Equity, royalty and interest income from investees
Impairment of light-duty diesel assets (1)
Restructuring actions and other charges (1)
Loss contingency charge (1)
__________________________________________________________________________
Year ended December 31, 2015 vs. 2014
Favorable/(Unfavorable) Change
Amount
Percent
Percentage point change
as a percent of sales
$
(184)
37
2
28
(202)
(17)
(60)
(10)%
6 %
1 %
24 %
NM
NM
NM
(1.4)
0.1
—
0.4
(2.3)
(0.2)
(0.7)
"NM" - not meaningful information
(1) See respective sections of Results of Operations for additional information.
The decrease in gross margin versus 2014 was primarily due to lower volumes and unfavorable mix, partially offset by lower
material and commodity costs and favorable foreign currency fluctuations. The decrease in selling, general and administrative
expenses was primarily due to lower compensation expenses and lower consulting expenses. The increase in equity, royalty and
interest income from investees was primarily due to increased earnings at Beijing Foton Cummins Engine Co., Ltd. as the joint
venture continued to increase market share with the new heavy-duty engine platform introduced in 2014, partially offset by
lower earnings at Dongfeng Cummins Engine Company, Ltd. and an asset impairment of $12 million.
Distribution Segment Results
Financial data for the Distribution segment was as follows:
Years ended December 31,
2016 vs. 2015
2015 vs. 2014
Favorable/(Unfavorable)
In millions
External sales
Intersegment sales
Total sales
Depreciation and amortization
Research, development and engineering expenses
Equity, royalty and interest income from investees
Interest income
Restructuring actions and other charges (1)
Segment EBIT (2)
2016
$ 6,157
24
6,181
116
13
70
4
—
392
2015
2014
Amount
Percent
Amount
Percent
$ 6,198
$ 5,135
$
31
6,229
105
10
78
4
23
412
39
5,174
86
9
148
4
—
491
(41)
(7)
(48)
(11)
(3)
(8)
—
23
(20)
(10)%
(23)%
(1)%
(1)% $ 1,063
(8)
1,055
(19)
(1)
(70)
—
(23)
(79)
(5)%
NM
— %
(30)%
(10)%
21 %
(21)%
20 %
(22)%
(11)%
(47)%
— %
NM
(16)%
Percentage Points
Percentage Points
Segment EBIT as a percentage of total sales (3)
____________________________________
"NM" - not meaningful information
(1) See Restructuring Actions and Other Charges section of "Results of Operations" for additional information.
(2) Segment EBIT for 2016, 2015 and 2014 included gains of $15 million, $18 million and $73 million, respectively, resulting from acquisitions of controlling
6.3%
6.6%
9.5%
(0.3)
(2.9)
interests in North American distributors. See Note 18, "ACQUISITIONS," to the Consolidated Financial Statements for additional information.
(3) North American distributor acquisitions are dilutive to segment EBIT as a percentage of sales.
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Table of Contents
Sales for our Distribution segment by region were as follows:
In millions
North and Central America
Europe, CIS and China
Asia Pacific
Africa
India
Middle East
South America
Total sales
Favorable/(Unfavorable)
Years ended December 31,
2016 vs. 2015
2015 vs. 2014
2016
2015
2014
Amount
Percent
Amount
Percent
$
$
4,015
798
720
206
175
160
107
6,181
$
$
3,992
758
763
232
165
199
120
6,229
$
$
2,765
908
794
187
157
208
155
5,174
$
$
23
40
(43)
(26)
10
(39)
(13)
(48)
1 % $
5 %
(6)%
(11)%
6 %
(20)%
(11)%
(1)% $
1,227
(150)
(31)
45
8
(9)
(35)
1,055
44 %
(17)%
(4)%
24 %
5 %
(4)%
(23)%
20 %
Sales for our Distribution segment by product line were as follows:
In millions
Parts (1)
Power generation
Service
Engines
Total sales
Favorable/(Unfavorable)
Years ended December 31,
2016 vs. 2015
2015 vs. 2014
2016
2015
2014
Amount
Percent
Amount
Percent
$
$
2,627
1,239
1,215
1,100
6,181
$
$
2,423
1,290
1,222
1,294
6,229
$
$
1,924
1,163
1,026
1,061
5,174
$
$
204
(51)
(7)
(194)
(48)
8 % $
(4)%
(1)%
(15)%
(1)% $
499
127
196
233
1,055
26%
11%
19%
22%
20%
____________________________________
(1 ) In conjunction with our segment realignment, we changed "Parts and filtration" to "Parts."
2016 vs. 2015
Sales
Distribution segment sales decreased $48 million versus 2015, primarily due to a decline in organic sales of $295 million
principally in North America, Asia Pacific and the Middle East and unfavorable foreign currency fluctuations (primarily in the
South African rand, Canadian dollar, Chinese renminbi, Indian rupee, Australian dollar and British pound), partially offset by
$344 million of segment sales related to the acquisition of North American distributors since December 31, 2014.
Segment EBIT
In 2015, we incurred a restructuring charge of $23 million for actions primarily in the form of professional voluntary and
involuntary employee separation programs in response to the continued deterioration in our global markets.
Distribution segment EBIT decreased $20 million versus 2015, primarily due to higher selling, general and administrative
expenses (mainly related to the acquisition of North American distributors since December 31, 2014), partially offset by higher
gross margin and restructuring actions and other charges in 2015. The acquisitions resulted in $11 million and $24 million of
additional amortization of intangible assets, partially offset by gains of $15 million and $18 million related to the
remeasurement of our pre-existing ownership interests for North American distributor acquisitions in 2016 and 2015,
respectively. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as
follows:
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Year ended December 31, 2016 vs. 2015
Favorable/(Unfavorable) Change
In millions
Gross margin
Selling, general and administrative expenses
Research, development and engineering expenses
Equity, royalty and interest income from investees
Restructuring actions and other charges (1)
__________________________________________________________________________
Amount
37
$
(68)
(3)
(8)
23
Percent
Percentage point change
as a percent of sales
4 %
(10)%
(30)%
(10)%
NM
0.7
(1.2)
—
(0.2)
0.4
"NM" - not meaningful information
(1) See Restructuring Actions and Other Charges section of "Results of Operations" for additional information.
The increase in gross margin versus 2015 was primarily due to the acquisitions of North American distributors since December
31, 2014 and improved pricing, partially offset by unfavorable foreign currency fluctuations (primarily in the South African
rand, Canadian dollar and Australian dollar) and lower volumes. The increase in selling, general and administrative expenses
was primarily due to higher compensation expenses related to the acquisitions of North American distributors and higher
consulting expenses. The decrease in equity, royalty and interest income from investees was the result of the acquisitions of
North American distributors.
2015 vs. 2014
Sales
Distribution segment sales increased $1,055 million versus 2014, primarily due to $1.4 billion of segment sales related to the
consolidation of partially-owned North American distributors since December 31, 2013, partially offset by unfavorable foreign
currency fluctuations (primarily the Australian dollar, Canadian dollar, euro, South African rand and Brazilian real) and
decreased sales in China, Western Europe, South America and Russia.
Segment EBIT
Distribution segment EBIT decreased $79 million versus 2014, primarily due to unfavorable foreign currency fluctuations
(primarily the Australian dollar, Canadian dollar and South African rand), higher selling, general and administrative expenses,
lower equity, royalty and interest income from investees and restructuring actions and other charges, partially offset by higher
gross margin due to the acquisitions of North American distributors. These acquisitions also resulted in $24 million and $36
million of additional amortization of intangible assets, partially offset by gains of $18 million and $73 million related to the
remeasurement of our pre-existing ownership interests for North American distributor acquisitions in 2015 and 2014,
respectively. The decrease in equity, royalty and interest income from investees was the result of the acquisitions of North
American distributors. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales
were as follows:
Year ended December 31, 2015 vs. 2014
Favorable/(Unfavorable) Change
In millions
Gross margin
Selling, general and administrative expenses
Equity, royalty and interest income from investees
Restructuring actions and other charges (1)
__________________________________________________________________________
Amount
160
$
(81)
(70)
(23)
Percent
Percentage point change
as a percent of sales
18 %
(14)%
(47)%
NM
(0.3)
0.6
(1.6)
(0.4)
"NM" - not meaningful information
(1) See Restructuring Actions and Other Charges section of "Results of Operations" for additional information.
44
Table of Contents
Components Segment Results
Financial data for the Components segment was as follows:
In millions
External sales (1)
Intersegment sales (1)
Total sales
Depreciation and amortization
Research, development and engineering expenses
Equity, royalty and interest income from investees
Interest income
Impairment of light-duty diesel assets (2)
Restructuring actions and other charges (2)
Segment EBIT
Years ended December 31,
2016 vs. 2015
2015 vs. 2014
Favorable/(Unfavorable)
2016
$ 3,514
1,322
4,836
133
208
41
4
—
—
641
2015
2014
Amount
Percent
Amount
Percent
$ 3,745
$ 3,791
$
1,427
5,172
109
236
35
4
9
13
727
1,327
5,118
106
230
36
4
—
—
684
(231)
(105)
(336)
(24)
28
6
—
9
13
(86)
(6)% $
(7)%
(6)%
(22)%
12 %
17 %
— %
NM
NM
(12)%
(46)
100
54
(3)
(6)
(1)
—
(9)
(13)
43
(1)%
8 %
1 %
(3)%
(3)%
(3)%
— %
NM
NM
6 %
Percentage Points
Percentage Points
Segment EBIT as a percentage of total sales
13.3%
14.1%
13.4%
(0.8)
0.7
____________________________________
"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.
(2) See respective sections of "Results of Operations" for additional information.
Sales for our Components segment by business were as follows:
Favorable/(Unfavorable)
Years ended December 31,
2016 vs. 2015
2015 vs. 2014
2016
2015
2014
Amount
Percent
Amount
Percent
$
$
2,317
1,036
1,010
473
4,836
$
$
2,499
1,141
1,010
522
5,172
$
$
2,343
1,222
1,075
478
5,118
$
$
(182)
(105)
—
(49)
(336)
(7)% $
(9)%
— %
(9)%
(6)% $
156
(81)
(65)
44
54
7 %
(7)%
(6)%
9 %
1 %
In millions
Emission solutions
Turbo technologies
Filtration
Fuel systems
Total sales
2016 vs. 2015
Sales
Components segment sales decreased $336 million across most lines of business versus 2015. The following were the primary
drivers by business:
• Emission solutions sales decreased $182 million primarily due to lower demand in North American on-highway
markets, partially offset by higher demand in China.
• Turbo technologies sales decreased $105 million primarily due to lower demand in North American on-highway
markets, partially offset by higher demand in China.
•
•
Foreign currency fluctuations unfavorably impacted sales results primarily in the Chinese renminbi, British pound and
Brazilian real.
Fuel systems sales decreased $49 million primarily due to lower demand in North American on-highway markets,
partially offset by higher demand in China.
45
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Segment EBIT
In 2015, we incurred a restructuring charge of $13 million for actions primarily in the form of professional voluntary and
involuntary employee separation programs in response to the continued deterioration in our global markets. We also incurred an
impairment charge of $9 million for our light-duty diesel assets.
Components segment EBIT decreased $86 million versus 2015, primarily due to lower gross margin and higher selling, general
and administrative expenses, partially offset by lower research, development and engineering expenses, restructuring actions
and other charges in 2015 and an impairment charge in 2015. Major components of EBIT and related changes to segment EBIT
and EBIT as a percentage of sales were as follows:
In millions
Gross margin
Selling, general and administrative expenses
Research, development and engineering expenses
Equity, royalty and interest income from investees
Impairment of light-duty diesel assets (1)
Restructuring actions and other charges (1)
__________________________________________________________________________
Year ended December 31, 2016 vs. 2015
Favorable/(Unfavorable) Change
Amount
Percent
Percentage point change
as a percent of sales
$
(111)
(33)
28
6
9
13
(9)%
(10)%
12 %
17 %
NM
NM
(0.6)
(1.1)
0.3
0.1
0.2
0.3
"NM" - not meaningful information
(1) See respective sections of "Results of Operations" for additional information.
The decrease in gross margin was primarily due to lower volumes, unfavorable pricing, unfavorable mix and unfavorable
foreign currency fluctuations (primarily in the Chinese renminbi and Brazilian real), partially offset by lower material
costs. The increase in selling, general and administrative expenses was primarily due to higher consulting and compensation
expenses as a result of absorbing a greater share of corporate costs under our new allocation methodology, partially offset by
savings from restructuring actions taken in the fourth quarter of 2015. The decrease in research, development and engineering
expenses was primarily due to reduced project spending, lower consulting expenses and lower compensation expenses from
restructuring actions taken in the fourth quarter of 2015.
2015 vs. 2014
Sales
Components segment sales increased $54 million versus 2014. The following were the primary drivers by business:
• Emission solutions sales increased, primarily due to improved demand in the North American on-highway markets
and increased demand in China, partially offset by unfavorable pricing.
•
Fuel systems sales increased due to the new Beijing Foton ISG engine that entered production in the second quarter of
2014 in China and improved demand in certain North American on-highway markets.
The increases above were partially offset by the following:
•
Foreign currency fluctuations unfavorably impacted sales primarily in the euro, Brazilian real and British pound.
• Turbo technologies sales decreased, primarily due to lower demand in China, Europe and Brazil, partially offset by
higher demand in the North American on-highway markets.
•
Filtration sales decreased, primarily due to lower demand in Europe, Asia Pacific and Brazil, partially offset by higher
demand in China.
Segment EBIT
Components segment EBIT increased $43 million versus 2014, primarily due to higher gross margin and lower selling, general
and administrative expenses, partially offset by unfavorable foreign currency fluctuations (primarily the euro and Brazilian
real), restructuring actions and other charges, an impairment of light-duty diesel assets 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:
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In millions
Gross margin
Selling, general and administrative expenses
Research, development and engineering expenses
Equity, royalty and interest income from investees
Impairment of light-duty diesel assets (1)
Restructuring actions and other charges (1)
__________________________________________________________________________
Year ended December 31, 2015 vs. 2014
Favorable/(Unfavorable) Change
Amount
Percent
Percentage point change
as a percent of sales
$
75
8
(6)
(1)
(9)
(13)
6 %
2 %
(3)%
(3)%
NM
NM
1.2
0.2
(0.1)
—
(0.2)
(0.3)
"NM" - not meaningful information
(1) See respective sections of "Results of Operations" for additional information.
The increase in gross margin was primarily due to lower material and commodity costs and higher volumes, partially offset by
unfavorable pricing and unfavorable foreign currency fluctuations (primarily the euro and Brazilian real). The decrease in
selling, general and administrative expenses was primarily due to lower consulting expenses and lower compensation
expenses. The increase in research, development and engineering expenses was primarily due to higher consulting expenses
and higher compensation expenses, partially offset by higher expense recovery.
Power Systems Segment Results
Financial data for the Power Systems segment was as follows:
In millions
External sales (1)
Intersegment sales (1)
Total sales
Depreciation and amortization
Research, development and engineering expenses
Equity, royalty and interest income from investees
Interest income
Restructuring actions and other charges (2)
Segment EBIT
Years ended December 31,
2016 vs. 2015
2015 vs. 2014
Favorable/(Unfavorable)
2016
$ 2,064
1,453
3,517
115
189
42
5
—
263
2015
2014
Amount
Percent
Amount
Percent
$ 2,434
$ 2,833
$
1,633
4,067
1,581
4,414
110
226
56
5
26
335
97
250
68
6
—
361
(370)
(180)
(550)
(5)
37
(14)
—
26
(72)
(15)% $
(11)%
(14)%
(5)%
16 %
(25)%
— %
NM
(21)%
(399)
52
(347)
(13)
24
(12)
(1)
(26)
(26)
(14)%
3 %
(8)%
(13)%
10 %
(18)%
(17)%
NM
(7)%
Segment EBIT as a percentage of total sales
7.5%
8.2%
8.2%
(0.7)
—
____________________________________
"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.
(2) See Restructuring Actions and Other Charges section of "Results of Operations" for additional information.
Percentage Points
Percentage Points
In the second quarter of 2016, in conjunction with the reorganization of our segments, our Power Systems segment reorganized
its reporting structure into the following product lines:
• Power generation - We design, manufacture, sell and support back-up and prime power generators ranging from 2
kilowatts to 3.5 megawatts, as well as controls, paralleling systems and transfer switches, for applications such as
consumer, commercial, industrial, data centers, health care, telecommunications and waste water treatment plants. We
also provide turnkey solutions for distributed generation and energy management applications using natural gas or
biogas as a fuel. We also serve global rental accounts for diesel and gas generator sets.
•
Industrial - We design, manufacture, sell and support diesel and natural gas high-horsepower engines up to 5,500
horsepower for a wide variety of equipment in the mining, rail, defense, oil and gas, and commercial marine
applications throughout the world. Across these markets, we have major customers in North America, Europe, the
Middle East, Africa, China, Korea, Japan, Latin America, India, Russia, Southeast Asia, South Pacific and Mexico.
47
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• Generator technologies - We design, manufacture, sell and support A/C generator/alternator products for internal
consumption and for external generator set assemblers. Our products are sold under the Stamford, AVK and Markon
brands and range in output from 3 kilovolt-amperes (kVA) to 12,000 kVA.
Sales for our Power Systems segment by product line were as follows:
In millions
Power generation
Industrial
Generator technologies
Total sales
Favorable/(Unfavorable)
Years ended December 31,
2016 vs. 2015
2015 vs. 2014
2016
2,235
963
319
3,517
$
2015
2,570
1,137
360
4,067
$
2014
2,633
1,331
450
4,414
$
Amount
Percent
Amount
Percent
(335)
(174)
(41)
(550)
$
(13)%
(15)%
(11)%
(14)% $
(63)
(194)
(90)
(347)
(2)%
(15)%
(20)%
(8)%
High-horsepower unit shipments by engine classification were as follows:
Favorable/(Unfavorable)
Years ended December 31,
2016 vs. 2015
2015 vs. 2014
2016
2015
2014
Amount
Percent
Amount
Percent
7,900
4,400
12,300
8,600
5,200
13,800
8,700
6,100
14,800
(700)
(800)
(1,500)
(8)%
(15)%
(11)%
(100)
(900)
(1,000)
(1)%
(15)%
(7)%
Power generation
Industrial
Total units
2016 vs. 2015
Sales
Power Systems segment sales decreased $550 million across all product lines versus 2015. The following were the primary
drivers:
•
•
•
Power generation sales decreased $335 million, in most regions, with the largest declines in demand primarily in Asia,
the Middle East, North America, Latin America, China, Western Europe, Africa and Mexico.
Industrial sales decreased $174 million primarily due to lower demand in North America (mainly oil and gas and
mining markets, partially offset by rail markets), Asia (mainly marine and mining markets), China (mainly marine and
mining markets) and Africa.
Foreign currency fluctuations unfavorably impacted sales results primarily in the British pound, Indian rupee and
Chinese renminbi.
• Generator technologies sales decreased $41 million primarily due to lower demand in China and North America.
Segment EBIT
In 2015, we incurred a restructuring charge of $26 million for actions primarily in the form of professional voluntary and
involuntary employee separation programs in response to the continued deterioration in our global markets.
Power Systems segment EBIT decreased $72 million versus 2015, primarily due to lower gross margin, partially offset by
lower selling, general and administrative expenses, favorable foreign currency fluctuations (primarily the British pound), lower
research, development and engineering expenses, restructuring actions and other charges in 2015 and a gain from the
divestiture of an equity investee. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of
sales were as follows:
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In millions
Gross margin
Selling, general and administrative expenses
Research, development and engineering expenses
Equity, royalty and interest income from investees
Restructuring actions and other charges (1)
Gain on sale of an equity investee
__________________________________________________________________________
Year ended December 31, 2016 vs. 2015
Favorable/(Unfavorable) Change
Amount
Percent
Percentage point change
as a percent of sales
$
(215)
75
37
(14)
26
17
(21)%
16 %
16 %
(25)%
NM
NM
(2.3)
0.3
0.2
(0.2)
0.6
0.5
"NM" - not meaningful information
(1) See Restructuring Actions and Other Charges section of "Results of Operations" for additional information.
The decrease in gross margin versus 2015 was primarily due to lower volumes and increased project costs. The decrease in
selling, general and administrative expenses was primarily due to lower compensation expenses as the result of restructuring
actions taken in the fourth quarter of 2015 and lower consulting expenses. The decrease in research, development and
engineering expenses was primarily due to reduced project spending, lower consulting expenses and lower compensation
expenses as the result of restructuring actions taken in the fourth quarter of 2015. The decrease in equity, royalty and interest
income from investees was primarily due to the impact of an $8 million asset impairment incurred by one of our joint ventures.
In the fourth quarter of 2016, we sold our remaining 49 percent interest in Cummins Olayan Energy for $61 million and
recognized a gain of $17 million.
2015 vs. 2014
Sales
Power Systems segment sales decreased $347 million overall and declined in all product lines versus 2014. The following were
the primary drivers:
•
Industrial sales decreased, primarily due to lower demand in North America, China, the Middle East and Western
Europe, partially offset by Africa and India.
• Generator technologies sales decreased, primarily due to lower demand in Western Europe, China, the U.K. and North
America.
•
Power generation sales decreased, primarily due to lower demand in North America, Brazil and Russia, partially offset
by higher demand in the Middle East, Africa, India and Mexico.
•
Foreign currency fluctuations unfavorably impacted sales results (primarily the euro, Brazilian real and Indian rupee).
Segment EBIT
Power Systems segment EBIT decreased $26 million versus 2014, primarily due to lower gross margin, restructuring charges
and lower equity, royalty and interest income from investees, partially offset by lower selling, general and administrative
expenses and lower research, development and engineering expenses. Major components of EBIT and related changes to
segment EBIT and EBIT as a percentage of sales were as follows:
In millions
Gross margin
Selling, general and administrative expenses
Research, development and engineering expenses
Equity, royalty and interest income from investees
Restructuring actions and other charges (1)
__________________________________________________________________________
Year ended December 31, 2015 vs. 2014
Favorable/(Unfavorable) Change
Amount
Percent
Percentage point change
as a percent of sales
$
(53)
39
24
(12)
(26)
(5)%
8 %
10 %
(18)%
NM
0.7
—
0.1
(0.1)
(0.6)
"NM" - not meaningful information
(1) See Restructuring Actions and Other Charges section of "Results of Operations" for additional information.
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The decrease in gross margin versus 2014 was primarily due to lower volumes and unfavorable pricing, partially offset by
savings from operating actions taken in December of 2014. The decrease in selling, general and administrative expenses was
primarily due to lower compensation expenses as the result of operating actions taken in December of 2014 and lower
consulting expenses. The decrease in research, development and engineering expenses was primarily due to lower
compensation expenses as the result of operating actions taken in December of 2014. The decrease in equity, royalty and
interest income from investees was primarily due to lower equity earnings in China.
Reconciliation of Segment EBIT to Net Income Attributable to Cummins Inc.
The table below reconciles the segment information to the corresponding amounts in the Consolidated Statements of Income.
In millions
TOTAL SEGMENT EBIT
Non-segment EBIT (1)
TOTAL EBIT
Less: Interest expense
INCOME BEFORE INCOME TAXES
Less: Income tax expense
CONSOLIDATED NET INCOME
Years ended December 31,
2016
2015
2014
$
1,982
$
17
1,999
69
1,930
474
1,456
62
1,394
$
2,110
(20)
2,090
65
2,025
555
1,470
71
1,399
$
$
2,567
(69)
2,498
64
2,434
698
1,736
85
1,651
Less: Net income attributable to noncontrolling interest
NET INCOME ATTRIBUTABLE TO CUMMINS INC.
$
_______________________________________________
(1) Includes intersegment profit in inventory eliminations and unallocated corporate expenses. The year ended
December 31, 2015, included an $11 million corporate restructuring charge. There were no significant unallocated
corporate expenses for the years ended December 31, 2016 and 2014.
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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
Working capital (1)
Current ratio
Accounts and notes receivable, net
Days’ sales in receivables
Inventories
Inventory turnover
Accounts payable (principally trade)
Days' payable outstanding
Total debt
Total debt as a percent of total capital (2)
____________________________________
(1)
Working capital includes cash and cash equivalents.
December 31,
2016
December 31,
2015
$
$
$
$
$
3,382
1.78
3,025
61
2,675
4.7
1,854
51
1,856
$
$
$
$
$
4,144
2.09
2,820
55
2,707
4.9
1,706
48
1,639
20.6%
17.5%
(2)
The increase in our debt to capital ratio was due to higher total debt, as a result of the commercial paper program added in 2016, and a net
decrease in shareholders' equity.
Cash Flows
Cash and cash equivalents were impacted as follows:
In millions
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Net decrease in cash and cash equivalents
2016 vs. 2015
Years ended December 31,
Change
2016
2015
2014
2015 vs. 2014
$
$
$
1,935
(917)
(1,409)
(200)
(591) $
$
2,059
(918)
(1,644)
(87)
(590) $
2,266
(1,234)
(1,343)
(87)
(398) $
(124) $
1
235
(113)
(1) $
(207)
316
(301)
—
(192)
2016 vs. 2015
$
Net cash provided by operating activities decreased $124 million versus 2015, primarily due to the absence of the 2015
impairment of light-duty diesel assets of $211 million and a $123 million year over year impact related to restructuring,
partially offset by an increase in deferred income taxes of $158 million and higher loss contingency charges of $62 million
resulting in lower cash net income in 2016.
Net cash used in investing activities decreased $1 million versus 2015, primarily due to lower capital expenditures of $213
million and proceeds from the sale of equity investees of $60 million, partially offset by higher net investments in marketable
securities of $160 million and changes in cash flows from derivatives not designated as hedges of $110 million.
Net cash used in financing activities decreased $235 million versus 2015, primarily due to higher net borrowings of commercial
paper of $212 million, lower common stock repurchases of $122 million and higher proceeds from borrowings of $67 million,
partially offset by higher acquisitions of noncontrolling interests of $88 million and higher payments on borrowings and capital
lease obligations of $87 million.
The effect of exchange rate changes on cash and cash equivalents decreased $113 million versus 2015, primarily due to the
British pound, which decreased cash and cash equivalents by $112 million.
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2015 vs. 2014
Net cash provided by operating activities decreased $207 million versus 2014, primarily due to lower consolidated net income
of $266 million and unfavorable working capital fluctuations of $328 million, partially offset by the impact of the non-cash
impairment of light-duty diesel assets of $211 million. During 2015, the higher working capital requirements resulted in a cash
outflow of $260 million compared to a cash inflow of $68 million in 2014. This change of $328 million was primarily driven
by a decrease in accrued expenses and accounts payable, partially offset by a decrease in inventory and accounts and notes
receivable.
Net cash used in investing activities decreased $316 million versus 2014, primarily due to lower cash investment for the
acquisitions of businesses of $319 million.
Net cash used in financing activities increased $301 million versus 2014, primarily due to higher common stock repurchases of
$230 million and higher dividend payments of $110 million.
Sources of Liquidity
We generate significant ongoing cash flow. Cash provided by operations is our principal source of liquidity with $1.9 billion
provided in 2016.
At December 31, 2016, our sources of liquidity included:
In millions
Cash and cash equivalents
Marketable securities (1)
Total
Available credit capacity
Revolving credit facility (2)
International and other uncommitted
domestic credit facilities (3)
Total
U.S.
International
Primary location of
international balances
December 31, 2016
323
40
363
$
$
797 U.K., Singapore, China
220
India, China
1,017
$
$
$
1,120
260
1,380
$
$
1,538
128
____________________________________
(1) The majority of marketable securities could be liquidated into cash within a few days.
(2) The revolving credit facility is maintained primarily to provide backup liquidity for our commercial paper borrowings and general corporate purposes. At
December 31, 2016, we had $212 million of commercial paper outstanding, which effectively reduced the $1.75 billion available capacity under our
revolving credit facility to $1.54 billion.
(3) The available capacity is net of letters of credit.
Cash, Cash Equivalents and Marketable Securities
A significant portion of our cash flows is generated outside the U.S. The geographic location of our cash and marketable
securities aligns well with our ongoing investments. We manage our worldwide cash requirements considering available funds
among the many subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be
accessed. As a result, we do not anticipate any local liquidity restrictions to preclude us from funding our operating needs with
local resources.
If we distribute our foreign cash balances to the U.S. or to other foreign subsidiaries, we could be required to accrue and pay
U.S. taxes, for example, if we repatriated cash from certain foreign subsidiaries whose earnings we have asserted are
permanently reinvested outside of the U.S. Foreign earnings for which we assert permanent reinvestment outside the U.S.
consist primarily of earnings of our China and U.K. domiciled subsidiaries. At present, we do not foresee a need to repatriate
any earnings from these subsidiaries for which we have asserted permanent reinvestment. However, to help fund cash needs of
the U.S. or other international subsidiaries as they arise, we repatriate available cash from certain foreign subsidiaries whose
earnings are not permanently reinvested when it is cost effective to do so. Earnings generated after December 31, 2011, from
our China operations are considered permanently reinvested, while earnings generated prior to January 1, 2012, for which U.S.
deferred tax liabilities have been recorded, are expected to be repatriated in future years.
Debt Facilities and Other Sources of Liquidity
In February 2016, the Board of Directors authorized the issuance of up to $1.75 billion of unsecured short-term promissory
notes ("commercial paper") pursuant to a commercial paper program. The program will facilitate the private placement of
unsecured short-term debt through third party brokers. We intend to use the net proceeds from the commercial paper program
for general corporate purposes.
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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. See Note 9, "DEBT," to our
Consolidated Financial Statements for additional information. The credit agreement includes one financial covenant: a leverage
ratio. The required leverage ratio, which measures the sum of total debt plus securitization financing to consolidated earnings
before interest, taxes, depreciation and amortization (EBITDA) as of the last day of any fiscal quarter, for the four fiscal
quarters ended on such date may not exceed 3.5 to 1.0. At December 31, 2016, our leverage ratio was 0.75 to 1.0.
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.
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 million to $35 million over each of the next five years.
Uses of Cash
Share 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 November 2015, our Board of Directors authorized the acquisition of up to $1
billion of additional common stock upon the completion of the 2014 repurchase plan. In 2016, we made the following
purchases under the respective purchase programs:
In millions (except per share amounts)
For each quarter ended
July 2014, $1 billion repurchase program
April 3 (2)
November 2015, $1 billion repurchase program
April 3
July 3
October 2
December 31
Subtotal
Total
Shares
Purchased
Average Cost
Per Share
Total Cost of
Repurchases
Cash Paid for
Shares Not
Received
Remaining
Authorized
Capacity (1)
2.7
$
100.12
$
274
— $
—
2.2
1.8
0.4
0.2
4.6
7.3
$
105.50
$
109.79
126.13
130.70
110.29
$
106.48
$
229
192
50
33
504
778
$
$
$
100
(100)
—
—
—
—
671
579
529
496
___________________________________________________________
(1) The remaining authorized capacity under the 2015 Plan was calculated based on the cost to purchase the shares but excludes commission expenses in
accordance with the authorized Plan.
(2) Upon completion of the accelerated share repurchase in the second quarter of 2016, the shares purchased and average cost per share were updated based on
the final valuation.
In 2016, we entered into an accelerated share repurchase agreement with a third party financial institution to repurchase $500
million of our common stock under our previously announced share repurchase plans and received 4.7 million shares at an
average purchase price of $105.50 per share.
Dividends
Total dividends paid to common shareholders in 2016, 2015 and 2014 were $676 million, $622 million and $512 million,
respectively. Declaration and payment of dividends in the future depends upon our income and liquidity position, among other
factors, and is subject to declaration by our Board of Directors, who meet quarterly to consider our dividend payment. We
expect to fund dividend payments with cash from operations.
In July 2016, our Board of Directors authorized an increase to our quarterly dividend of 5.1 percent from $0.975 per share to
$1.025 per share. In July 2015, our Board of Directors authorized an increase to our quarterly dividend of 25 percent from
$0.78 per share to $0.975 per share. In July 2014, the Board of Directors authorized a 25 percent increase to our quarterly
dividend on our common stock from $0.625 per share to $0.78 per share. Cash dividends per share paid to common
shareholders for the last three years were as follows:
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Table of Contents
First quarter
Second quarter
Third quarter
Fourth quarter
Total
Quarterly Dividends
2016
2015
2014
$
$
0.975
0.975
1.025
1.025
4.00
$
$
0.78
0.78
0.975
0.975
3.51
$
$
0.625
0.625
0.78
0.78
2.81
Capital Expenditures
Capital expenditures and spending on internal use software were $594 million in 2016, compared to $799 million in 2015. 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
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 2016, the investment return on our U.S.
pension trust was 7.2 percent while our U.K. pension trust return was 25.5 percent. Approximately 78 percent of our pension
plan assets are held in highly liquid investments such as fixed income and equity securities. The remaining 22 percent of our
plan assets are held in less liquid, but market valued investments, including real estate, private equity, venture capital,
opportunistic credit and insurance contracts.
We sponsor funded and unfunded domestic and foreign defined benefit pension plans. Contributions to these plans were as
follows:
In millions
Defined benefit pension plans
Voluntary contribution
Mandatory contribution
Defined benefit pension contributions
Defined contribution pension plans
Years ended December 31,
2016
2015
2014
$
$
133
$
82
$
1
134
108
190
68
$
74
$
111
94
205
73
We anticipate making total contributions of approximately $134 million to our defined benefit pension plans in 2017. Expected
contributions to our defined benefit pension plans in 2017 will meet or exceed the current funding requirements.
Restructuring Actions
In 2015, we executed worldwide work force restructuring actions primarily in the form of professional voluntary and
involuntary employee separation programs in response to lower demand for our products in the U.S. and key markets around
the world. We incurred a charge of $90 million ($61 million after-tax) for the headcount reductions, with $86 million expected
to be settled in cash. In 2016, we paid $58 million and as of December 31, 2016, substantially all terminations were
complete. See Note 20, "RESTRUCTURING ACTIONS AND OTHER CHARGES," to the Consolidated Financial Statements
for additional information.
Acquisitions
During 2016, we paid $109 million to acquire the remaining interest in the last two partially owned North American
distributors, including the related debt retirements, and recognized a total gain of $15 million on the fair value adjustment
resulting from the acquisition of the controlling interest in the previously unconsolidated entity. See Note 18,
"ACQUISITIONS," to the Consolidated Financial Statements for additional information.
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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.
Credit Rating Agency (1)
Standard & Poor’s Rating Services
Fitch Ratings
Moody’s Investors Service, Inc.
Long-Term
Short-Term
Senior Debt
Rating
A+
A
A2
Debt Rating
A1
F1
P1
Outlook
Stable
Stable
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, capital expenditures, dividend payments, projected pension
obligations and debt service obligations. We continue to generate cash from operations in the U.S. and maintain access to our
revolving credit facility as noted above.
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Table of Contents
CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
A summary of our contractual obligations and commercial commitments, at December 31, 2016, are as follows:
Contractual Cash Obligations
In millions
Loans payable
Long-term debt and capital lease obligations (1)
Operating leases
Capital expenditures
Purchase commitments for inventory
Other purchase commitments
Other postretirement benefits
$
2017
2020-2021
After 2021
Total
Payments Due by Period
2018-2019
$
41
136
141
254
593
254
35
1,454
— $
255
182
7
—
36
65
545
$
— $
174
103
—
—
2
59
338
$
— $
2,858
93
—
—
1
126
3,078
$
41
3,423
519
261
593
293
285
5,415
Total
___________________________________________________________
(1) Includes principal payments and expected interest payments based on the terms of the obligations.
$
$
The contractual obligations reported above exclude our unrecognized tax benefits of $59 million as of December 31, 2016. We
are not able to reasonably estimate the period in which cash outflows relating to uncertain tax contingencies could occur. See
Note 3, "INCOME TAXES," to the Consolidated Financial Statements for additional information.
Our other commercial commitments at December 31, 2016, are as follows:
Other Commercial Commitments
In millions
International and other domestic letters of credit
Performance and excise bonds
Guarantees, indemnifications and other commitments
Total
Payments Due by Period
2017
2018-2019
2020-2021
After 2021
Total
$
$
77
69
9
$
57
$
3
2
155
$
62
$
4
12
4
20
$
$
$
2
1
9
12
$
140
85
24
249
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
A summary of our significant accounting policies is included in Note 1, "SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES," of our Consolidated Financial Statements which discusses accounting policies that we have selected from
acceptable alternatives.
Our Consolidated Financial Statements are prepared in accordance with generally accepted accounting principles in the U.S.
(GAAP) which often requires 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 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.
We believe our critical accounting estimates include those addressing the estimation of liabilities for warranty programs,
accounting for income taxes and pension benefits.
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Warranty Programs
We estimate and record a liability for base warranty programs at the time our products are sold. Our estimates are based on
historical experience and reflect management's best estimates of expected costs at the time products are sold and subsequent
adjustment to those expected costs when actual costs differ. As a result of the uncertainty surrounding the nature and frequency
of product recall programs, the liability for such programs is recorded when we commit to a recall action or when a recall
becomes probable and estimable, which generally occurs when it is announced. Our warranty liability is generally affected by
component failure rates, repair costs and the point of failure within the product life cycle. Future events and circumstances
related to these factors could materially change our estimates and require adjustments to our liability. New product launches
require a greater use of judgment in developing estimates until historical experience becomes available. Product specific
experience is typically available four or five quarters after product launch, with a clear experience trend evident eight quarters
after launch. We generally record warranty expense for new products upon shipment using a preceding product's warranty
history and a multiplicative factor based upon preceding similar product experience and new product assessment until sufficient
new product data is available for warranty estimation. We then use a blend of actual new product experience and preceding
product historical experience for several subsequent quarters, and new product specific experience thereafter. Note 10,
"PRODUCT WARRANTY LIABILITY," to our Consolidated Financial Statements contains a summary of the activity in our
warranty liability account for 2016 and 2015 including adjustments to pre-existing warranties.
Accounting for Income Taxes
We determine our income tax expense using the asset and liability method. Under this method, deferred tax assets and liabilities
are recognized for the future tax effects of temporary differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Future tax benefits of net operating loss and credit carryforwards are also
recognized as deferred tax assets. We evaluate the recoverability of our deferred tax assets each quarter by assessing the
likelihood of future profitability and available tax planning strategies that could be implemented to realize our net deferred tax
assets. At December 31, 2016, we recorded net deferred tax assets of $344 million. These assets included $313 million for the
value of net operating loss and credit carryforwards. A valuation allowance of $307 million was recorded to reduce the tax
assets to the net value management believed was more likely than not to be realized. In the event our operating performance
deteriorates, future assessments could conclude that a larger valuation allowance will be needed to further reduce the deferred
tax assets. In addition, we operate within multiple taxing jurisdictions and are subject to tax audits in these jurisdictions. These
audits can involve complex issues, which may require an extended period of time to resolve. We accrue for the estimated
additional tax and interest that may result from tax authorities disputing uncertain tax positions. We have taken and we believe
we have made adequate provision for income taxes for all years that are subject to audit based upon the latest information
available. A more complete description of our income taxes and the future benefits of our net operating loss and credit
carryforwards is disclosed in Note 3, "INCOME TAXES," to our Consolidated Financial Statements.
Pension Benefits
We sponsor a number of pension plans primarily in the U.S. and the U.K. and to a lesser degree in various other countries. In
the U.S. and the U.K., we have several major defined benefit plans that are separately funded. We account for our pension
programs in accordance with employers' accounting for defined benefit pension and other postretirement plans under GAAP.
GAAP requires that amounts recognized in financial statements be determined using an actuarial basis. As a result, our pension
benefit programs are based on a number of statistical and judgmental assumptions that attempt to anticipate future events and
are used in calculating the expense and liability related to our plans each year at December 31. These assumptions include
discount rates used to value liabilities, assumed rates of return on plan assets, future compensation increases, employee
turnover rates, actuarial assumptions relating to retirement age, mortality rates and participant withdrawals. The actuarial
assumptions we use may differ significantly from actual results due to changing economic conditions, participant life span and
withdrawal rates. These differences may result in a material impact to the amount of net periodic pension cost to be recorded in
our Consolidated Financial Statements in the future.
The expected long-term return on plan assets is used in calculating the net periodic pension cost. We considered several factors
in developing our expected rate of return on plan assets. The long-term rate of return considers historical returns and expected
returns on current and projected asset allocations and is generally applied to a five-year average market value of return.
Projected returns are based primarily on broad, publicly traded fixed income and equity indices and forward-looking estimates
of active portfolio and investment management. At December 31, 2016, based upon our target asset allocations, it is anticipated
that our U.S. investment policy will generate an average annual return over the 10-year projection period equal to or in excess
of 7.25 percent approximately 35 percent of the time while returns of 8.0 percent or greater are anticipated 26 percent of the
time, including the additional positive returns expected from active investment management. Despite the 2016 one-year return
of 7.2 percent, our plan assets have averaged 10.0 percent returns since 2010, and resulted in approximately $271 million of
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actuarial gains in accumulated other comprehensive income in the same period. Based on the historical returns and forward-
looking return expectations, we believe an investment return assumption of 7.25 percent per year in 2017 for U.S. pension
assets is reasonable.
The methodology used to determine the rate of return on pension plan assets in the U.K. was based on establishing an equity-
risk premium over current long-term bond yields adjusted based on target asset allocations. At December 31, 2016, based upon
our target asset allocations, it is anticipated that our U.K. investment policy will generate an average annual return over the 20-
year projection period equal to or in excess of 3.9 percent approximately 50 percent of the time while returns of 4.6 percent or
greater are anticipated 25 percent of the time. We expect additional positive returns from active investment management. The
one-year return for our U.K. plan was 25.5 percent for 2016, and similar to our U.S. plan, the strong returns since 2010 have
resulted in approximately $544 million of actuarial gains in accumulated other comprehensive income. Our strategy with
respect to our investments in pension plan assets is to be invested with a long-term outlook. Therefore, the risk and return
balance of our asset portfolio should reflect a long-term horizon. Based on the historical returns and forward-looking return
expectations, we believe an investment return assumption of 4.5 percent in 2017 for U.K. pension assets is reasonable. Our
pension plan asset allocations at December 31, 2016 and 2015 and target allocation for 2017 are as follows:
Investment description
Fixed income
Equity securities
Real estate/other
Total
U.S. Plans
U.K. Plans
Target Allocation
Percentage of Plan
Assets at December 31,
Target Allocation
Percentage of Plan
Assets at December 31,
2017
2015
2016
57.8%
65.9%
57.0%
29.0%
21.5%
24.0%
13.2%
19.0%
12.6%
100.0% 100.0% 100.0%
2017
2015
2016
60.7%
53.0%
64.0%
30.4%
39.0%
23.0%
8.9%
13.0%
8.0%
100.0% 100.0% 100.0%
The differences between the actual return on plan assets and expected long-term return on plan assets are recognized in the
asset value used to calculate net periodic cost over five years. The table below sets forth the expected return assumptions used
to develop our pension cost for the period 2014-2016 and our expected rate of return for 2017.
U.S. plans
U.K. plans
Long-term Expected Return Assumptions
2017
7.25%
4.50%
2016
7.50%
4.70%
2015
7.50%
5.80%
2014
7.50%
5.80%
A lower expected rate of return will increase our net periodic pension cost and reduce profitability.
GAAP for pensions offers various acceptable alternatives to account for the differences that eventually arise between the
estimates used in the actuarial valuations and the actual results. It is acceptable to delay or immediately recognize these
differences. Under the delayed recognition alternative, changes in pension obligation (including those resulting from plan
amendments) and changes in the value of assets set aside to meet those obligations are not recognized in net periodic pension
cost as they occur but are recognized initially in accumulated other comprehensive loss and subsequently amortized as
components of net periodic pension cost systematically and gradually over future periods. In addition to this approach, GAAP
also allows immediate recognition of actuarial gains or losses. Immediate recognition introduces volatility in financial results.
We have chosen to delay recognition and amortize actuarial differences over future periods. If we adopted the immediate
recognition approach, we would record a loss of $951 million ($634 million after-tax) from cumulative actuarial net losses for
our U.S. and U.K. pension plans.
The difference between the expected return and the actual return on plan assets is deferred from recognition in our results of
operations and, under certain circumstances such as when the difference exceeds 10 percent of the market value of plan assets
or the projected benefit obligation, amortized over future years of service. This is also true of changes to actuarial assumptions.
Under GAAP, the actuarial gains and losses are recognized and recorded in accumulated other comprehensive loss. At
December 31, 2016, we had net pension actuarial losses of $770 million and $172 million for the U.S. and U.K. pension plans,
respectively. As these amounts exceed 10 percent of their respective plan assets, the excess is amortized over the average
remaining service lives of participating employees. Net actuarial losses decreased our shareholders' equity by $65 million after-
tax in 2016. The loss is due to lower discount rates in the U.S. and U.K. and unfavorable foreign currency, partially offset by
strong asset performance in the U.K.
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The table below sets forth the net periodic pension cost for the years ended December 31 and our expected cost for 2017.
In millions
Net periodic pension cost
2017
2016
2015
2014
$
83
$
42
$
63
$
57
We expect 2017 net periodic pension cost to increase compared to 2016, primarily due to onboarding a significant portion of
our newly acquired North American distributors to Cummins pension benefits, a lower expected rate of return in the U.S. and
U.K. and lower discount rates in the U.S. and U.K. The decrease in net periodic pension cost in 2016 compared to 2015 was
due to reduced loss amortizations in the U.S. and U.K. and higher discount rates in the U.S. and U.K., partially offset by lower
expected asset returns in the U.K. as we de-risked plan trust assets. The increase in net periodic pension cost in 2015 compared
to 2014 was due to lower discount rates in the U.S. and U.K. and unfavorable mortality demographics in the U.S. Another key
assumption used in the development of the net periodic pension cost is the discount rate. The weighted average discount rates
used to develop our net periodic pension cost are set forth in the table below.
Discount Rates
U.S. plans
U.K. plans
2016
2017
4.12% 4.47% 4.07%
2.70% 3.95% 3.80%
2015
2014
4.83%
4.60%
Changes in the discount rate assumptions will impact the interest cost component of the net periodic pension cost calculation.
The discount rate enables us to state expected future cash payments for benefits as a present value on the measurement date.
The guidelines for setting this rate are discussed in GAAP which suggests the use of a high-quality corporate bond rate. We
used bond information provided by Moody's Investor Services, Inc. and Standard & Poor's Rating Services. All bonds used to
develop our hypothetical portfolio in the U.S. and U.K. were deemed high-quality, non-callable bonds (Aa or better) at
December 31, 2016, by at least one of the bond rating agencies.
Our model called for projected payments until near extinction for the U.S. and the U.K. For both countries, our model matches
the present value of the plan's projected benefit payments to the market value of the theoretical settlement bond portfolio. A
single equivalent discount rate is determined to align the present value of the required cash flow with the value of the bond
portfolio. The resulting discount rate is reflective of both the current interest rate environment and the plan's distinct liability
characteristics.
The table below sets forth the estimated impact on our 2017 net periodic pension cost relative to a change in the discount rate
and a change in the expected rate of return on plan assets.
In millions
Discount rate used to value liabilities
0.25 percent increase
0.25 percent decrease
Expected rate of return on assets
$
1 percent increase
1 percent decrease
Impact on Pension Cost
Increase/(Decrease)
(15)
16
(43)
43
The above sensitivities reflect the impact of changing one assumption at a time. A higher discount rate decreases the plan
obligations and decreases our net periodic pension cost. A lower discount rate increases the plan obligations and increases our
net periodic pension cost. It should be noted that economic factors and conditions often affect multiple assumptions
simultaneously and the effects of changes in key assumptions are not necessarily linear. Note 8, "PENSION AND OTHER
POSTRETIREMENT BENEFITS," to our Consolidated Financial Statements provides a summary of our pension benefit plan
activity, the funded status of our plans and the amounts recognized in our Consolidated Financial Statements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In August 2016, the Financial Accounting Standards Board (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
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an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the
fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same
period. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case it
would be required to apply the amendments prospectively as of the earliest date practicable. We are in the process of evaluating
the impact this standard will have on our Consolidated Statements of Cash Flows.
In June 2016, the FASB amended its standards related to the accounting for credit losses on financial instruments. This
amendment introduces new guidance for accounting for credit losses on instruments including trade receivables and held-to-
maturity debt securities. The new rules are effective for annual and interim periods beginning after December 15, 2019. Early
adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
We are in the process of evaluating the impact the amendment will have on our Consolidated Financial Statements.
In March 2016, the FASB amended its standards related to the accounting for stock compensation. This amendment addresses
several aspects of the accounting for share-based payment transactions that could impact us including, but not limited to,
recognition of excess tax benefits or deficiencies in the income statement each period and classification of the excess tax
benefits or deficiencies as operating activities in the cash flow statement. The new standard is effective for annual periods
beginning after December 15, 2016. The adoption of this standard could result in future volatility in our income tax expense
since all excess tax benefits and deficiencies are now recorded in the income statement. We are unable to estimate this impact
since the amount of excess benefits and deficiencies are dependent on our stock price at the time a stock award vests or is
exercised.
In February 2016, the FASB amended its standards related to the accounting for leases. Under the new standard, lessees will
now be required to recognize substantially all leases on the balance sheet as both a right-of-use-asset and a liability. The
standard will continue to have two types of leases for income statement recognition purposes: operating leases and finance
leases. Operating leases will result in the recognition of a single lease expense on a straight-line basis over the lease term
similar to the treatment for operating leases under today's standards. Finance leases will result in an accelerated expense similar
to the accounting for capital leases under today's standards. The determination of a lease classification as operating or finance
will be done in a manner similar to today's standard. The new standard also contains amended guidance regarding the
identification of embedded leases in service contracts and the identification of lease and non-lease components in an
arrangement. The new standard is effective on January 1, 2019, with early adoption permitted. We are still evaluating the
impact the standard could have on our Consolidated Financial Statements; however, while we have not yet quantified the
amount, we do expect the standard will have a material impact on our Consolidated Balance Sheets due to the recognition of
additional assets and liabilities for operating leases.
In January 2016, the FASB amended its standards related to the accounting for certain financial instruments. This amendment
addresses certain aspects of recognition, measurement, presentation and disclosure. The new rules will become effective for
annual and interim periods beginning after December 15, 2017. Early adoption is not permitted. We are in the process of
evaluating the impact the amendment will have on our Consolidated Financial Statements.
In May 2014, the FASB amended its standards related to revenue recognition. This amendment replaces all existing revenue
recognition guidance and provides a single, comprehensive revenue recognition model for all contracts with customers. The
standard contains principles that we will apply to determine the measurement of revenue and timing of when it is recognized.
The underlying principle is that we will recognize revenue in a manner that depicts the transfer of goods or services to
customers at an amount that we expect to be entitled to in exchange for those goods or services. The guidance provides a five-
step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization
of certain contract costs, consideration of the time value of money in the transaction price and allowing estimates of variable
consideration to be recognized before contingencies are resolved in certain circumstances. The amendment also requires
additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer
contracts, including significant judgments and changes in those judgments and assets recognized from costs incurred to fulfill a
contract. The standard allows either full or modified retrospective adoption effective for annual and interim periods beginning
January 1, 2018. We are in the process of evaluating the impact the amendment will have on our Consolidated Financial
Statements. We expect to adopt the standard using the modified retrospective approach. While we have not yet completed our
evaluation process, we have identified that a change will be required related to our accounting for remanufactured product sales
that include an exchange of the used product, referred to as core. Revenue is not currently recognized related to the core
component unless the used product is not returned. Under the new standard, the transaction will be accounted for as a gross sale
and a purchase of inventory. As a result the exchange will increase both sales and cost of sales, in equal amounts, related to the
used core. This will not impact gross margin dollars, but will impact the gross margin percentage. We are still quantifying the
amount of this change. We have also identified transactions where revenue recognition is currently limited to the amount of
billings not contingent on our future performance. With the allocation provisions of the new model, we expect to accelerate the
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timing of revenue recognition for amounts related to satisfied performance obligations that would have been delayed under the
current guidance. We do not expect the impact of this change to be material, but we are still quantifying the impact.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to financial risk resulting from volatility in foreign exchange rates, interest rates and commodity prices. This
risk is closely monitored and managed through the use of financial derivative instruments including foreign currency forward
contracts, interest rate swaps, commodity zero-cost collars and physical forward contracts. These instruments, as further
described below, are accounted for as cash flow or fair value hedges or as economic hedges not designated as hedges for
accounting purposes. Financial derivatives are used expressly for hedging purposes and under no circumstances are they used
for speculative purposes. When material, we adjust the estimated fair value of our derivative contracts for counterparty or our
credit risk. None of our derivative instruments are subject to collateral requirements. Substantially all of our derivative
contracts are subject to master netting arrangements which provide us with the option to settle certain contracts on a net basis
when they settle on the same day with the same currency. In addition, these arrangements provide for a net settlement of all
contracts with a given counterparty in the event that the arrangement is terminated due to the occurrence of default or a
termination event.
We also enter into physical forward contracts with certain suppliers to purchase minimum volumes of commodities at
contractually stated prices for various periods. These arrangements, as further described below, enable us to fix the prices of
portions of our normal purchases of these commodities, which otherwise are subject to market volatility.
The following describes our risk exposures and provides the results of a sensitivity analysis performed at December 31, 2016.
The sensitivity analysis assumes instantaneous, parallel shifts in foreign currency exchange rates and commodity prices.
Foreign Exchange Rate Risk
As a result of our international business presence, we are exposed to foreign currency exchange rate risks. We transact business
in foreign currencies and, as a result, our income experiences some volatility related to movements in foreign currency
exchange rates. To help manage our exposure to exchange rate volatility, we use foreign currency forward contracts on a
regular basis to hedge forecasted intercompany and third-party sales and purchases denominated in non-functional
currencies. Our internal policy allows for managing anticipated foreign currency cash flows for up to 18 months. These foreign
currency forward contracts are designated and qualify as foreign currency cash flow hedges under GAAP. For the years ended
December 31, 2016 and 2015, there were no circumstances that would have resulted in the discontinuance of a foreign currency
cash flow hedge.
To minimize the income volatility resulting from the remeasurement of net monetary assets and payables denominated in a
currency other than the functional currency, we enter into foreign currency forward contracts, which are considered economic
hedges. The objective is to offset the gain or loss from remeasurement with the gain or loss from the fair market valuation of
the forward contract. These derivative instruments are not designated as hedges under GAAP.
At December 31, 2016, the potential gain or loss in the fair value of our outstanding foreign currency contracts, assuming a
hypothetical 10 percent fluctuation in the currencies of such contracts, would be approximately $63 million. The sensitivity
analysis of the effects of changes in foreign currency exchange rates assumes the notional value to remain constant for the next
12 months. The analysis ignores the impact of foreign exchange movements on our competitive position and potential changes
in sales levels. Any change in the value of the contracts, real or hypothetical, would be significantly offset by an inverse change
in the value of the underlying hedged items.
Interest Rate Risk
We are exposed to market risk from fluctuations in interest rates. We manage our exposure to interest rate fluctuations through
the use of interest rate swaps. The objective of the swaps is to more effectively balance our borrowing costs and interest rate
risk.
In February 2014, we settled our November 2005 interest rate swap which previously converted our $250 million debt issue,
due in 2028, from a fixed rate of 7.125 percent to a floating rate based on the LIBOR plus a spread. Also, in February 2014, we
entered into a series of interest rate swaps to effectively convert our September 2013, $500 million debt issue, due in 2023,
from a fixed rate of 3.65 percent to a floating rate equal to the one-month LIBOR plus a spread. The terms of the swaps mirror
those of the debt, with interest paid semi-annually. The swaps were designated, and will be accounted for, as fair value hedges
under GAAP. The gain or loss on these derivative instruments, as well as the offsetting gain or loss on the hedged item
attributable to the hedged risk, are recognized in current income as “Interest expense.” The net swap settlements that accrue
each period are also reported in interest expense.
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The following table summarizes these gains and losses for the years presented below:
In millions
2016
2015
2014
Years ended December 31,
Income Statement Classification
Interest expense (1)
___________________________________________________________
(1) The difference between the gain/(loss) on swaps and borrowings represents hedge ineffectiveness.
(8) $
12
$
6
$
Gain/(Loss) on
Swaps
Gain/(Loss) on
Borrowings
Gain/(Loss) on
Swaps
Gain/(Loss) on
Borrowings
Gain/(Loss) on
Swaps
Gain/(Loss) on
Borrowings
$
(2) $
23
$
(19)
Commodity Price Risk
We are exposed to fluctuations in commodity prices due to contractual agreements with component suppliers. In order to
protect ourselves against future price volatility and, consequently, fluctuations in gross margins, we periodically enter into
commodity zero-cost collar contracts with designated banks to fix the cost of certain raw material purchases with the objective
of minimizing changes in inventory cost due to market price fluctuations. These commodity zero-cost collar contracts that
represent an economic hedge, but are not designated for hedge accounting and are marked to market through earnings. Our
internal policy allows for managing our cash flow hedges for up to three years.
At December 31, 2016, the potential gain or loss related to the outstanding commodity zero-cost collar contracts, assuming a
hypothetical 10 percent fluctuation in the price of such commodities, was less than $1 million. The sensitivity analysis of the
effects of changes in commodity prices assumes the notional value to remain constant for the next 12 months. The analysis
ignores the impact of commodity price movements on our competitive position and potential changes in sales levels. Any
change in the value of the zero-cost collar contracts, real or hypothetical, would be significantly offset by an inverse change in
the value of the underlying hedged items.
We also limit our exposure to commodity price risk by entering into purchasing arrangements to fix the price of certain
volumes of platinum and palladium expected to be used in our products. During 2014, we began entering into physical forward
contracts with suppliers of platinum and palladium to purchase some volumes of the commodities at contractually stated prices
for various periods, generally not exceeding one year. These arrangements enable us to fix the prices of a portion of our
purchases of these commodities, which otherwise are subject to market volatility.
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ITEM 8. Financial Statements and Supplementary Data
Index to Financial Statements
• Management's Report to Shareholders
• Report of Independent Registered Public Accounting Firm
• Consolidated Statements of Income for the years ended December 31, 2016, 2015 and 2014
• Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015 and 2014
• Consolidated Balance Sheets at December 31, 2016 and 2015
• Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
• Consolidated Statements of Changes in Equity for the years ended December 31, 2016, 2015 and 2014
• Notes to Consolidated Financial Statements
INVENTORIES
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS IN EQUITY INVESTEES
NOTE 2
NOTE 3
INCOME TAXES
NOTE 4 MARKETABLE SECURITIES
NOTE 5
NOTE 6 PROPERTY, PLANT AND EQUIPMENT
NOTE 7 GOODWILL AND OTHER INTANGIBLE ASSETS
NOTE 8 PENSION AND OTHER POSTRETIREMENT BENEFITS
NOTE 9 DEBT
NOTE 10 PRODUCT WARRANTY LIABILITY
NOTE 11 OTHER LIABILITIES AND DEFERRED REVENUE
NOTE 12 COMMITMENTS AND CONTINGENCIES
NOTE 13 SHAREHOLDERS' EQUITY
NOTE 14 ACCUMULATED OTHER COMPREHENSIVE LOSS
NOTE 15 STOCK INCENTIVE AND STOCK OPTION PLANS
NOTE 16 NONCONTROLLING INTERESTS
NOTE 17 EARNINGS PER SHARE
NOTE 18 ACQUISITIONS
NOTE 19
NOTE 20
NOTE 21 OPERATING SEGMENTS
IMPAIRMENT OF LIGHT-DUTY DIESEL ASSETS
RESTRUCTURING ACTIONS AND OTHER CHARGES
•
Selected Quarterly Financial Data (Unaudited)
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Management's Report on Financial Statements and Practices
MANAGEMENT'S REPORT TO SHAREHOLDERS
The accompanying Consolidated Financial Statements of Cummins Inc. were prepared by management, which is responsible
for their integrity and objectivity. The statements were prepared in accordance with generally accepted accounting principles
and include amounts that are based on management's best judgments and estimates. The other financial information included in
the annual report is consistent with that in the financial statements.
Management also recognizes its responsibility for conducting our affairs according to the highest standards of personal and
corporate conduct. This responsibility is characterized and reflected in key policy statements issued from time to time
regarding, among other things, conduct of its business activities within the laws of the host countries in which we operate,
within The Foreign Corrupt Practices Act and potentially conflicting interests of its employees. We maintain a systematic
program to assess compliance with these policies.
To comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, we designed and implemented a structured
and comprehensive compliance process to evaluate our internal control over financial reporting across the enterprise.
Management's Report on Internal Control Over Financial Reporting
The management of Cummins Inc. is responsible for establishing and maintaining adequate internal control over financial
reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and preparation of our Consolidated Financial Statements for external purposes in accordance
with accounting principles generally accepted in the United States of America.
Management assessed the effectiveness of our internal control over financial reporting and concluded it was effective as of
December 31, 2016. In making its assessment, management utilized the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control—Integrated Framework (2013).
The effectiveness of our internal control over financial reporting as of December 31, 2016, has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Officer Certifications
Please refer to Exhibits 31(a) and 31(b) attached to this report for certifications required under Section 302 of the Sarbanes-
Oxley Act of 2002.
/s/ N. THOMAS LINEBARGER
Chairman and Chief Executive Officer
/s/ PATRICK J. WARD
Vice President and Chief Financial Officer
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Cummins Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income,
comprehensive income, cash flows, and changes in equity present fairly, in all material respects, the financial position of
Cummins Inc. and its subsidiaries at December 31, 2016 and 2015, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in
the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's
management is responsible for these financial statements, for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
“Management's Report on Internal Control over Financial Reporting.” Our responsibility is to express opinions on these
financial statements and on the Company's internal control over financial reporting based on our integrated audits. We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal control over financial reporting was maintained in
all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Indianapolis, Indiana
February 13, 2017
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CUMMINS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
In millions, except per share amounts
NET SALES (a)
Cost of sales
GROSS MARGIN
OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses
Research, development and engineering expenses
Equity, royalty and interest income from investees (Note 2)
Loss contingency charges (Note 12)
Impairment of light-duty diesel assets (Note 19)
Restructuring actions and other charges (Note 20)
Other operating expense, net
OPERATING INCOME
Interest income
Interest expense (Note 9)
Other income, net
INCOME BEFORE INCOME TAXES
Income tax expense (Note 3)
CONSOLIDATED NET INCOME
Less: Net income attributable to noncontrolling interests
NET INCOME ATTRIBUTABLE TO CUMMINS INC.
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC. (Note 17)
Basic
Diluted
Years ended December 31,
2016
$ 17,509
13,057
4,452
2015
$ 19,110
14,163
4,947
2014
$ 19,221
14,360
4,861
2,046
636
301
138
—
—
(5)
1,928
23
69
48
1,930
474
1,456
62
1,394
8.25
8.23
$
$
$
2,092
735
315
60
211
90
(17)
2,057
24
65
9
2,025
555
1,470
71
1,399
7.86
7.84
$
$
$
2,095
754
370
—
—
—
(17)
2,365
23
64
110
2,434
698
1,736
85
1,651
9.04
9.02
$
$
$
____________________________________
(a)
Includes sales to nonconsolidated equity investees of $1,028 million, $1,209 million and $2,063 million for the years ended December 31, 2016, 2015 and
2014, respectively.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
In millions
CONSOLIDATED NET INCOME
Other comprehensive (loss) income, net of tax (Note 14)
Foreign currency translation adjustments
Unrealized (loss) gain on derivatives
Change in pension and other postretirement defined benefit plans
Unrealized gain (loss) on marketable securities
Total other comprehensive loss, net of tax
COMPREHENSIVE INCOME
Less: Comprehensive income attributable to noncontrolling interests
COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC.
Years ended December 31,
2016
2015
2014
$
1,456
$
1,470
$
1,736
(448)
(12)
(31)
1
(490)
966
45
(305)
6
15
(1)
(285)
1,185
56
(234)
(1)
(58)
(12)
(305)
1,431
74
$
921
$
1,129
$
1,357
The accompanying notes are an integral part of our Consolidated Financial Statements.
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CUMMINS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
In millions, except par value
ASSETS
Current assets
Cash and cash equivalents
Marketable securities (Note 4)
Total cash, cash equivalents and marketable securities
Accounts and notes receivable, net
Trade and other
Nonconsolidated equity investees
Inventories (Note 5)
Prepaid expenses and other current assets
Total current assets
Long-term assets
Property, plant and equipment, net (Note 6)
Investments and advances related to equity method investees (Note 2)
Goodwill (Note 7)
Other intangible assets, net (Note 7)
Pension assets (Note 8)
Other assets
Total assets
LIABILITIES
Current liabilities
Accounts payable (principally trade)
Loans payable (Note 9)
Commercial paper (Note 9)
Accrued compensation, benefits and retirement costs
Current portion of accrued product warranty (Note 10)
Current portion of deferred revenue
Other accrued expenses
Current maturities of long-term debt (Note 9)
Total current liabilities
Long-term liabilities
Long-term debt (Note 9)
Postretirement benefits other than pensions (Note 8)
Pensions (Note 8)
Other liabilities and deferred revenue (Note 11)
Total liabilities
Commitments and contingencies (Note 12)
EQUITY
Cummins Inc. shareholders’ equity (Note 13)
Common stock, $2.50 par value, 500 shares authorized, 222.4 and 222.4 shares issued
Retained earnings
Treasury stock, at cost, 54.2 and 47.2 shares
Common stock held by employee benefits trust, at cost, 0.7 and 0.9 shares
Accumulated other comprehensive loss (Note 14)
Total Cummins Inc. shareholders’ equity
Noncontrolling interests (Note 16)
Total equity
Total liabilities and equity
December 31,
2016
2015
$
$
$
$
$
$
$
1,120
260
1,380
2,803
222
2,675
627
7,707
3,800
946
480
332
731
1,015
15,011
1,854
41
212
412
333
468
970
35
4,325
1,568
329
326
1,289
7,837
2,153
11,040
(4,489)
(8)
(1,821)
6,875
299
7,174
15,011
$
$
$
$
$
$
$
1,711
100
1,811
2,640
180
2,707
609
7,947
3,745
975
482
328
735
922
15,134
1,706
24
—
409
359
403
863
39
3,803
1,576
349
298
1,358
7,384
2,178
10,322
(3,735)
(11)
(1,348)
7,406
344
7,750
15,134
The accompanying notes are an integral part of our Consolidated Financial Statements.
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CUMMINS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
In millions
CASH FLOWS FROM OPERATING ACTIVITIES
Years ended December 31,
2016
2015
2014
Consolidated net income
Adjustments to reconcile consolidated net income to net cash provided by operating activities
$ 1,456
$ 1,470
$ 1,736
Loss contingency charges, net of payments (Note 12)
Depreciation and amortization
Gains on fair value adjustment for consolidated investees (Note 18)
Deferred income taxes (Note 3)
Equity in income of investees, net of dividends (Note 2)
Pension contributions in excess of expense (Note 8)
Other post-retirement benefits payments in excess of expense (Note 8)
Stock-based compensation expense (Note 15)
Impairment of light-duty diesel assets (Note 19)
Restructuring charges and other actions, net of cash payments (Note 20)
Translation and hedging activities
Changes in current assets and liabilities, net of acquisitions
Accounts and notes receivable
Inventories
Other current assets
Accounts payable
Accrued expenses
Changes in other liabilities and deferred revenue
Other, net
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures
Investments in internal use software
Investments in and advances to equity investees
Acquisitions of businesses, net of cash acquired (Note 18)
Investments in marketable securities—acquisitions (Note 4)
Investments in marketable securities—liquidations (Note 4)
Proceeds from sale of equity investees (Note 2)
Cash flows from derivatives not designated as hedges
Other, net
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings
Net borrowings of commercial paper (Note 9)
Payments on borrowings and capital lease obligations
Net borrowings (payments) under short-term credit agreements
Distributions to noncontrolling interests
Dividend payments on common stock (Note 13)
Repurchases of common stock (Note 13)
Acquisitions of noncontrolling interests (Note 18)
Other, net
Net cash used in financing activities
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
CASH AND CASH EQUIVALENTS AT END OF PERIOD
122
530
(15)
50
(46)
(92)
(25)
32
—
(59)
(55)
(265)
(4)
14
184
(195)
200
103
1,935
(531)
(63)
(41)
(94)
(478)
306
60
(102)
26
(917)
60
514
(18)
(108)
(36)
(127)
(23)
24
211
64
26
103
150
(151)
(136)
(226)
292
(30)
2,059
(744)
(55)
(7)
(117)
(282)
270
—
8
9
(918)
—
455
(73)
31
(100)
(148)
(28)
36
—
—
(13)
(89)
(256)
1
244
168
282
20
2,266
(743)
(55)
(60)
(436)
(275)
336
4
(14)
9
(1,234)
111
212
(163)
19
(65)
(676)
(778)
(98)
29
(1,409)
(200)
(591)
1,711
$ 1,120
44
—
(76)
(41)
(49)
(622)
(900)
(10)
10
(1,644)
(87)
(590)
2,301
$ 1,711
55
—
(94)
(40)
(83)
(512)
(670)
(14)
15
(1,343)
(87)
(398)
2,699
$ 2,301
The accompanying notes are an integral part of our Consolidated Financial Statements.
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CUMMINS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Common
Stock
Held in
Trust
Accumulated
Other
Comprehensive
Loss
Total
Cummins Inc.
Shareholders’
Equity
Treasury
Stock
Noncontrolling
Interests
Total
Equity
In millions
BALANCE AT DECEMBER 31, 2013
Net income
Other comprehensive loss, net of tax (Note 14)
Issuance of common stock
Employee benefits trust activity (Note 13)
Repurchases of common stock
Cash dividends on common stock (Note 13)
Distributions to noncontrolling interests
Stock based awards
Acquisition of noncontrolling interests
Other shareholder transactions
BALANCE AT DECEMBER 31, 2014
Net income
Other comprehensive loss, net of tax (Note 14)
Issuance of common stock
Employee benefits trust activity (Note 13)
Repurchases of common stock
Cash dividends on common stock (Note 13)
Distributions to noncontrolling interests
Stock based awards
Acquisition of noncontrolling interests
Other shareholder transactions
BALANCE AT DECEMBER 31, 2015
Net income
Other comprehensive loss, net of tax (Note 14)
Issuance of common stock
Employee benefits trust activity (Note 13)
Repurchases of common stock (Note 13)
Cash dividends on common stock (Note 13)
Distributions to noncontrolling interests
Stock based awards
Acquisition of noncontrolling interests
Other shareholder transactions
BALANCE AT DECEMBER 31, 2016
Common
Stock
Additional
Paid-in
Capital
$
556
$
1,543
Retained
Earnings
8,406
$
1,651
$ (2,195) $
(16) $
(784) $
(294)
3
(512)
(670)
21
$
9,545
1,399
$ (2,844) $
(13) $
(1,078) $
(270)
2
(622)
(900)
9
$ 10,322
1,394
$ (3,735) $
(11) $
(1,348) $
(473)
3
(676)
(778)
24
$ 11,040
$ (4,489) $
(8) $
(1,821) $
9
24
(5)
(7)
19
1,583
9
25
(4)
(3)
12
1,622
6
23
(5)
(73)
24
1,597
$
556
$
$
556
$
$
556
$
7,510
1,651
(294)
9
27
(670)
(512)
—
16
(7)
19
7,749
1,399
(270)
9
27
(900)
(622)
—
5
(3)
12
7,406
1,394
(473)
6
26
(778)
(676)
—
19
(73)
24
6,875
$
$
$
$
360
85
(11)
—
—
—
—
(83)
—
(7)
—
344
71
(15)
—
—
—
—
(49)
—
(7)
—
344
62
(17)
—
—
—
—
(65)
—
(25)
—
299
$
$
$
$
7,870
1,736
(305)
9
27
(670)
(512)
(83)
16
(14)
19
8,093
1,470
(285)
9
27
(900)
(622)
(49)
5
(10)
12
7,750
1,456
(490)
6
26
(778)
(676)
(65)
19
(98)
24
7,174
The accompanying notes are an integral part of our Consolidated Financial Statements.
69
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
We were founded in 1919 as Cummins Engine Company, a corporation in Columbus, Indiana. We were one of the first diesel
engine manufacturers. We changed our name to Cummins Inc. in 2001. We are a global power leader that designs,
manufactures, distributes and services diesel and natural gas engines and engine-related component products, including
filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems and electric power generation
systems. We sell our products to original equipment manufacturers (OEMs), distributors and other customers worldwide. We
serve our customers through a network of approximately 600 wholly-owned and independent distributor locations and over
7,400 dealer locations in more than 190 countries and territories.
Principles of Consolidation
Our Consolidated Financial Statements include the accounts of all wholly-owned and majority-owned domestic and foreign
subsidiaries where our ownership is more than 50 percent of outstanding equity interests except for majority-owned
subsidiaries that are considered variable interest entities (VIEs) where we are not deemed to have a controlling financial
interest. In addition, we also consolidate, regardless of our ownership percentage, VIEs for which we are deemed to have a
controlling financial interest. Intercompany balances and transactions are eliminated in consolidation. Where our ownership
interest is less than 100 percent, the noncontrolling ownership interests are reported in our Consolidated Balance Sheets. The
noncontrolling ownership interest in our income, net of tax, is classified as "Net income attributable to noncontrolling interests"
in our Consolidated Statements of Income.
We have variable interests in several businesses accounted for under the equity method of accounting that are deemed to be
VIEs and are subject to generally accepted accounting principles in the United States of America (GAAP) for variable interest
entities. Most of these VIEs are unconsolidated.
Reclassifications
Certain amounts for 2015 and 2014 have been reclassified to conform to the current year presentation.
Investments in Equity Investees
We use the equity method to account for our investments in joint ventures, affiliated companies and alliances in which we have
the ability to exercise significant influence, generally represented by equity ownership or partnership equity of at least 20
percent but not more than 50 percent. Generally, under the equity method, original investments in these entities are recorded at
cost and subsequently adjusted by our share of equity in income or losses after the date of acquisition. Investment amounts in
excess of our share of an investee's net assets are amortized over the life of the related asset creating the excess. If the excess is
goodwill, then it is not amortized. Equity in income or losses of each investee is recorded according to our level of ownership;
if losses accumulate, we record our share of losses until our investment has been fully depleted. If our investment has been
fully depleted, we recognize additional losses only when we are the primary funding source. We eliminate (to the extent of our
ownership percentage) in our Consolidated Financial Statements the profit in inventory held by our equity method investees
that has not yet been sold to a third-party. Our investments are classified as "Investments and advances related to equity method
investees" in our Consolidated Balance Sheets. Our share of the results from joint ventures, affiliated companies and alliances
is reported in our Consolidated Statements of Income as "Equity, royalty and interest income from investees," and is reported
net of all applicable income taxes.
Our foreign equity investees are presented net of applicable foreign income taxes in our Consolidated Statements of Income.
Our remaining United States (U.S.) equity investees are partnerships (non-taxable), thus there is no difference between gross or
net of tax presentation as the investees are not taxed. See NOTE 2, "INVESTMENTS IN EQUITY INVESTEES," for
additional information.
Use of Estimates in the Preparation of the 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 Consolidated Financial Statements. Significant estimates and
assumptions in these 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
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other assumptions for pension and other postretirement benefit costs, impairment charges, restructuring 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.
Revenue Recognition
We recognize revenue, net of estimated costs of returns, allowances and sales incentives, when it is realized or realizable,
which generally occurs when:
•
Persuasive evidence of an arrangement exists;
• The product has been shipped and legal title and all risks of ownership have been transferred;
• The sales price is fixed or determinable; and
•
Payment is reasonably assured.
Products are generally sold on open account under credit terms customary to the geographic region of distribution. We perform
ongoing credit evaluations of our customers and generally do not require collateral to secure our accounts receivable. For
engines, service parts, service tools and other items sold to independent distributors and to partially-owned distributors
accounted for under the equity method, revenues are recorded when title and risk of ownership transfers. This transfer is based
on the agreement in effect with the respective distributor, which generally occurs when the products are shipped. To the extent
of our ownership percentage, margins on sales to distributors accounted for under the equity method are deferred until the
distributor sells the product to unrelated parties.
We provide various sales incentives to both our distribution network and our OEM customers. These programs are designed to
promote the sale of our product in the channel or encourage the usage of our products by OEM customers. Sales incentives
primarily fall into three categories:
• Volume rebates;
• Market share rebates; and
• Aftermarket rebates.
For volume rebates, we provide certain customers with rebate opportunities for attaining specified volumes during a particular
quarter or year. We accrue for the expected amount of these rebates at the time of the original sale and update our accruals
quarterly based on our best estimate of the volume levels the customer will reach during the measurement period. For market
share rebates, we provide certain customers with rebate opportunities based on the percentage of their production that utilizes
our product. These rebates are typically measured either quarterly or annually and are accrued at the time of the original sale
based on the current market shares, with adjustments made as the level changes. For aftermarket rebates, we provide incentives
to promote sales to certain dealers and end-markets. These rebates are typically paid on a quarterly, or more frequent, basis and
estimates are made at the end of each quarter as to the amount yet to be paid. These estimates are based on historical experience
with the particular program. The incentives are classified as a reduction in sales in our Consolidated Statements of Income.
We classify shipping and handling billed to customers as sales in our Consolidated Statements of Income. Substantially all
shipping and handling costs are included in "Cost of sales."
Rights of return do not exist for the majority of our sales, other than for quality issues. We do offer certain return rights in our
aftermarket business, where some aftermarket customers are permitted to return small amounts of parts and filters each year
and in our power systems business, which sells portable generators to retail customers. An estimate of future returns is accrued
at the time of sale based on historical return rates.
Foreign Currency Transactions and Translation
We translate assets and liabilities of foreign entities to U.S. dollars, where the local currency is the functional currency, at year-
end exchange rates. We translate income and expenses to U.S. dollars using weighted-average exchange rates for the year. We
record adjustments resulting from translation in a separate component of accumulated other comprehensive loss (AOCL) and
include the adjustments in net income only upon sale, loss of controlling financial interest or liquidation of the underlying
foreign investment.
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Foreign currency transaction gains and losses are included in current net income. For foreign entities where the U.S. dollar is
the functional currency, including those operating in highly inflationary economies when applicable, we remeasure non-
monetary balances and the related income statement using historical exchange rates. We include in income the resulting gains
and losses, including the effect of derivatives in our Consolidated Statements of Income, which combined with transaction
gains and losses amounted to a net loss of $12 million, $18 million and $6 million for the years ended December 31, 2016,
2015 and 2014, respectively.
Fair Value Measurements
A three-level valuation hierarchy, based upon the observable and unobservable inputs, is used for fair value measurements.
Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market
assumptions based on the best evidence available. These two types of inputs create the following fair value hierarchy:
• Level 1 - Quoted prices for identical instruments in active markets;
• Level 2 - Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in
markets that are not active and model-derived valuations whose significant inputs are observable; and
• Level 3 - Instruments whose significant inputs are unobservable.
Derivative Instruments
We make use of derivative instruments in foreign exchange, commodity price and interest rate hedging programs. Derivatives
currently in use are foreign currency forward contracts, commodity physical forward contracts and zero-cost collars and interest
rate swaps. These contracts are used strictly for hedging and not for speculative purposes.
We are exposed to market risk from fluctuations in interest rates. We manage our exposure to interest rate fluctuations through
the use of interest rate swaps. The objective of the swaps is to more effectively balance our borrowing costs and interest rate
risk. The gain or loss on these derivative instruments as well as the offsetting gain or loss on the hedged item are recognized in
current income as "Interest expense." For more detail on our interest rate swaps see NOTE 9, "DEBT."
Due to our international business presence, we are exposed to foreign currency exchange risk. We transact in foreign currencies
and have assets and liabilities denominated in foreign currencies. Consequently, our income experiences some volatility related
to movements in foreign currency exchange rates. In order to benefit from global diversification and after considering naturally
offsetting currency positions, we enter into foreign currency forward contracts to minimize our existing exposures (recognized
assets and liabilities) and hedge forecasted transactions. Foreign currency forward contracts are designated and qualify as
foreign currency cash flow hedges under GAAP. The effective portion of the unrealized gain or loss on the forward contract is
deferred and reported as a component of AOCL. When the hedged forecasted transaction (sale or purchase) occurs, the
unrealized gain or loss is reclassified into income in the same line item associated with the hedged transaction in the same
period or periods during which the hedged transaction affects income.
To minimize the income volatility resulting from the remeasurement of net monetary assets and payables denominated in a
currency other than the functional currency, we enter into foreign currency forward contracts, which are considered economic
hedges. The objective is to offset the gain or loss from remeasurement with the gain or loss from the fair market valuation of
the forward contract. These derivative instruments are not designated as hedges under GAAP.
We are exposed to fluctuations in commodity prices due to contractual agreements with component suppliers. In order to
protect ourselves against future price volatility and, consequently, fluctuations in gross margins, we periodically enter into
commodity physical forward contracts and zero-cost collar contracts with designated banks and other counterparties to fix the
cost of certain raw material purchases with the objective of minimizing changes in inventory cost due to market price
fluctuations. The physical forward contracts qualify for the normal purchases scope exceptions and are treated as purchase
commitments. The commodity zero-cost collar contracts that represent an economic hedge, but are not designated for hedge
accounting, are marked to market through earnings.
Income Tax Accounting
We determine our income tax expense using the asset and liability method. Under this method, deferred tax assets and liabilities
are recognized for the future tax effects of temporary differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Future tax benefits of net operating loss and credit carryforwards are also
recognized as deferred tax assets. We evaluate the recoverability of our deferred tax assets each quarter by assessing the
likelihood of future profitability and available tax planning strategies that could be implemented to realize our net deferred tax
assets. A valuation allowance is recorded to reduce the tax assets to the net value management believes is more likely than not
to be realized. In the event our operating performance deteriorates, future assessments could conclude that a larger valuation
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allowance will be needed to further reduce the deferred tax assets. In addition, we operate within multiple taxing jurisdictions
and are subject to tax audits in these jurisdictions. These audits can involve complex issues, which may require an extended
period of time to resolve. We accrue for the estimated additional tax and interest that may result from tax authorities disputing
uncertain tax positions. We have taken and we believe we have made adequate provision for income taxes for all years that are
subject to audit based upon the latest information available. A more complete description of our income taxes and the future
benefits of our net operating loss and credit carryforwards is disclosed in NOTE 3, "INCOME TAXES."
Cash and Cash Equivalents
Cash equivalents are defined as short-term, highly liquid investments with an original maturity of 90 days or less at the time of
purchase. The carrying amounts reflected in our Consolidated Balance Sheets for cash and cash equivalents approximate fair
value due to the short-term maturity of these investments.
In millions
Cash payments for income taxes, net of refunds
Cash payments for interest, net of capitalized interest
Marketable Securities
Years ended December 31,
2016
2015
2014
$
430
$
732
$
68
65
659
65
We account for marketable securities in accordance with GAAP for investments in debt and equity securities. We determine the
appropriate classification of all marketable securities as "held-to-maturity," "available-for-sale" or "trading" at the time of
purchase, and re-evaluate such classifications at each balance sheet date. At December 31, 2016 and 2015, all of our
investments were classified as available-for-sale.
Available-for-sale (AFS) securities are carried at fair value with the unrealized gain or loss, net of tax, reported in other
comprehensive income. Unrealized losses considered to be "other-than-temporary" are recognized currently in income. The
cost of securities sold is based on the specific identification method. The fair value of most investment securities is determined
by currently available market prices. Where quoted market prices are not available, we use the market price of similar types of
securities that are traded in the market to estimate fair value. See NOTE 4, "MARKETABLE SECURITIES," for a detailed
description of our investments in marketable securities.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount, which approximates net realizable value, and generally do not
bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing
accounts receivable. We determine the allowance based on our historical collection experience and by performing an analysis
of our accounts receivable in light of the current economic environment. We review our allowance for doubtful accounts on a
regular basis. In addition, when necessary, we provide an allowance for the full amount of specific accounts deemed to be
uncollectible. Account balances are charged off against the allowance in the period in which we determine that it is probable the
receivable will not be recovered. The allowance for doubtful accounts balances for the years ended December 31, 2016 and
2015 were $16 million and $15 million, respectively.
Inventories
Our inventories are stated at the lower of cost or market. For the years ended December 31, 2016 and 2015, approximately 13
percent and 13 percent, respectively, of our consolidated inventories (primarily heavy-duty and high-horsepower engines and
parts) were valued using the last-in, first-out (LIFO) cost method. The cost of other inventories is generally valued using the
first-in, first-out (FIFO) cost method. Our inventories at interim and year-end reporting dates include estimates for adjustments
related to annual physical inventory results and for inventory cost changes under the LIFO cost method. Due to significant
movements of partially-manufactured components and parts between manufacturing plants, we do not internally measure, nor
do our accounting systems provide, a meaningful segregation between raw materials and work-in-process. See NOTE 5,
"INVENTORIES," for additional information.
Property, Plant and Equipment
We record property, plant and equipment, inclusive of assets under capital leases, at cost. We depreciate the cost of the majority
of our equipment using the straight-line method with depreciable lives ranging from 20 to 40 years for buildings and 3 to 20
years for machinery, equipment and fixtures. Capital lease amortization is recorded in depreciation expense. We expense
normal maintenance and repair costs as incurred. Depreciation expense totaled $434 million, $419 million and $351 million for
the years ended December 31, 2016, 2015 and 2014, respectively. See NOTE 6, "PROPERTY, PLANT AND EQUIPMENT,"
for additional information.
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Impairment of Long-Lived Assets
We review our long-lived assets for possible impairment whenever events or circumstances indicate that the carrying value of
an asset or asset group may not be recoverable. We assess the recoverability of the carrying value of the long-lived assets at the
lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. An
impairment of a long-lived asset or asset group exists when the expected future pre-tax cash flows (undiscounted and without
interest charges) estimated to be generated by the asset or asset group is less than its carrying value. If these cash flows are less
than the carrying value of such asset or asset group, an impairment loss is measured based on the difference between the
estimated fair value and carrying value of the asset or asset group. Assumptions and estimates used to estimate cash flows in
the evaluation of impairment and the fair values used to determine the impairment are subject to a degree of judgment and
complexity. Any changes to the assumptions and estimates resulting from changes in actual results or market conditions from
those anticipated may affect the carrying value of long-lived assets and could result in a future impairment charge. See NOTE
19, "IMPAIRMENT OF LIGHT-DUTY DIESEL ASSETS," for additional information.
Goodwill
Under GAAP for goodwill, we have the option to first assess qualitative factors to determine whether it is more likely than not
that the fair value of a reporting unit is less than its carrying value as a basis for determining whether it is necessary to perform
an annual two-step goodwill impairment test. We have elected this option on certain reporting units. The two-step impairment
test is now only required if an entity determines through this qualitative analysis that it is more likely than not that the fair value
of the reporting unit is less than its carrying value. In addition, the carrying value of goodwill must be tested for impairment on
an interim basis in certain circumstances where impairment may be indicated. When we are required or opt to perform the two-
step impairment test, the fair value of each reporting unit is estimated by discounting the after tax future cash flows less
requirements for working capital and fixed asset additions. Our reporting units are generally defined as one level below an
operating segment. However, there are two situations where we have aggregated two or more reporting units which share
similar economic characteristics and thus are aggregated into a single reporting unit for testing purposes. These two situations
are described further below:
• Within our Components segment, our emission solutions and filtration businesses have been aggregated into a single
reporting unit.
• Our Distribution segment is considered a single reporting unit as it is managed geographically and all regions share
similar economic characteristics and provide similar products and services.
Goodwill in other reporting units is immaterial for separate disclosure. Our valuation method requires us to make projections of
revenue, operating expenses, working capital investment and fixed asset additions for the reporting units over a multi-year
period. Additionally, management must estimate a weighted-average cost of capital, which reflects a market rate, for each
reporting unit for use as a discount rate. The discounted cash flows are compared to the carrying value of the reporting unit and,
if less than the carrying value, a separate valuation of the goodwill is required to determine if an impairment loss has occurred.
In addition, we also perform a sensitivity analysis to determine how much our forecasts can fluctuate before the fair value of a
reporting unit would be lower than its carrying amount. We performed the required procedures as of the end of our fiscal third
quarter and determined that our goodwill was not impaired. At December 31, 2016, our recorded goodwill was $480 million,
approximately 79 percent of which resided in the aggregated emission solutions and filtration reporting unit. For this reporting
unit, the fair value exceeded its carrying value by a substantial margin when we last performed step one of the two-step
impairment test. Changes in our projections or estimates, a deterioration of our operating results and the related cash flow effect
or a significant increase in the discount rate could decrease the estimated fair value of our reporting units and result in a future
impairment of goodwill. See NOTE 7, "GOODWILL AND OTHER INTANGIBLE ASSETS," for additional information.
Software
We capitalize software that is developed or obtained for internal use. Software costs are amortized on a straight-line basis over
their estimated useful lives generally ranging from 3 to 12 years. Software assets are reviewed for impairment when events or
circumstances indicate that the carrying value may not be recoverable over the remaining lives of the assets. Upgrades and
enhancements are capitalized if they result in significant modifications that enable the software to perform tasks it was
previously incapable of performing. Software maintenance, training, data conversion and business process reengineering costs
are expensed in the period in which they are incurred. See NOTE 7, "GOODWILL AND OTHER INTANGIBLE ASSETS," for
additional information.
Warranty
We charge the estimated costs of warranty programs, other than product recalls, to cost of sales at the time products are sold
and revenue is recognized. We use historical experience to develop the estimated liability for our various warranty programs.
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As a result of the uncertainty surrounding the nature and frequency of product recall programs, the liability for such programs
is recorded when we commit to a recall action or when a recall becomes probable and estimable, which generally occurs when
it is announced. The liability for these programs is reflected in the provision for warranties issued. We review and assess the
liability for these programs on a quarterly basis. We also assess our ability to recover certain costs from our suppliers and
record a receivable when we believe a recovery is probable. In addition to costs incurred on warranty and recall programs, from
time to time we also incur costs related to customer satisfaction programs for items not covered by warranty. We accrue for
these costs when agreement is reached with a specific customer. These costs are not included in the provision for warranties,
but are included in cost of sales.
In addition, we sell extended warranty coverage on most of our engines. The revenue collected is initially deferred and is
recognized as revenue in proportion to the costs expected to be incurred in performing services over the contract period. We
compare the remaining deferred revenue balance quarterly to the estimated amount of future claims under extended warranty
programs and provide an additional accrual when the deferred revenue balance is less than expected future costs. See NOTE
10, "PRODUCT WARRANTY LIABILITY," for additional information.
Research and Development
Our research and development program is focused on product improvements, product extensions, innovations and cost
reductions for our customers. Research and development expenditures include salaries, contractor fees, building costs, utilities,
testing, technical IT, administrative expenses and allocation of corporate costs and are expensed, net of contract
reimbursements, when incurred. From time to time, we enter into agreements with customers and government agencies to fund
a portion of the research and development costs of a particular project. We generally account for these reimbursements as an
offset to the related research and development expenditure. Research and development expenses, net of contract
reimbursements, were $616 million in 2016, $718 million in 2015 and $737 million in 2014. Contract reimbursements were
$131 million in 2016, $98 million in 2015 and $121 million in 2014.
Related Party Transactions
In accordance with the provisions of various joint venture agreements, we may purchase products and components from our
joint ventures, sell products and components to our joint ventures and our joint ventures may sell products and components to
unrelated parties. Joint venture transfer prices may differ from normal selling prices. Certain joint venture agreements transfer
product at cost, some transfer product on a cost-plus basis, and others transfer product at market value. Our related party sales
are presented on the face of our Consolidated Statements of Income. Our related party purchases were not material to our
financial position or results of operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In August 2016, the Financial Accounting Standards Board (FASB) amended its standards related to the classification of certain
cash receipts and cash payments. The new standard will make eight targeted changes to how cash receipts and cash payments
are presented and classified in the statement of cash flows. The standard is effective for fiscal years beginning after December
15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If
an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the
fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same
period. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case it
would be required to apply the amendments prospectively as of the earliest date practicable. We are in the process of evaluating
the impact this standard will have on our Consolidated Statements of Cash Flows.
In June 2016, the FASB amended its standards related to the accounting for credit losses on financial instruments. This
amendment introduces new guidance for accounting for credit losses on instruments including trade receivables and held-to-
maturity debt securities. The new rules are effective for annual and interim periods beginning after December 15, 2019. Early
adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
We are in the process of evaluating the impact the amendment will have on our Consolidated Financial Statements.
In March 2016, the FASB amended its standards related to the accounting for stock compensation. This amendment addresses
several aspects of the accounting for share-based payment transactions that could impact us including, but not limited to,
recognition of excess tax benefits or deficiencies in the income statement each period and classification of the excess tax
benefits or deficiencies as operating activities in the cash flow statement. The new standard is effective for annual periods
beginning after December 15, 2016. The adoption of this standard could result in future volatility in our income tax expense
since all excess tax benefits and deficiencies are now recorded in the income statement. We are unable to estimate this impact
since the amount of excess benefits and deficiencies are dependent on our stock price at the time a stock award vests or is
exercised.
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In February 2016, the FASB amended its standards related to the accounting for leases. Under the new standard, lessees will
now be required to recognize substantially all leases on the balance sheet as both a right-of-use-asset and a liability. The
standard will continue to have two types of leases for income statement recognition purposes: operating leases and finance
leases. Operating leases will result in the recognition of a single lease expense on a straight-line basis over the lease term
similar to the treatment for operating leases under today's standards. Finance leases will result in an accelerated expense similar
to the accounting for capital leases under today's standards. The determination of a lease classification as operating or finance
will be done in a manner similar to today's standard. The new standard also contains amended guidance regarding the
identification of embedded leases in service contracts and the identification of lease and non-lease components in an
arrangement. The new standard is effective on January 1, 2019, with early adoption permitted. We are still evaluating the
impact the standard could have on our Consolidated Financial Statements; however, while we have not yet quantified the
amount, we do expect the standard will have a material impact on our Consolidated Balance Sheets due to the recognition of
additional assets and liabilities for operating leases.
In January 2016, the FASB amended its standards related to the accounting for certain financial instruments. This amendment
addresses certain aspects of recognition, measurement, presentation and disclosure. The new rules will become effective for
annual and interim periods beginning after December 15, 2017. Early adoption is not permitted. We are in the process of
evaluating the impact the amendment will have on our Consolidated Financial Statements.
In May 2014, the FASB amended its standards related to revenue recognition. This amendment replaces all existing revenue
recognition guidance and provides a single, comprehensive revenue recognition model for all contracts with customers. The
standard contains principles that we will apply to determine the measurement of revenue and timing of when it is recognized.
The underlying principle is that we will recognize revenue in a manner that depicts the transfer of goods or services to
customers at an amount that we expect to be entitled to in exchange for those goods or services. The guidance provides a five-
step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization
of certain contract costs, consideration of the time value of money in the transaction price and allowing estimates of variable
consideration to be recognized before contingencies are resolved in certain circumstances. The amendment also requires
additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer
contracts, including significant judgments and changes in those judgments and assets recognized from costs incurred to fulfill a
contract. The standard allows either full or modified retrospective adoption effective for annual and interim periods beginning
January 1, 2018. We are in the process of evaluating the impact the amendment will have on our Consolidated Financial
Statements. We expect to adopt the standard using the modified retrospective approach. While we have not yet completed our
evaluation process, we have identified that a change will be required related to our accounting for remanufactured product sales
that include an exchange of the used product, referred to as core. Revenue is not currently recognized related to the core
component unless the used product is not returned. Under the new standard, the transaction will be accounted for as a gross sale
and a purchase of inventory. As a result the exchange will increase both sales and cost of sales, in equal amounts, related to the
used core. This will not impact gross margin dollars, but will impact the gross margin percentage. We are still quantifying the
amount of this change. We have also identified transactions where revenue recognition is currently limited to the amount of
billings not contingent on our future performance. With the allocation provisions of the new model, we expect to accelerate the
timing of revenue recognition for amounts related to satisfied performance obligations that would have been delayed under the
current guidance. We do not expect the impact of this change to be material, but we are still quantifying the impact.
NOTE 2. INVESTMENTS IN EQUITY INVESTEES
Investments and advances related to equity method investees and our ownership percentage was as follows:
In millions
Komatsu alliances
Beijing Foton Cummins Engine Co., Ltd.
Dongfeng Cummins Engine Company, Ltd.
Chongqing Cummins Engine Company, Ltd.
Cummins-Scania XPI Manufacturing, LLC
Tata Cummins, Ltd.
North American distributors (1)
Other
Ownership %
20-50%
50%
50%
50%
50%
50%
50%
Various
Investments and advances related to equity method investees
____________________________________
(1) Ownership percentage of North American distributor investments at December 31, 2015.
76
December 31,
2016
2015
$
$
197
163
111
73
82
63
—
257
946
$
$
173
172
118
80
66
60
15
291
975
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Equity, royalty and interest income from investees, net of applicable taxes, was as follows:
$
In millions
Distribution entities
Komatsu Cummins Chile, Ltda.
North American distributors
All other distributors
Manufacturing entities
Beijing Foton Cummins Engine Co., Ltd.
Dongfeng Cummins Engine Company, Ltd.
Chongqing Cummins Engine Company, Ltd.
All other manufacturers
Cummins share of net income
Royalty and interest income
Equity, royalty and interest income from investees
$
Distribution Entities
Years ended December 31,
2016
2015
2014
34
21
—
52
46
38
69
260
41
301
$
$
31
33
3
62
51
41
52
273
42
315
$
$
29
107
4
(2)
67
51
74
330
40
370
We have an extensive worldwide distributor and dealer network through which we sell and distribute our products and services.
Generally, our distributors are divided by geographic region with some of our distributors being wholly-owned by Cummins,
some partially-owned and some independently owned. We consolidate all wholly-owned distributors and partially-owned
distributors where we are the primary beneficiary and account for other partially-owned distributors using the equity method of
accounting.
• Komatsu Cummins Chile, Ltda. - Komatsu Cummins Chile, Ltda. is a joint venture with Komatsu America
Corporation. The joint venture is a distributor that offers the full range of our products and services to customers and
end-users in the Chilean and Peruvian markets.
• North American Distributors - During 2016, we acquired the remaining interest in the final unconsolidated North
American distributor joint venture.
In certain cases where we own a partial interest in a distributor, we may be obligated to purchase the other equity holders'
interests if certain events occur (such as the death or resignation of the distributor principal or a change in control of Cummins
Inc.). The purchase consideration of the equity interests may be determined based on the fair vale of the distributor's assets.
Repurchase obligations and practices vary by geographic region.
All distributors that are partially-owned are considered to be related parties in our Consolidated Financial Statements.
Manufacturing Entities
Our manufacturing joint ventures have generally been formed with customers and generally are intended to allow us to increase
our market penetration in geographic regions, reduce capital spending, streamline our supply chain management and develop
technologies. Our largest manufacturing joint ventures are based in China and are included in the list below. Our engine
manufacturing joint ventures are supplied by our Components segment in the same manner as it supplies our wholly-owned
Engine segment and Power Systems segment manufacturing facilities. Our Components segment joint ventures and wholly
owned entities provide fuel systems, filtration, aftertreatment systems and turbocharger products that are used in our engines as
well as some competitors' products. The results and investments in our joint ventures in which we have 50 percent or less
ownership interest are included in “Equity, royalty and interest income from investees” and “Investments and advances related
to equity method investees” in our Consolidated Statements of Income and Consolidated Balance Sheets, respectively.
• Beijing Foton Cummins Engine Co., Ltd. - Beijing Foton Cummins Engine Co., Ltd. is a joint venture in China with
Beiqi Foton Motor Co., Ltd., a commercial vehicle manufacturer, which consists of two distinct lines of business, a
light-duty business and a heavy-duty business. The light-duty business produces ISF 2.8 liter and ISF 3.8 liter families
of our high performance light-duty diesel engines in Beijing. These engines are used in light-duty commercial trucks,
pickup trucks, buses, multipurpose and sport utility vehicles with main markets in China, Brazil and Russia. Certain
types of marine, small construction equipment and industrial applications are also served by these engine families. The
heavy-duty business produces ISG 10.5 liter and ISG 11.8 liter families of our high performance heavy-duty diesel
engines in Beijing. These engines are used in heavy-duty commercial trucks in China and will be used in world wide
markets. Certain types of construction equipment and industrial applications are also served by these engine families.
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• Dongfeng Cummins Engine Company, Ltd. - Dongfeng Cummins Engine Company, Ltd. (DCEC) is a joint venture
in China with Dongfeng Automotive Co. Ltd., a subsidiary of Dongfeng Motor Corporation, one of the largest
medium-duty and heavy-duty truck manufacturers in China. DCEC produces Cummins 4- to 13-liter mechanical
engines, full-electric diesel engines, with a power range from 125 to 545 horsepower, and natural gas engines.
• Chongqing Cummins Engine Company, Ltd. - Chongqing Cummins Engine Company, Ltd. is a joint venture in
China with Chongqing Machinery and Electric Co. Ltd. This joint venture manufactures several models of our heavy-
duty and high-horsepower diesel engines, primarily serving the industrial and stationary power markets in China.
Equity Investee Financial Summary
We have approximately $525 million in our investment account at December 31, 2016, that represents cumulative undistributed
income in our equity investees. Dividends received from our unconsolidated equity investees were $212 million, $248 million
and $227 million in 2016, 2015 and 2014, respectively. Summary financial information for our equity investees was as follows:
In millions
Net sales
Gross margin
Net income
Cummins share of net income
Royalty and interest income
Total equity, royalty and interest from investees
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Net assets
Cummins share of net assets
Sale of Equity Investee
At and for the years ended December 31,
2016
2015
2014
$
$
$
$
$
$
5,654
1,182
499
260
41
301
2,602
1,377
(1,938)
(232)
1,809
927
$
$
$
$
$
$
5,946
1,265
521
273
42
315
$
$
$
7,426
1,539
630
330
40
370
2,458
1,539
(1,796)
(284)
1,917
958
In the fourth quarter of 2016, we sold our remaining 49 percent interest in Cummins Olayan Energy for $61 million and
recognized a gain of $17 million. We received cash of $58 million with the remaining balance receivable in future periods.
NOTE 3. INCOME TAXES
The following table summarizes income before income taxes:
In millions
U.S. income
Foreign income
Income before income taxes
Years ended December 31,
2016
2015
2014
$
$
995
935
1,930
$
$
1,275
750
2,025
$
$
1,407
1,027
2,434
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Income tax expense consists of the following:
In millions
Current
U.S. federal and state
Foreign
Total current
Deferred
U.S. federal and state
Foreign
Total deferred
Income tax expense
Years ended December 31,
2016
2015
2014
$
$
211
213
424
57
(7)
50
474
$
$
516
147
663
(151)
43
(108)
555
$
$
470
197
667
39
(8)
31
698
A reconciliation of the statutory U.S. federal income tax rate to the effective tax rate was as follows:
Statutory U.S. federal income tax rate
State income tax, net of federal effect
Differences in rates and taxability of foreign subsidiaries and joint ventures
Research tax credits
Other, net
Effective tax rate
Years ended December 31,
2016
2015
2014
35.0%
0.8
(7.2)
(1.7)
(2.3)
24.6%
35.0%
1.2
(6.6)
(1.4)
(0.8)
27.4%
35.0%
1.1
(5.7)
(1.5)
(0.2)
28.7%
Our income tax rates are generally less than the 35 percent U.S. statutory income tax rate primarily because of lower taxes on
foreign earnings and research tax credits. Our effective tax rate for 2016 was 24.6 percent compared to 27.4 percent for 2015.
The 2.8 percent decrease in the effective tax rate from 2015 to 2016 is primarily due to favorable changes in the jurisdictional
mix of pre-tax income.
Retained earnings of our U.K. domiciled subsidiaries and certain Singapore, German, Indian and Mexican subsidiaries are
considered to be permanently reinvested. In addition, earnings of our China operations generated after December 31, 2011, are
considered to be permanently reinvested. U.S. deferred tax is not provided on these permanently reinvested earnings. Our
permanently reinvested foreign earnings are expected to be used for items such as capital expenditures and to fund joint
ventures outside of the U.S. The total permanently reinvested retained earnings and related cumulative translation adjustment
balances for these entities were $3.4 billion, $3.3 billion and $3.8 billion for the years ended December 31, 2016, 2015 and
2014, respectively. These amounts were determined primarily based on book retained earnings balances for these subsidiaries
translated at historical rates. The determination of the deferred tax liability related to these retained earnings and cumulative
translation adjustment balances, which are considered to be permanently reinvested outside the U.S., is not practicable.
For our remaining subsidiary companies and joint ventures outside the U.S., we provide for the additional taxes that would be
due upon the dividend distribution of the income of those foreign subsidiaries and joint ventures assuming the full utilization of
foreign tax credits. Deferred tax liabilities on unremitted earnings of foreign subsidiaries and joint ventures, including those in
China generated in years prior to 2012, were $59 million and $69 million at December 31, 2016 and 2015, respectively. We
have $616 million of retained earnings and related cumulative translation adjustments in our China operations generated prior
to December 31, 2011, for which we have provided a U.S. deferred tax liability of $139 million.
Income before income taxes included equity income of foreign joint ventures of $225 million, $213 million and $212 million
for the years ended December 31, 2016, 2015 and 2014, respectively. This equity income is recorded net of foreign taxes.
Additional U.S. income taxes of $13 million, $20 million and $14 million for the years ended December 31, 2016, 2015 and
2014, respectively, were provided for the additional U.S. taxes that will ultimately be due upon the distribution of the foreign
joint venture equity income.
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Table of Contents
Carryforward tax benefits and the tax effect of temporary differences between financial and tax reporting that give rise to net
deferred tax assets were as follows:
In millions
Deferred tax assets
U.S. state carryforward benefits
Foreign carryforward benefits
Employee benefit plans
Warranty expenses
Accrued expenses
Other
Gross deferred tax assets
Valuation allowance
Total deferred tax assets
Deferred tax liabilities
Property, plant and equipment
Unremitted income of foreign subsidiaries and joint ventures
Employee benefit plans
Other
Total deferred tax liabilities
Net deferred tax assets
December 31,
2016
2015
$
$
159
154
401
405
107
64
1,290
(307)
983
(319)
(59)
(213)
(48)
(639)
344
$
$
133
103
377
369
76
78
1,136
(209)
927
(269)
(69)
(212)
(21)
(571)
356
Our 2016 U.S. carryforward benefits include $159 million of state credit and net operating loss carryforward benefits that begin
to expire in 2017. Our foreign carryforward benefits include $154 million of net operating loss carryforwards that begin to
expire in 2017. A valuation allowance is recorded to reduce the gross deferred tax assets to an amount we believe is more likely
than not to be realized. The valuation allowance increased in 2016 by a net $98 million and increased in 2015 by a net $65
million. The valuation allowance is primarily attributable to the uncertainty regarding the realization of a portion of the U.S.
state and foreign net operating loss and tax credit carryforward benefits.
Our Consolidated Balance Sheets contain the following tax related items:
In millions
Prepaid and other current assets
Refundable income taxes
Other assets
Deferred tax assets
Long-term refundable income taxes
Other liabilities and deferred revenue
Deferred tax liabilities
December 31,
2016
2015
$
192
$
176
420
22
76
390
18
34
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A reconciliation of unrecognized tax benefits for the years ended December 31, 2016, 2015 and 2014 was as follows:
In millions
Balance at beginning of year
Additions to current year tax positions
Additions to prior years tax positions
Reductions to prior years tax positions
Reductions for tax positions due to settlements with taxing authorities
Reductions for tax positions due to lapse of statute of limitations
December 31,
2016
2015
2014
$
135
$
174
$
10
18
—
(104)
—
8
24
—
(71)
—
169
8
5
(2)
(5)
(1)
174
Balance at end of year
$
59
$
135
$
Included in the December 31, 2016 and 2015, balances are $31 million and $78 million, respectively, related to tax positions
that, if recognized, would favorably impact the effective tax rate in future periods. Also, we had accrued interest expense
related to the unrecognized tax benefits of $3 million, $8 million and $7 million as of December 31, 2016, 2015 and 2014,
respectively. We recognize potential accrued interest and penalties related to unrecognized tax benefits in income tax expense.
For the years ended December 31, 2016, 2015 and 2014, we recognized $2 million, $5 million and $4 million in net interest
expense, respectively.
Audit outcomes and the timing of audit settlements are subject to significant uncertainty. Although we believe that adequate
provision has been made for such issues, there is the possibility that the ultimate resolution of such issues could have an
adverse effect on our earnings. Conversely, if these issues are resolved favorably in the future, the related provision would be
reduced, thus having a positive impact on earnings.
As a result of our global operations, we file income tax returns in various jurisdictions including U.S. federal, state and foreign
jurisdictions. We are routinely subject to examination by taxing authorities throughout the world, including Australia, Belgium,
Brazil, Canada, China, France, India, Mexico, the U.K. and the U.S. With few exceptions, our U.S. federal, major state and
foreign jurisdictions are no longer subject to income tax assessments for years before 2012. The U.S. examinations related to
tax years 2011-2012 concluded during 2016. The U.S. examinations related to tax years 2013-2015 commenced during 2016.
NOTE 4. MARKETABLE SECURITIES
A summary of marketable securities, all of which are classified as current, was as follows:
In millions
Available-for-sale (1)
Debt mutual funds
Bank debentures
Equity mutual funds
Government debt securities
$
2016
Gross unrealized
gains/(losses)
Cost
Estimated
fair value
Cost
2015
Gross unrealized
gains/(losses)
Estimated
fair value
December 31,
$
132
114
12
2
260
— $
—
—
—
— $
132
114
12
2
260
$
$
88
—
11
2
101
— $
—
(1)
—
(1) $
88
—
10
2
100
Total marketable securities
______________________________________________________
(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 2016 and 2015.
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 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.
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• 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 from the sale of AFS securities were
as follows:
In millions
Proceeds from sales and maturities of marketable securities
Gross realized gains from the sale of available-for-sale securities(1)
2016
2015
2014
$
306
$
—
$
270
1
336
14
Years ended December 31,
____________________________________________________
(1) Gross realized losses from the sale of available-for-sale securities were immaterial.
At December 31, 2016, the fair value of AFS investments in debt securities that utilize a Level 2 fair value measure is shown by
contractual maturity below:
Maturity date
1 year or less
5 - 10 years
Total
(in millions)
$
$
247
1
248
NOTE 5. INVENTORIES
Inventories are stated at the lower of cost or market. Inventories included the following:
In millions
Finished products
Work-in-process and raw materials
Inventories at FIFO cost
Excess of FIFO over LIFO
Total inventories
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
Details of our property, plant and equipment balance were as follows:
In millions
Land and buildings
Machinery, equipment and fixtures
Construction in process
Property, plant and equipment, gross
Less: Accumulated depreciation
Property, plant and equipment, net
$
82
December 31,
2016
2015
$
1,779
$
1,005
2,784
(109)
2,675
$
$
1,796
1,022
2,818
(111)
2,707
December 31,
2016
2015
$
2,075
$
4,898
662
7,635
(3,835)
3,800
$
1,978
4,739
605
7,322
(3,577)
3,745
Table of Contents
NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table summarizes the changes in the carrying amount of goodwill for the years ended December 31, 2016 and
2015:
In millions
Balance at December 31, 2014
Acquisitions
Translation and other
Balance at December 31, 2015
Acquisitions
Translation and other
Balance at December 31, 2016
Components
Distribution
Power
Systems
Engine
Total
$
$
400
—
(9)
391
—
(5)
386
$
$
62
12
1
75
4
—
79
$
$
11
—
(1)
10
—
(1)
9
$
$
6
—
—
6
—
—
6
$
$
479
12
(9)
482
4
(6)
480
Intangible assets that have finite useful lives are amortized over their estimated useful lives. The following table summarizes
our other intangible assets with finite useful lives that are subject to amortization:
In millions
Software
Less: Accumulated amortization
Software, net
Trademarks, patents and other
Less: Accumulated amortization
Trademarks, patents and other, net
Total other intangible assets, net
December 31,
2016
2015
$
$
617
(330)
287
164
(119)
45
332
$
$
536
(269)
267
165
(104)
61
328
Amortization expense for software and other intangibles totaled $92 million, $90 million and $99 million for the years ended
December 31, 2016, 2015 and 2014, respectively. Internal and external software costs (excluding those related to research, re-
engineering and training), trademarks and patents are amortized generally over a 3 to 12 year period. The projected
amortization expense of our intangible assets, assuming no further acquisitions or dispositions, is as follows:
In millions
Projected amortization expense
2017
2018
2019
2020
2021
$
83
$
66
$
56
$
43
$
28
NOTE 8. PENSION AND OTHER POSTRETIREMENT BENEFITS
Pension Plans
We sponsor several contributory and noncontributory pension plans covering substantially all employees. Generally, hourly
employee pension benefits are earned based on years of service and compensation during active employment while future
benefits for salaried employees are determined using a cash balance formula. However, the level of benefits and terms of
vesting may vary among plans. Pension plan assets are administered by trustees and are principally invested in fixed income
securities and equity securities. It is our policy to make contributions to our various qualified plans in accordance with statutory
and contractual funding requirements and any additional contributions we determine are appropriate.
Obligations, Assets and Funded Status
Benefit obligation balances presented below reflect the projected benefit obligation (PBO) for our pension plans. The changes
in the benefit obligations, the various plan assets, the funded status of the plans and the amounts recognized in our
Consolidated Balance Sheets for our significant pension plans at December 31 were as follows:
83
Table of Contents
In millions
Change in benefit obligation
Benefit obligation at the beginning of the year
Service cost
Interest cost
Actuarial loss (gain)
Benefits paid from fund
Benefits paid directly by employer
Plan amendments
Exchange rate changes
Benefit obligation at end of year
Change in plan assets
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Benefits paid
Exchange rate changes
Fair value of plan assets at end of year
Funded status (including underfunded and nonfunded plans) at end of year
Amounts recognized in consolidated balance sheets
Pension assets - long-term
Accrued compensation, benefits and retirement costs - current liabilities
Pensions - long-term liabilities
Net amount recognized
Amounts recognized in accumulated other comprehensive loss
Net actuarial loss
Prior service cost (credit)
Net amount recognized
Qualified and Non-Qualified Pension Plans
U.S. Plans
U.K. Plans
2016
2015
2016
2015
$
$
$
$
$
$
$
$
$
2,533
90
109
111
(175)
(16)
9
—
2,661
2,636
200
90
(175)
—
2,751
90
429
(13)
(326)
90
770
9
779
$
$
$
$
$
$
$
$
$
2,579
80
102
(76)
(139)
(13)
—
—
2,533
2,713
(8)
70
(139)
—
2,636
103
413
(12)
(298)
103
689
(1)
688
$
$
$
$
$
$
$
$
$
1,390
21
50
316
(55)
—
—
(271)
1,451
1,712
402
28
(55)
(334)
1,753
302
302
—
—
302
172
—
172
$
$
$
$
$
$
$
$
$
1,522
27
56
(88)
(53)
—
—
(74)
1,390
1,724
20
107
(53)
(86)
1,712
322
322
—
—
322
228
—
228
In addition to the pension plans in the above table, we also maintain less significant defined benefit pension plans primarily in
14 other countries outside of the U.S. and the U.K. that comprise approximately 3 percent and 4 percent of our pension plan
assets and obligations at December 31, 2016 and 2015, respectively. These plans are reflected in "Other liabilities and deferred
revenue" on our Consolidated Balance Sheets. In 2016, we made $54 million of contributions to these plans including a
contribution of $44 million to our German plans.
The following table presents information regarding total accumulated benefit obligation, PBO's and underfunded pension plans
that are included in the preceding table:
In millions
Total accumulated benefit obligation
Plans with accumulated benefit obligation in excess of plan assets
Accumulated benefit obligation
Plans with projected benefit obligation in excess of plan assets
Projected benefit obligation
Qualified and Non-Qualified Pension Plans
U.S. Plans
U.K. Plans
2016
2015
2016
2015
$
2,625
$
2,499
$
1,366
$
1,311
304
339
276
311
—
—
—
—
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Components of Net Periodic Pension Cost
The following table presents the net periodic pension cost under our plans for the years ended December 31:
In millions
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service credit
Recognized net actuarial loss
Net periodic pension cost
Qualified and Non-Qualified Pension Plans
U.S. Plans
U.K. Plans
2016
2015
2014
2016
2015
2014
$
$
90
109
(201)
—
29
$
27
$
80
102
(189)
(1)
45
37
$
$
66
105
(173)
(1)
31
28
$
$
21
50
(71)
—
15
$
15
$
27
56
(91)
—
34
26
$
$
24
63
(84)
—
26
29
Other changes in benefit obligations and plan assets recognized in other comprehensive income for the years ended December
31 were as follows:
In millions
Amortization of prior service credit
Recognized net actuarial loss
Incurred actuarial loss
Foreign exchange translation adjustments
Total recognized in other comprehensive income
2016
2015
2014
$ — $
(44)
107
(28)
35
$
$
1
(79)
105
(7)
20
$
$
$
1
(57)
133
(18)
59
116
Total recognized in net periodic pension cost and other comprehensive income
$
77
$
83
The amount in accumulated other comprehensive loss expected to be recognized as a component of net periodic pension cost
during the next fiscal year is a net actuarial loss of $77 million.
Assumptions
The table below presents various assumptions used in determining the PBO for each year and reflects weighted-average
percentages for the various plans as follows:
Qualified and Non-Qualified Pension Plans
U.S. Plans
U.K. Plans
Discount rate
Compensation increase rate
2015
2016
4.12% 4.47% 2.70% 3.95%
4.87% 4.88% 3.75% 3.75%
2015
2016
The table below presents various assumptions used in determining the net periodic pension cost and reflects weighted-average
percentages for the various plans as follows:
Qualified and Non-Qualified Pension Plans
U.S. Plans
U.K. Plans
Discount rate
Expected return on plan assets
Compensation increase rate
2015
2014
2016
2016
4.47% 4.07% 4.83% 3.95% 3.80% 4.60%
7.50% 7.50% 7.50% 4.70% 5.80% 5.80%
4.87% 4.88% 4.91% 3.75% 4.25% 4.50%
2014
2015
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Plan Assets
Our investment policies in the U.S. and U.K. provide for the rebalancing of assets to maintain our long-term strategic asset
allocation. We are committed to its long-term strategy and do not attempt to time the market given empirical evidence that asset
allocation is more critical than individual asset or investment manager selection. Rebalancing of the assets has and continues to
occur. The rebalancing is critical to having the proper weighting of assets to achieve the expected total portfolio returns. We
believe that our portfolio is highly diversified and does not have any significant exposure to concentration risk. The plan assets
for our defined benefit pension plans do not include any of our common stock.
U.S. Plan Assets
For the U.S. qualified pension plans, our assumption for the expected return on assets was 7.5 percent in 2016. Projected
returns are based primarily on broad, publicly traded equity and fixed income indices and forward-looking estimates of active
portfolio and investment management. We expect additional positive returns from this active investment management. Based
on the historical returns and forward-looking return expectations in a rising interest rate environment, we have elected to reduce
our assumption to 7.25 percent in 2017.
The primary investment objective is to exceed, on a net-of-fee basis, the rate of return of a policy portfolio comprised of the
following:
Asset Class
U.S. equities
Non-U.S. equities
Global equities
Total equities
Target
13.0%
5.0%
6.0%
24.0%
Range
+/-5.0%
+/-3.0%
+/-3.0%
Real estate
Private equity/venture capital
Opportunistic credit
Fixed income
Total
7.5% +2.5/-7.5%
7.5% +2.5/-7.5%
4.0% +6.0/-4.0%
+/-5.0%
57.0%
100.0%
The fixed income component is structured to represent a custom bond benchmark that will closely hedge the change in the
value of our liabilities. This component is structured in such a way that its benchmark covers approximately 100 percent of the
plan's exposure to changes in its discount rate (AA corporate bond yields). In order to achieve a hedge on more than the
targeted 57 percent of plan assets invested in fixed income securities, our Benefits Policy Committee (BPC) permits the fixed
income managers, other managers or the custodian/trustee to utilize derivative securities, as part of a liability driven investment
strategy to further reduce the plan's risk of declining interest rates. However, all managers hired to manage assets for the trust
are prohibited from using leverage unless specifically discussed with the BPC and approved in their guidelines.
U.K. Plan Assets
For the U.K. qualified pension plans, our assumption for the expected return on assets was 4.7 percent in 2016. The
methodology used to determine the rate of return on pension plan assets in the U.K. was based on establishing an equity-risk
premium over current long-term bond yields adjusted based on target asset allocations. Our strategy with respect to our
investments in these assets is to be invested in a suitable mixture of return-seeking assets such as equities and real estate and
liability matching assets such as bonds with a long-term outlook. Therefore, the risk and return balance of our U.K. asset
portfolio should reflect a long-term horizon. To achieve these objectives we have established the following targets:
Asset Class
Global equities
Real estate
Re-insurance
Corporate credit instruments
Fixed income
Total
Target
23.0%
5.0%
8.0%
7.5%
56.5%
100.0%
As part of our strategy in the U.K. we have not prohibited the use of any financial instrument, including derivatives. Based on
the above discussion, we have elected an assumption of 4.5 percent in 2017.
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Fair Value of U.S. Plan Assets
The fair values of U.S. pension plan assets by asset category were as follows:
In millions
Equities
U.S.
Non-U.S.
Fixed income
Government debt
Corporate debt
U.S.
Non-U.S.
Asset/mortgaged backed securities
Net cash equivalents(1)
Derivative instruments(2)
Private equity and real estate(3)
Net plan assets subject to leveling
$
Pending trade/purchases/sales
Accruals(4)
Investments measured at net asset value
Net plan assets
In millions
Equities
U.S.
Non-U.S.
Fixed income
Government debt
Corporate debt
U.S.
Non-U.S.
Asset/mortgaged backed securities
Net cash equivalents (1)
Derivative instruments (2)
Private equity and real estate (3)
Net plan assets subject to leveling
$
Fair Value Measurements at December 31, 2016
Quoted prices in active
markets for identical assets
(Level 1)
Significant other
observable inputs
(Level 2)
Significant
unobservable inputs
(Level 3)
Total
$
$
145
125
— $
—
— $
—
—
—
—
—
18
—
—
288
$
570
497
84
58
20
9
—
1,238
$
—
—
—
—
—
—
212
212
$
$
Fair Value Measurements at December 31, 2015
Quoted prices in active
markets for identical assets
(Level 1)
Significant other
observable inputs
(Level 2)
Significant
unobservable inputs
(Level 3)
Total
$
$
96
130
— $
—
— $
—
—
—
—
—
42
—
533
406
80
56
10
3
—
—
—
—
—
—
—
268
$
—
1,088
$
203
203
$
Pending trade/purchases/sales
Accruals (4)
Investments measured at net asset value
Net plan assets
____________________________________________________
(1) Cash equivalents include commercial paper, short-term government/agency, mortgage and credit instruments.
(2) Derivative instruments include interest rate swaps and credit default swaps.
(3) The instruments in private equity, real estate and insurance funds, for which quoted market prices are not available, are valued at their estimated fair value
1,094
2,636
$
as determined by applicable investment managers or by audited financial statement of the funds.
(4) Accruals include interest or dividends that were not settled at December 31.
87
145
125
570
497
84
58
38
9
212
1,738
(83)
12
1,084
2,751
96
130
533
406
80
56
52
3
203
1,559
(27)
10
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Certain of our assets are valued based on their respective net asset value (NAV) (or its equivalent), as an alternative to
estimated fair value due to the absence of readily available market prices. The fair value of each such investment category was
as follows:
• U.S. and Non-U.S. Equities ($511 million and $335 million at December 31, 2016 and 2015, respectively) - These
commingled funds have observable NAVs provided to investors and provide for liquidity either immediately or within
a couple of days.
• Government Debt ($178 million and $287 million at December 31, 2016 and 2015, respectively) - These commingled
funds have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of
days.
• U.S. and Non-U.S. Corporate Debt ($265 million and $346 million at December 31, 2016 and 2015, respectively) -
These commingled funds have observable NAVs provided to investors and provide for liquidity either immediately or
within a couple of days.
• Real Estate ($129 million and $119 million at December 31, 2016 and 2015, respectively) - This asset type represents
different types of real estate including development property, industrial property, individual mortgages, office
property, property investment companies, and retail property. These funds are valued using NAVs and allow quarterly
or more frequent redemptions.
• Asset/Mortgage Backed Securities ($1 million and $7 million at December 31, 2016 and 2015, respectively) - This
asset type represents investments in fixed- and floating-rate loans. These funds are valued using NAVs and allow
quarterly or more frequent redemptions.
The reconciliation of Level 3 assets was as follows:
In millions
Balance at December 31, 2014
Actual return on plan assets
Unrealized gains on assets still held at the reporting date
Purchases, sales and settlements, net
Balance at December 31, 2015
Actual return on plan assets
Unrealized gains on assets still held at the reporting date
Purchases, sales and settlements, net
Balance at December 31, 2016
Fair Value of U.K. Plan Assets
Fair Value Measurements
Using Significant Unobservable Inputs (Level 3)
Private Equity
148
$
$
17
(22)
143
6
(1)
148
$
$
Real Estate
Total
54
$
8
(2)
60
6
(2)
64
$
202
25
(24)
203
12
(3)
212
In July 2012, the U.K. pension plan purchased an insurance contract that will guarantee payment of specified pension
liabilities. The contract defers payment for 10 years and is included in the table below in Level 3 for years ended December 31,
2016 and 2015 at a value of $439 million and $445 million, respectively.
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The fair values of U.K. pension plan assets by asset category were as follows:
In millions
Equities
U.S.
Non-U.S.
Fixed income
Net cash equivalents (1)
Private equity, real estate and insurance (2)
Net plan assets subject to leveling
Investments measured at net asset value
Net plan assets
In millions
Equities
U.S.
Non-U.S.
Fixed income
Corporate debt non-U.S.
Net cash equivalents (1)
Private equity, real estate and insurance (2)
Net plan assets subject to leveling
Fair Value Measurements at December 31, 2016
Quoted prices in active
markets for identical assets
(Level 1)
Significant other
observable inputs
(Level 2)
Significant
unobservable inputs
(Level 3)
Total
$
$
— $
—
24
—
24
$
174
193
—
—
367
$
$
— $
—
—
613
613
$
$
174
193
24
613
1,004
749
1,753
Fair Value Measurements at December 31, 2015
Quoted prices in active
markets for identical assets
(Level 1)
Significant other
observable inputs
(Level 2)
Significant
unobservable inputs
(Level 3)
Total
$
$
— $
—
—
33
—
33
$
250
269
45
—
—
564
$
$
— $
—
—
—
601
601
$
250
269
45
33
601
1,198
514
1,712
Investments measured at net asset value
Net plan assets
_____________________________________________________
(1) Cash equivalents include commercial paper, short-term government/agency, mortgage and credit instruments.
(2) The instruments in private equity, real estate and insurance funds, for which quoted market prices are not available, are valued at their estimated fair value
$
as determined by applicable investment managers or by audited financial statement of the funds.
Certain of our assets are valued based on their respective NAV (or its equivalent), as an alternative to estimated fair value due
to the absence of readily available market prices. The fair value of each such investment category was as follows:
• U.S. and Non-U.S. Corporate Debt ($655 million and $458 million at December 31, 2016 and 2015, respectively) -
These commingled funds have observable NAVs provided to investors and provide for liquidity either immediately or
within a couple of days.
• Re-insurance ($56 million and $56 million at December 31, 2016 and 2015, respectively) - This commingled fund has
a NAVs that is determined on a monthly basis and the investment may be sold at that value.
• Managed Futures Funds ($38 million and $0 million at December 31, 2016 and 2015, respectively) - These
commingled funds invest in commodities, fixed income and equity securities. They have observable NAVs provided to
investors and provide for liquidity either immediately or within a couple of days.
89
Table of Contents
The reconciliation of Level 3 assets was as follows:
In millions
Balance at December 31, 2014
Actual return on plan assets
Fair Value Measurements
Using Significant Unobservable Inputs (Level 3)
Insurance
462
$
Real Estate
61
$
Private Equity
81
$
Total
$
604
Unrealized gains on assets still held at the reporting date
Purchases, sales and settlements, net
Balance at December 31, 2015
Actual return on plan assets
Unrealized (losses) gains on assets still held at the reporting date
Purchases, sales and settlements, net
Balance at December 31, 2016
$
6
(23)
445
(6)
—
439
$
7
(11)
57
(7)
7
57
$
10
8
99
15
3
117
$
23
(26)
601
2
10
613
Level 3 Assets
The investments in an insurance contract, venture capital, private equity, opportunistic credit and real estate funds, for which
quoted market prices are not available, are valued at their estimated fair value as determined by applicable investment
managers or by quarterly financial statements of the funds. These financial statements are audited at least annually. In
conjunction with our investment consultant, we monitor the fair value of the insurance contract as periodically reported by our
insurer and their counterparty risk. The fair value of all real estate properties, held in the partnerships, are valued at least once
per year by an independent professional real estate valuation firm. Fair value generally represents the fund's proportionate share
of the net assets of the investment partnerships as reported by the general partners of the underlying partnerships. Some
securities with no readily available market are initially valued at cost, utilizing independent professional valuation firms as well
as market comparisons with subsequent adjustments to values which reflect either the basis of meaningful third-party
transactions in the private market or the fair value deemed appropriate by the general partners of the underlying investment
partnerships. In such instances, consideration is also given to the financial condition and operating results of the issuer, the
amount that the investment partnerships can reasonably expect to realize upon the sale of the securities and any other factors
deemed relevant. The estimated fair values are subject to uncertainty and therefore may differ from the values that would have
been used had a ready market for such investments existed and such differences could be material.
Estimated Future Contributions and Benefit Payments
We plan to contribute approximately $134 million to our defined benefit pension plans in 2017. The table below presents
expected future benefit payments under our pension plans:
In millions
Expected benefit payments
2017
2018
2019
2020
2021
$
241
$
237
$
243
$
249
$
254
2022 - 2026
1,322
$
Qualified and Non-Qualified Pension Plans
Other Pension Plans
We also sponsor defined contribution plans for certain hourly and salaried employees. Our contributions to these plans were
$68 million, $74 million and $73 million for the years ended December 31, 2016, 2015 and 2014.
Other Postretirement Benefits
Our other postretirement benefit plans provide various health care and life insurance benefits to eligible employees, who retire
and satisfy certain age and service requirements, and their dependents. The plans are contributory and contain cost-sharing
features such as caps, deductibles, coinsurance and spousal contributions. Employer contributions are limited by formulas in
each plan. Retiree contributions for health care benefits are adjusted annually, and we reserve the right to change benefits
covered under these plans. There were no plan assets for the postretirement benefit plans as our policy is to fund benefits and
expenses for these plans as claims and premiums are incurred.
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Table of Contents
Obligations and Funded Status
Benefit obligation balances presented below reflect the accumulated postretirement benefit obligations (APBO) for our other
postretirement benefit plans. The changes in the benefit obligations, the funded status of the plans and the amounts recognized
in our Consolidated Balance Sheets for our significant other postretirement benefit plans were as follows:
In millions
Change in benefit obligation
Years ended December 31,
2016
2015
Benefit obligation at the beginning of the year
$
385
$
Interest cost
Plan participants' contributions
Actuarial loss
Benefits paid directly by employer
Benefit obligation at end of year
Funded status at end of year
Amounts recognized in consolidated balance sheets
Accrued compensation, benefits and retirement costs - current liabilities
Postretirement benefits other than pensions-long-term liabilities
Net amount recognized
Amounts recognized in accumulated other comprehensive loss:
Net actuarial loss
Prior service credit
Net amount recognized
$
$
$
$
$
$
16
14
9
(60)
364
$
408
15
10
5
(53)
385
(364) $
(385)
(35) $
(329)
(364) $
(36)
(349)
(385)
69
(5)
64
$
$
66
(5)
61
In addition to the other postretirement plans in the above table, we also maintain less significant postretirement plans in four
other countries outside the U.S. that comprise approximately 5 percent and 3 percent of our postretirement obligations at
December 31, 2016 and 2015, respectively. These plans are reflected in "Other liabilities and deferred revenue" in our
Consolidated Balance Sheets.
Components of Net Periodic Other Postretirement Benefits Cost
The following table presents the net periodic other postretirement benefits cost under our plans:
In millions
Interest cost
Recognized net actuarial loss
Net periodic other postretirement benefit cost
Years ended December 31,
2016
2015
2014
$
$
16
5
21
$
$
15
5
20
$
$
17
—
17
Other changes in benefit obligations recognized in other comprehensive income for the years ended December 31 were as
follows:
In millions
Recognized net actuarial loss
Incurred actuarial loss
Total recognized in other comprehensive income
Total recognized in net periodic other postretirement benefit cost and other comprehensive income
91
Years ended December 31,
2016
2015
2014
$
$
$
(6) $
9
3
24
$
$
(5) $
6
1
21
$
$
—
38
38
55
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The amount in accumulated other comprehensive loss expected to be recognized as a component of net periodic other
postretirement benefit cost during the next fiscal year is $7 million.
Assumptions
The table below presents assumptions used in determining the other postretirement benefit obligation for each year and reflects
weighted-average percentages for our other postretirement plans as follows:
Discount rate
2015
2016
4.00% 4.35%
The table below presents assumptions used in determining the net periodic other postretirement benefits cost and reflects
weighted-average percentages for the various plans as follows:
Discount rate
2016
2015
4.35% 3.90% 4.55%
2014
Our consolidated other postretirement benefit obligation is determined by application of the terms of health care and life
insurance plans, together with relevant actuarial assumptions and health care cost trend rates. For measurement purposes, a 7.63
percent annual rate of increase in the per capita cost of covered health care benefits was assumed in 2016. The rate is assumed
to decrease on a linear basis to 5.00 percent through 2024 and remain at that level thereafter. An increase in the health care cost
trends of 1 percent would increase our APBO by $19 million at December 31, 2016 and the net periodic other postretirement
benefit cost for 2017 by $1 million. A decrease in the health care cost trends of 1 percent would decrease our APBO by $16
million at December 31, 2016 and the net periodic other postretirement benefit cost for 2017 by $1 million.
Estimated Benefit Payments
The table below presents expected benefit payments under our other postretirement benefit plans:
In millions
2017
2018
2019
2020
2021
2022 - 2026
Expected benefit payments
$
35
$
33
$
32
$
30
$
29
$
126
NOTE 9. DEBT
Loans Payable and Commercial Paper
Loans payable at December 31, 2016 and 2015 were $41 million and $24 million, respectively, and consisted primarily of notes
payable to financial institutions. The weighted-average interest rate for notes payable, bank overdrafts and current maturities of
long-term debt at December 31 was as follows:
Weighted average interest rate
2015
2016
4.20% 3.65%
2014
3.70%
In February 2016, the Board of Directors authorized the issuance of up to $1.75 billion of unsecured short-term promissory
notes ("commercial paper") pursuant to a commercial paper program. The program will facilitate the private placement of
unsecured short-term debt through third party brokers. We intend to use the net proceeds from the commercial paper program
for general corporate purposes. We had $212 million in outstanding borrowings under our commercial paper program at
December 31, 2016, with a weighted-average interest rate of 0.79 percent.
Interest
For the years ended December 31, 2016, 2015 and 2014, total interest incurred was $75 million, $68 million and $71 million,
respectively, and interest capitalized was $6 million, $3 million and $7 million, respectively.
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Revolving Credit Facility
On November 13, 2015, we entered into an amended and restated five-year revolving credit agreement with a syndicate of
lenders. The credit agreement provides us with a $1.75 billion senior unsecured revolving credit facility, the proceeds of which
are to be used for working capital or other general corporate purposes. Amounts payable under our revolving credit facility will
rank pro rata with all of our unsecured, unsubordinated indebtedness. Up to $300 million under our credit facility is available
for swingline loans. Advances under the facility bear interest at (i) a base rate or (ii) a rate equal to the LIBOR rate plus an
applicable margin based on the credit ratings of our outstanding senior unsecured long-term debt. Based on our current long-
term debt ratings, the applicable margin on LIBOR rate loans was 0.75 percent per annum at December 31, 2016. Advances
under the facility may be prepaid without premium or penalty, subject to customary breakage costs.
The credit agreement includes various covenants, including, among others, maintaining a leverage ratio of no more than 3.5 to
1.0. At December 31, 2016, we were in compliance with the covenants.
There were no outstanding borrowings under this facility at December 31, 2016. The revolving credit facility is maintained
primarily to provide backup liquidity for our commercial paper borrowings and general corporate purposes. At December 31,
2016, we had $212 million of commercial paper outstanding, which effectively reduced the $1.75 billion available capacity
under our revolving credit facility to $1.54 billion.
At December 31, 2016, we also had $128 million available for borrowings under our international and other domestic credit
facilities, net of outstanding letters of credit of $27 million.
Long-term Debt
In millions
Long-term debt
Senior notes, 3.65%, due 2023
Debentures, 6.75%, due 2027
Debentures, 7.125%, due 2028
Senior notes, 4.875%, due 2043
Debentures, 5.65%, due 2098 (effective interest rate 7.48%)
Other debt
Unamortized discount
Fair value adjustments due to hedge on indebtedness
Capital leases
Total long-term debt
Less: Current maturities of long-term debt
Long-term debt
December 31,
2016
2015
$
500
$
58
250
500
165
51
(56)
47
88
500
58
250
500
165
55
(57)
63
81
1,603
35
1,615
39
$
1,568
$
1,576
Principal payments required on long-term debt during the next five years are as follows:
In millions
2017
2018
2019
2020
2021
Principal payments
$
35
$
33
$
29
$
8
$
4
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.
In September 2013, we issued $1 billion aggregate principal amount of senior notes consisting of $500 million aggregate
principal amount of 3.65% senior unsecured notes due in 2023 and $500 million aggregate principal amount of 4.875% senior
unsecured notes due in 2043. The senior notes pay interest semi-annually on April 1 and October 1.
Interest on the 6.75% debentures is payable on February 15 and August 15 each year.
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Interest on the $250 million 7.125% debentures and $165 million 5.65% debentures is payable on March 1 and September 1 of
each year. The debentures are unsecured and are not subject to any sinking fund requirements. We can redeem the 7.125%
debentures and the 5.65% debentures at any time prior to maturity at the greater of par plus accrued interest or an amount
designed to ensure that the debenture holders are not penalized by the early redemption.
Our debt agreements contain several restrictive covenants. The most restrictive of these covenants applies to our revolving
credit facility which will upon default, among other things, limit our ability to incur additional debt or issue preferred stock,
enter into sale-leaseback transactions, sell or create liens on our assets, make investments and merge or consolidate with any
other entity. In addition, we are subject to a maximum debt-to-EBITDA ratio financial covenant. At December 31, 2016, we
were in compliance with all of the covenants under our borrowing agreements.
Interest Rate Risk
We are exposed to market risk from fluctuations in interest rates. We manage our exposure to interest rate fluctuations through
the use of interest rate swaps. The objective of the swaps is to more effectively balance our borrowing costs and interest rate
risk.
In February 2014, we settled our November 2005 interest rate swap which previously converted our $250 million debt issue,
due in 2028, from a fixed rate to a floating rate based on the LIBOR spread. We are amortizing the $52 million gain realized
upon settlement over the remaining 14-year term of related debt.
Also, in February 2014, we entered into a series of interest rate swaps to effectively convert our September 2013, $500 million
debt issue, due in 2023, from a fixed rate of 3.65 percent to a floating rate equal to the one-month LIBOR plus a spread. The
terms of the swaps mirror those of the debt, with interest paid semi-annually. The swaps were designated, and will be accounted
for, as fair value hedges under GAAP. The gain or loss on these derivative instruments, as well as the offsetting gain or loss on
the hedged item attributable to the hedged risk, are recognized in current income as “Interest expense.” The net swap
settlements that accrue each period are also reported in interest expense.
The following table summarizes these gains and losses for the years presented below:
In millions
2016
2015
2014
Years ended December 31,
Income Statement
Classification
Interest expense (1)
___________________________________________
(1) The difference between the gain/(loss) on swaps and borrowings represents hedge ineffectiveness.
Gain/(Loss) on
Swaps
Gain/(Loss) on
Borrowings
Gain/(Loss) on
Swaps
(8) $
12
$
$
$
6
Gain/(Loss) on
Borrowings
Gain/(Loss) on
Swaps
Gain/(Loss) on
Borrowings
(2) $
23
$
(19)
Fair Value of Debt
Based on borrowing rates currently available to us for bank loans with similar terms and average maturities, considering our
risk premium, the fair value and carrying value of total debt, including current maturities, was as follows:
In millions
Fair value of total debt (1)
Carrying value of total debt
___________________________________________
(1) The fair value of debt is derived from Level 2 inputs.
December 31,
2016
2015
$
$
2,077
1,856
1,821
1,639
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NOTE 10. PRODUCT WARRANTY LIABILITY
A tabular reconciliation of the product warranty liability, including the deferred revenue related to our extended warranty
coverage and accrued recall programs was as follows:
In millions
Balance, beginning of year
Provision for warranties issued
Deferred revenue on extended warranty contracts sold
Payments
Amortization of deferred revenue on extended warranty contracts
Changes in estimates for pre-existing warranties
Foreign currency translation
Balance, end of year
December 31,
2016
2015
$
$
1,404
334
231
(385)
(201)
44
(13)
1,414
$
$
1,283
391
290
(389)
(179)
20
(12)
1,404
Warranty related deferred revenue and the long-term portion of the warranty liability on our Consolidated Balance Sheets were
as follows:
In millions
Deferred revenue related to extended coverage programs
Current portion
Long-term portion
Total
Long-term portion of warranty liability
December 31,
2016
2015
Balance Sheet Location
218
527
745
$
$
189 Current portion of deferred revenue
529 Other liabilities and deferred revenue
718
336
$
327 Other liabilities and deferred revenue
$
$
$
NOTE 11. OTHER LIABILITIES AND DEFERRED REVENUE
Other liabilities and deferred revenue included the following:
In millions
Deferred revenue
Accrued warranty
Accrued compensation
Other long-term liabilities
Other liabilities and deferred revenue
$
1,289
$
December 31,
2016
2015
$
$
589
336
151
213
583
327
199
249
1,358
NOTE 12. COMMITMENTS AND CONTINGENCIES
We are subject to numerous lawsuits and claims arising out of the ordinary course of our business, including actions related to
product liability; personal injury; the use and performance of our products; warranty matters; product recalls; patent, trademark
or other intellectual property infringement; contractual liability; the conduct of our business; tax reporting in foreign
jurisdictions; distributor termination; workplace safety; and environmental matters. We also have been identified as a
potentially responsible party at multiple waste disposal sites under U.S. federal and related state environmental statutes and
regulations and may have joint and several liability for any investigation and remediation costs incurred with respect to such
sites. We have denied liability with respect to many of these lawsuits, claims and proceedings and are vigorously defending
such lawsuits, claims and proceedings. We carry various forms of commercial, property and casualty, product liability and other
forms of insurance; however, such insurance may not be applicable or adequate to cover the costs associated with a judgment
against us with respect to these lawsuits, claims and proceedings. We do not believe that these lawsuits are material individually
or in the aggregate. While we believe we have also established adequate accruals pursuant to GAAP for our expected future
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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 Charges
Engine systems sold in the U.S. must be certified to comply with the Environmental Protection Agency (EPA) and California
Air Resources Board (CARB) emission standards. EPA and CARB regulations require that in-use testing be performed on
vehicles by the emission certificate holder and reported to the EPA and CARB in order to ensure ongoing compliance with
these emission standards. We are the holder of this emission certificate for our engines, including engines installed in certain
vehicles with one customer on which we did not also manufacture or sell the emission aftertreatment system. During 2015, a
quality issue in certain of these third party aftertreatment systems caused some of our inter-related engines to fail in-use
emission testing. In the fourth quarter of 2015, the vehicle manufacturer made a request that we assist in the design and bear the
financial cost of a field campaign (Campaign) to address the technical issue purportedly causing some vehicles to fail the in-use
testing.
While we are not responsible for the warranty issues related to a component that we did not manufacture or sell, as the emission
compliance certificate holder, we are responsible for proposing a remedy to the EPA and CARB. As a result, we have proposed
actions to the agencies that we believe will address the emission failures. As the certificate holder, we expect to participate in
the cost of the proposed voluntary Campaign and recorded a charge of $60 million in 2015. The Campaign design was finalized
with our OEM customer, reviewed with the EPA and submitted for final approval in 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 million in 2016 to reflect the estimated cost of our
participation in the Campaign. We continue to work with our OEM customer to resolve the allocation of costs for the
Campaign, including pending litigation between the parties. The Campaign is not expected to be completed for some time and
our final cost could differ from the amount we have recorded.
We do not currently expect any fines or penalties from the EPA or CARB related to this matter.
The accrual related to the Campaign is included in "Other accrued expenses" in our Consolidated Balance Sheets.
Guarantees and Commitments
From time to time 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 December 31, 2016, the maximum potential loss related to these guarantees was $24 million.
We have arrangements with certain suppliers that require us to purchase minimum volumes or be subject to monetary
penalties. At December 31, 2016, if we were to stop purchasing from each of these suppliers, the aggregate amount of the
penalty would be approximately $90 million, of which $47 million relates to a contract with a components supplier that extends
to 2018. Most of these arrangements enable us to secure critical components. We do not currently anticipate paying any
penalties under these contracts.
We enter into physical forward contracts with suppliers of platinum, palladium and copper to purchase minimum volumes of
the commodities at contractually stated prices for various periods, not to exceed two years. At December 31, 2016, the total
commitments under these contracts were $45 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 $85 million at December 31, 2016.
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;
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•
•
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.
Leases
We lease certain manufacturing equipment, facilities, warehouses, office space and equipment, aircraft and automobiles for
varying periods under lease agreements. Most of the leases are non-cancelable operating leases with fixed rental payments,
expire over the next 10 years and contain renewal provisions. Rent expense under these leases was as follows:
In millions
Rent expense
Years ended December 31,
2016
2015
2014
$
210
$
205
$
195
The following is a summary of the leased property under capital leases by major classes:
In millions
Building
Equipment
Land
Less: Accumulated depreciation
Total
December 31,
2016
2015
$
$
113
109
15
(133)
104
$
$
113
86
15
(112)
102
Following is a summary of the future minimum lease payments due under capital and operating leases, including leases in our
rental business, with terms of more than one year at December 31, 2016, together with the net present value of the minimum
payments due under capital leases:
In millions
2017
2018
2019
2020
2021
After 2021
Total minimum lease payments
Interest
Present value of net minimum lease payments
Capital Leases
Operating Leases
$
$
$
$
$
25
22
19
7
6
39
118
(30)
88
141
101
81
59
44
93
519
In addition, we have subleased certain facilities under operating leases to third parties. The future minimum lease payments due
from lessees under those arrangements are less than $1 million per year for the next five years.
NOTE 13. SHAREHOLDERS' EQUITY
Preferred and Preference Stock
We are authorized to issue one million shares each of zero par value preferred and preference stock with preferred shares being
senior to preference shares. We can determine the number of shares of each series, and the rights, preferences and limitations of
each series. At December 31, 2016, there was no preferred or preference stock outstanding.
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Common Stock
Changes in shares of common stock, treasury stock and common stock held in trust for employee benefit plans were as follows:
In millions
Balance at December 31, 2013
Shares acquired
Shares issued
Other shareholder transactions
Balance at December 31, 2014
Shares acquired
Shares issued
Balance at December 31, 2015
Shares acquired
Shares issued
Balance at December 31, 2016
Common
Stock
Treasury
Stock
Common Stock
Held in Trust
222.3
—
0.1
(0.1)
222.3
—
0.1
222.4
—
—
222.4
35.6
4.8
(0.3)
—
40.1
7.2
(0.1)
47.2
7.3
(0.3)
54.2
1.3
—
(0.2)
—
1.1
—
(0.2)
0.9
—
(0.2)
0.7
Treasury Stock
Shares of common stock repurchased by us are recorded at cost as treasury stock and result in a reduction of shareholders'
equity in our Consolidated Balance Sheets. Treasury shares may be reissued as part of our stock-based compensation programs.
When shares are reissued, we use the weighted-average cost method for determining cost. The gains between the cost of the
shares and the issuance price are added to additional paid-in-capital. The losses are deducted from additional paid-in capital to
the extent of the gains. Thereafter, the losses are deducted from retained earnings. Treasury stock activity for the three-year
period ended December 31, 2016, consisting of shares issued and repurchased is presented in our Consolidated Statements of
Changes in Equity.
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, the Board of Directors authorized the acquisition of up to $1
billion of additional common stock upon completion of the 2014 repurchase program. In 2016, we made the following
purchases under the respective purchase programs:
In millions (except per share amounts)
For each quarter ended
July 2014, $1 billion repurchase program
2016 Shares
Purchased
Average Cost
Per Share
Total Cost of
Repurchases
Cash Paid for
Shares Not
Received
Remaining
Authorized
Capacity (1)
April 3
2.7
$
100.12
$
274
$
— $
—
November 2015, $1 billion repurchase program
April 3
July 3
October 2
December 31
Subtotal
Total
2.2
1.8
0.4
0.2
4.6
7.3
$
105.50
$
109.79
126.13
130.70
110.29
$
106.48
$
229
192
50
33
504
778
$
$
$
100
(100)
—
—
—
—
671
579
529
496
___________________________________________
(1) The remaining authorized capacity under the 2015 Plan was calculated based on the cost to purchase the shares but excludes commission expenses in
accordance with the authorized Plan.
In 2016, we entered into an accelerated share repurchase agreement with a third party financial institution to repurchase $500
million of our common stock under our previously announced share repurchase plans and received 4.7 million shares at an
average purchase price of $105.50 per share.
We repurchased $778 million and $900 million of our common stock in the years ended December 31, 2016 and 2015,
respectively.
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Quarterly Dividends
Total dividends paid to common shareholders in 2016, 2015 and 2014 were $676 million, $622 million and $512 million,
respectively. Declaration and payment of dividends in the future depends upon our income and liquidity position, among other
factors, and is subject to declaration by our Board of Directors, who meet quarterly to consider our dividend payment. We
expect to fund dividend payments with cash from operations.
In July 2016, the Board of Directors authorized an increase to our quarterly dividend of 5.1 percent from $0.975 per share to
$1.025. In July 2015, the Board of Directors authorized a 25 percent increase to our quarterly cash dividend on our common
stock from $0.78 per share to $0.975 per share. In July 2014, the Board of Directors approved a 25 percent increase to our
quarterly dividend on our common stock from $0.625 per share to $0.78 per share. Cash dividends per share paid to common
shareholders for the last three years were as follows:
First quarter
Second quarter
Third quarter
Fourth quarter
Total
Quarterly Dividends
2016
2015
2014
$
0.975
$
0.975
1.025
1.025
$
0.78
0.78
0.975
0.975
$
4.00
$
3.51
$
0.625
0.625
0.78
0.78
2.81
Employee Benefits Trust
In 1997, we established the Employee Benefits Trust (EBT) funded with common stock for use in meeting our future
obligations under employee benefit and compensation plans. The primary sources of cash for the EBT are dividends received
on unallocated shares of our common stock held by the EBT. The EBT may be used to fund matching contributions to
employee accounts in the 401(k) Retirement Savings Plan (RSP) made in proportion to employee contributions under the terms
of the RSP. In addition, we may direct the trustee to sell shares of the EBT on the open market to fund other non-qualified
employee benefit plans. Matching contributions charged to income for the years ended December 31, 2016, 2015 and 2014
were $23 million, $25 million and $24 million, respectively.
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NOTE 14. ACCUMULATED OTHER COMPREHENSIVE LOSS
Following are the changes in accumulated other comprehensive income (loss) by component:
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.
(784)
Noncontrolling
interests
Total
In millions
Balance at December 31, 2013
Other comprehensive income before reclassifications
Before tax amount
Tax benefit (expense)
After tax amount
Amounts reclassified from accumulated other comprehensive income(1)(2)
Net current period other comprehensive income (loss)
Balance at December 31, 2014
Other comprehensive income before reclassifications
Before tax amount
Tax benefit (expense)
After tax amount
Amounts reclassified from accumulated other comprehensive income(1)(2)
Net current period other comprehensive income (loss)
Balance at December 31, 2015
Other comprehensive income before reclassifications
Before tax amount
Tax benefit
After tax amount
Amounts reclassified from accumulated other comprehensive income(1)(2)
Net current period other comprehensive income (loss)
Balance at December 31, 2016
$
(611) $
(179) $
(196)
92
(104)
46
(58)
(669) $
(81)
35
(46)
61
15
(654) $
(111)
44
(67)
36
(31)
(685) $
(241)
14
(227)
—
(227)
(406) $
(366)
76
(290)
—
(290)
(696) $
(469)
38
(431)
—
(431)
(1,127) $
$
$
$
7
$
2
(1)
1
(9)
(8)
(1) $
—
—
—
(1)
(1)
(2) $
1
—
1
—
1
(1) $
(1) $
2
(1)
1
(2)
(1)
(2) $
17
(1)
16
(10)
6
4
(433) $
104
(329)
35
(294) $
(1,078)
(430) $
110
(320)
50
(270) $
$
(1,348)
(38)
6
(32)
20
(12)
(8) $
(617) $
88
(529)
56
(473) $
(1,821)
(7) $
—
(7)
(4)
(11) $
(15) $
—
(15)
—
(15) $
(17) $
—
(17)
—
(17) $
(440)
104
(336)
31
(305)
(445)
110
(335)
50
(285)
(634)
88
(546)
56
(490)
_______________________________________________________________________
(1) Amounts are net of tax.
(2) See reclassifications out of accumulated other comprehensive (loss) income disclosure below for further details.
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Following are the items reclassified out of accumulated other comprehensive (loss) income and the related tax effects:
In millions
(Gain)/Loss Components
Change in pensions and other postretirement
defined benefit plans
Years ended December 31,
2016
2015
2014
Statement of Income Location
Recognized actuarial loss
Tax effect
$
$
53
(17)
$
87
(26)
Net change in pensions and other
postretirement defined benefit plans
Realized gain on marketable securities
Tax effect
Net realized gain on marketable securities
Realized loss (gain) on derivatives
Foreign currency forward contracts
Commodity swap contracts
Total before taxes
Tax effect
Net realized loss (gain) on derivatives
36
—
—
—
27
—
27
(7)
20
61
(1)
—
(1)
(11)
—
(11)
1
(10)
(1)
Income tax expense
63
(17)
46
(14) Other income (expense), net
Income tax expense
1
(13)
(5) Net sales
2 Cost of sales
(3)
1
(2)
Income tax expense
Total reclassifications for the period
$
_______________________________________________________________________
(1) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 8,
31
50
56
$
$
''PENSION AND OTHER POSTRETIREMENT BENEFITS'').
NOTE 15. STOCK INCENTIVE AND STOCK OPTION PLANS
We have a shareholder approved stock incentive plan (the Plan) which allows for the granting of equity awards covering up to
3.5 million shares to executives, employees and non-employee directors. Awards available for grant under the Plan include, but
are not limited to, stock options, stock appreciation rights, performance shares and other stock awards. Shares issued under the
Plan may be newly issued shares or reissued treasury shares.
Stock options are generally granted with a strike price equal to the fair market value of the stock on the date of grant and a life
of 10 years. Stock options granted have a three-year vesting period. The strike price may be higher than the fair value of the
stock on the date of the grant, but cannot be lower. Compensation expense is recorded on a straight-line basis over the vesting
period beginning on the grant date. The compensation expense is based on the fair value of each option grant using the Black-
Scholes option pricing model. Options granted to employees eligible for retirement under our retirement plan are fully
expensed at the grant date.
Stock options are also awarded through the Key Employee Stock Investment Plan (KESIP) which allows certain employees,
other than officers, to purchase shares of common stock on an installment basis up to an established credit limit. For every even
block of 100 KESIP shares purchased by the employee 50 stock options are granted. The options granted through the KESIP
program are considered awards under the Plan and are vested immediately. Compensation expense for stock options granted
through the KESIP program is recorded based on the fair value of each option grant using the Black-Scholes option pricing
model.
Performance shares are granted as target awards and are earned based on our return on equity (ROE) performance. A payout
factor has been established ranging from 0 to 200 percent of the target award based on our actual ROE performance. Shares
have a three-year performance period. The fair value of the award is equal to the average market price, adjusted for the present
value of dividends over the vesting period, of our stock on the grant date. Compensation expense is recorded ratably over the
period beginning on the grant date until the shares become unrestricted and is based on the amount of the award that is
expected to be earned under the plan formula, adjusted each reporting period based on current information.
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Restricted common stock is awarded from time to time at no cost to certain employees. Participants are entitled to cash
dividends and voting rights. Restrictions limit the sale or transfer of the shares during a defined period. Generally, one-third of
the shares become vested and free from restrictions after two years and one-third of the shares issued become vested and free
from restrictions each year thereafter on the anniversary of the grant date, provided the participant remains an employee. The
fair value of the award is equal to the average market price of our stock on the grant date. Compensation expense is determined
at the grant date and is recognized over the restriction period on a straight-line basis.
Employee compensation expense (net of estimated forfeitures) related to our share-based plans for the years ended December
31, 2016, 2015 and 2014, was approximately $31 million, $22 million and $35 million, respectively. In addition, non-employee
director share-based compensation expense for the years ended December 31, 2016, 2015 and 2014, was approximately $1
million, $2 million and $1 million, respectively. Shares granted to non-employee directors vest immediately and have no
restrictions or performance conditions. The excess tax benefit associated with our employee share-based plans for the years
ended December 31, 2016, 2015 and 2014, was $1 million, $1 million and $5 million, respectively. The total unrecognized
compensation expense (net of estimated forfeitures) related to nonvested awards for our employee share-based plans was
approximately $28 million at December 31, 2016, and is expected to be recognized over a weighted-average period of less than
two years.
The tables below summarize the employee share-based activity in the Plan:
Balance at December 31, 2013
Granted
Exercised
Forfeited
Balance at December 31, 2014
Granted
Exercised
Forfeited
Balance at December 31, 2015
Granted
Exercised
Forfeited
Balance at December 31, 2016
Exercisable, December 31, 2014
Exercisable, December 31, 2015
Exercisable, December 31, 2016
Options
1,462,336
350,630
(175,526)
(10,716)
1,626,724
476,205
(53,545)
(19,698)
2,029,686
984,430
(215,890)
(63,462)
2,734,764
903,059
1,318,101
1,149,549
Weighted-average
Exercise Price
Weighted-average
Remaining
Contractual Life
(in years)
Aggregate
Intrinsic Value
(in millions)
$
$
$
$
$
95.35
148.98
82.06
102.56
108.30
135.21
82.89
135.89
115.02
109.24
87.27
119.56
115.02
92.18
100.55
104.19
7.12
6.05
5.73
4.81
$
$
$
$
64
48
13
38
The weighted-average grant date fair value of options granted during the years ended December 31, 2016, 2015 and 2014, was
$25.28, $35.25 and $49.16, respectively. The total intrinsic value of options exercised during the years ended December 31,
2016, 2015 and 2014, was approximately $9 million, $3 million and $12 million, respectively.
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The weighted-average grant date fair value of performance and restricted shares was as follows:
Nonvested
Balance at December 31, 2013
Granted
Vested
Forfeited
Balance at December 31, 2014
Granted
Vested
Forfeited
Balance at December 31, 2015
Granted
Vested
Forfeited
Balance at December 31, 2016
Performance Shares
Restricted Shares
Shares
Weighted-average
Fair Value
Shares
Weighted-average
Fair Value
475,913
206,031
(207,093)
(8,158)
466,693
133,975
(112,901)
(67,398)
420,369
169,150
(115,680)
(69,345)
404,494
$
$
109.93
130.38
107.64
121.18
119.78
128.48
115.48
118.71
123.88
98.26
106.55
110.52
120.41
32,541
—
(21,266)
—
11,275
—
(7,021)
—
4,254
8,089
(2,502)
—
9,841
$
$
81.49
—
65.88
—
110.94
—
110.66
—
111.40
117.69
114.57
—
115.76
The total vesting date fair value of performance shares vested during the years ended December 31, 2016, 2015 and 2014 was
$12 million, $11 million and $30 million, respectively. The total fair value of restricted shares vested was less than $1 million,
$1 million and $3 million for the years ended December 31, 2016, 2015 and 2014, respectively.
The fair value of each option grant was estimated on the grant date using the Black-Scholes option pricing model with the
following assumptions:
Expected life (years)
Risk-free interest rate
Expected volatility
Dividend yield
2016
2015
2014
5
5
1.34%
1.41%
30.96% 33.06%
2.10%
1.69%
5
1.80%
41.17%
1.61%
Expected life—The expected life of employee stock options represents the weighted-average period the stock options are
expected to remain outstanding based upon our historical data.
Risk-free interest rate—The risk-free interest rate assumption is based upon the observed U.S. treasury security rate appropriate
for the expected life of our employee stock options.
Expected volatility—The expected volatility assumption is based upon the weighted-average historical daily price changes of
our common stock over the most recent period equal to the expected option life of the grant, adjusted for activity which is not
expected to occur in the future.
Dividend yield—The dividend yield assumption is based on our history and expectation of dividend payouts.
NOTE 16. NONCONTROLLING INTERESTS
Noncontrolling interests in the equity of consolidated subsidiaries were as follows:
In millions
Cummins India Ltd.
Wuxi Cummins Turbo Technologies Co. Ltd. (1)
Other
Total
December 31,
2016
2015
$
$
285
$
—
14
299
$
271
54
19
344
____________________________________________________
(1) In December 2016, we purchased the remaining interest in Wuxi Cummins Turbo Technologies
Co. Ltd. See Note 18, "ACQUISITIONS," for additional information.
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NOTE 17. EARNINGS PER SHARE
We calculate basic earnings per share (EPS) of common stock by dividing net income attributable to Cummins Inc. by the
weighted-average number of common shares outstanding for the period. The calculation of diluted EPS assumes the issuance of
common stock for all potentially dilutive share equivalents outstanding. We exclude shares of common stock held in the EBT
(see Note 13, "SHAREHOLDERS' EQUITY") from the calculation of the weighted-average common shares outstanding until
those shares are distributed from the EBT to the RSP. Following are the computations for basic and diluted earnings per share:
Dollars in millions, except per share amounts
Net income attributable to Cummins Inc.
Weighted-average common shares outstanding
Basic
Dilutive effect of stock compensation awards
Diluted
Earnings per common share attributable to Cummins Inc.
Basic
Diluted
$
$
Years ended December 31,
2016
2015
2014
1,394
$
1,399
$
1,651
169,038,410
298,206
169,336,616
178,037,581
369,247
178,406,828
182,637,568
441,727
183,079,295
$
8.25
8.23
$
7.86
7.84
9.04
9.02
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:
Options excluded
Years ended December 31,
2016
1,091,799
2015
2014
866,262
165,840
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NOTE 18. ACQUISITIONS
In 2016, we completed the acquisition of the last two partially-owned North American distributors. The joint venture acquisitions for the years ended December 31, 2016, 2015 and
2014 were as follows:
Additional
Percent
Interest
Acquired
Payments
to
Former
Owners
Acquisition
Related
Debt
Retirements
Total
Purchase
Consideration
Type of
Acquisition(1)
Gain
Recognized(1)
Goodwill
Acquired
Intangibles
Recognized(2)
Net Sales
Previous
Fiscal Year
Ended(3)
Entity Acquired (Dollars in millions)
2016
Wuxi Cummins Turbo Technologies Co. Ltd
Cummins Pacific LLC
Cummins Northeast LLC
2015
Cummins Crosspoint LLC
Cummins Atlantic LLC
Cummins Central Power LLC
2014
Cummins Bridgeway LLC
Cummins NPower LLC
Cummins Power South LLC
Cummins Eastern Canada LP
Cummins Power Systems LLC
Cummins Southern Plains LLC
Date of
Acquisition
12/05/16
10/04/16
01/01/16
45% $
50%
35%
$
$
08/03/15
08/03/15
50%
51%
06/29/15
20.01%
11/03/14
09/29/14
09/29/14
08/04/14
05/05/14
03/31/14
54%
50%
50%
50%
30%
50%
$
$
$
86
30
12
29
21
8
32
39
19
30
14
44
— $
$
$
67
—
36
28
—
45
34
16
32
—
48
EQUITY $
86
99 (4) COMB
EQUITY
12
65
49
8
77
73
35
62
14
92
$
$
COMB
COMB
EQUITY
COMB
COMB
COMB
COMB
EQUITY
COMB
— $ — $
— $
$
$
15
—
10
8
—
13
15
7
18
—
13
$
$
4
—
7
5
—
4
7
8
5
—
1
8
—
2
6
—
$
15
$
8
1
4
—
11
—
391
—
258
245
—
331
374
239
228
—
433
Cummins Mid-South LLC
____________________________________________________
(1) All results from acquired entities were included in segment results subsequent to the acquisition date. Previously consolidated entities were accounted for as equity transactions (EQUITY). Newly consolidated entities were
accounted for as business combinations (COMB) with gains recognized based on the requirement to remeasure our pre-existing ownership to fair value in accordance with GAAP and are included in the Consolidated
Statements of Income as "Other income, net."
Intangible assets acquired in business combinations were mostly customer related, the majority of which will be amortized over a period of up to five years from the date of the acquisition.
(2)
(3) Sales amounts are not fully incremental to our consolidated sales as the amount would be reduced by the elimination of sales to the previously unconsolidated entity.
(4) The "Total Purchase Consideration" represents the total amount that will or is estimated to be paid to complete the acquisition. In some instances a portion of the acquisition payment has not yet been made and will be paid in
02/14/14
COMB
62.2%
118
61
57
4
7
8
368
future periods in accordance with the purchase contract. The total outstanding consideration at December 31, 2016, was $2 million.
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The final purchase price allocations for the significant acquisitions in 2016 and 2014 were as follows:
In millions
Accounts receivable
Inventory
Fixed assets
Intangible assets
Goodwill
Other current assets
Current liabilities
Other long-term liability
Total business valuation
Fair value of pre-existing interest
Total purchase consideration
Pacific
Southern Plains
Mid-South
$
$
65
35
56
8
4
10
(46)
—
132
(33)
99
$
$
63
59
47
11
1
8
(53)
—
136
(44)
92
$
$
71
70
37
8
4
10
(43)
(4)
153
(35)
118
North American distributor acquisitions excluded from the table were deemed immaterial individually and in the aggregate for
additional disclosure.
NOTE 19. IMPAIRMENT OF LIGHT-DUTY DIESEL ASSETS
We began development of a new North American light-duty diesel engine (LDD) platform in July of 2006 for use in a variety
of on- and off-highway applications. Since that time, and as of December 31, 2015, we capitalized investments of
approximately $279 million, with a net book value prior to the impairment of $246 million ($235 million of which was in our
Engine segment and $11 million of which was in our Components segment). Market uncertainty due to the global recession in
2008/2009 resulted in some customers delaying or canceling their vehicle programs, while others remained active. We
announced an agreement with Nissan Motor Co. Ltd. in 2013 to supply our light-duty diesel engine and began commercial
shipment in 2015. In the fourth quarter of 2015, we learned that we were not successful in our bid to supply this product for an
additional customer. In addition, the recent deterioration in global economic conditions and excess manufacturing capacity in
other markets made it unlikely that we would manufacture additional products on the LDD line to utilize its excess capacity
during the asset recovery period. As a result, we concluded that the combination of these events presented a triggering event
requiring an assessment of the recoverability of these assets in the fourth quarter of 2015. The assessment indicated that the
projected undiscounted cash flows related to this asset group were not sufficient to recover its carrying value. Consequently, we
were required to write down the LDD asset group to fair value. Our 2015 fourth quarter results included an impairment charge
of $211 million ($133 million after-tax), of which $202 million was in the Engine segment and $9 million was in the
Components segment, to reflect the assets at fair value. We remain committed to servicing existing contracts and are not exiting
this product line.
The fair value of the asset group was estimated to be $35 million ($33 million for the Engine segment and $2 million for the
Components segment) at December 31, 2015 and was calculated primarily using a cost approach with consideration of a market
approach where secondary market information was available for the type and age of these assets. In the application of the
market approach, we determined that the liquidation value in-place reflected the best estimate of fair value. In the application of
the cost approach we considered the current cost of replacing the assets with a reduction for physical deterioration given the
age of the assets and a reduction for functional and economic obsolescence in the form of a discount reflecting the current and
projected under-utilization of the assets. The fair value of these assets are considered Level 3 under the fair value hierarchy as
they are either derived from unobservable inputs or have significant adjustments to the observable inputs.
NOTE 20. RESTRUCTURING ACTIONS AND OTHER CHARGES
We executed restructuring actions primarily in the form of professional voluntary and involuntary employee separation
programs in the fourth quarter of 2015. These actions were in response to the continued deterioration in our global markets in
the second half of 2015, as well as expected reductions in orders in most U.S. and global markets in 2016. We reduced our
worldwide workforce by approximately 1,900 employees, including approximately 370 employees accepting voluntary
retirement packages with the remainder of the reductions being involuntary. We incurred a charge of $90 million ($61 million
after-tax) in the fourth quarter of 2015, of which $86 million related to severance costs for both voluntary and involuntary
terminations and $4 million for asset impairments and other charges.
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Employee termination and severance costs were recorded based on approved plans developed by the businesses and corporate
management which specified positions to be eliminated, benefits to be paid under existing severance plans or statutory
requirements and the expected timetable for completion of the plan. Estimates of restructuring costs and benefits were made
based on information available at the time charges were recorded. Due to the inherent uncertainty involved, actual amounts paid
for such activities may differ from amounts initially recorded and we may need to revise previous estimates.
Restructuring actions and other charges were included in each segment in our operating results as follows:
In millions (1)
Power Systems
Distribution
Engine
Components
Corporate
Restructuring actions and other charges
Year ended
December 31, 2015
$
$
26
23
17
13
11
90
______________________________
(1) The charges by segment were revised in conjunction with our segment
realignment in the second quarter of 2016. See Note 21, "OPERATING
SEGMENTS," for additional information.
At December 31, 2016, substantially all terminations have been completed.
The table below summarizes the activity and balance of accrued restructuring charges, which is included in "Other accrued
expenses" in our Consolidated Balance Sheets:
In millions
Workforce reductions
Cash payments
Balance at December 31, 2015
Cash payments
Change in estimate
Balance at December 31, 2016
Restructuring
Accrual
$
$
86
(26)
60
(58)
(1)
1
NOTE 21. 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 Chief Operating Officer.
We use segment EBIT (defined as earnings before interest expense, income taxes and noncontrolling interests) as a primary basis for
the CODM to evaluate the performance of each of our operating segments. Segment amounts exclude certain expenses not specifically
identifiable to segments.
As previously announced, beginning with the second quarter of 2016, we realigned certain of our reportable segments to be consistent
with changes to our organizational structure and how the CODM monitors the performance of our segments. We reorganized our
business to combine our Power Generation segment and our high-horsepower engine business to create the new Power Systems
segment. Our reportable operating segments consist of Engine, Distribution, Components and Power Systems. We began to report
results for our new reporting structure in the second quarter of 2016 and also reflected this change for historical periods.
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We allocate certain common costs and expenses, primarily corporate functions, among segments. These include certain costs and
expenses of shared services, such as information technology, human resources, legal, finance and supply chain management. In
addition to the reorganization noted above, we reevaluated the allocation of these costs, considering the new segment structure created
in April 2016 and adjusted our allocation methodology accordingly. The revised methodology, which is based on a combination of
relative segment sales and relative service usage levels, is effective for the periods beginning after January 1, 2016 and resulted in the
revision of our segment operating results, including segment EBIT, for all four segments for the first quarter of 2016 with a greater
share of costs allocated to the Distribution and Components segments than in previous years. Prior periods were not revised for the
new allocation methodology. These changes had no impact on our consolidated results.
Our new reporting structure is organized according to the products and markets each segment serves. The Engine segment produces
engines (15 liters and less in size) and associated parts for sale to customers in on-highway and various off-highway markets. Our
engines are used in trucks of all sizes, buses and recreational vehicles, as well as in various industrial applications, including
construction, agriculture, power generation systems and other off-highway applications. The Distribution segment includes wholly-
owned and partially-owned distributorships engaged in wholesaling engines, generator sets and service parts, as well as performing
service and repair activities on our products and maintaining relationships with various OEMs throughout the world. The Components
segment sells filtration products, aftertreatment systems, turbochargers and fuel systems. The Power Systems segment is an integrated
power provider, which designs, manufactures and sells engines (16 liters and larger) for industrial applications (including mining, oil
and gas and marine), standby and prime power generator sets, alternators and other power components.
The accounting policies of our operating segments are the same as those applied in our Consolidated Financial Statements. We
prepared the financial results of our operating segments on a basis that is consistent with the manner in which we internally
disaggregate financial information to assist in making internal operating decisions. As noted above, we allocate certain common costs
and expenses, primarily corporate functions, among segments. 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 at December 31, is shown in the table below:
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Table of Contents
In millions
2016
External sales
Intersegment sales
Total sales
Depreciation and amortization (1)
Research, development and engineering expenses
Equity, royalty and interest income from investees
Interest income
Loss contingency charges (2)
Segment EBIT
Net assets
Investments and advances to equity investees
Capital expenditures
2015
External sales
Intersegment sales
Total sales
Depreciation and amortization (1)
Research, development and engineering expenses
Equity, royalty and interest income from investees
Interest income
Loss contingency charge (2)
Impairment of light-duty diesel assets (5)
Restructuring actions and other charges (6)
Segment EBIT
Net assets
Investments and advances to equity investees
Capital expenditures
2014
External sales
Intersegment sales
Total sales
$
$
$
Engine
Distribution
Components
Power
Systems
Intersegment
Eliminations
Total
$
$
$
$
$
$
6,157
24
6,181
116
13
70
4
—
392 (3)
2,604
204
96
6,198
31
6,229
105
10
78
4
—
—
23
412 (3)
2,330
192
125
5,135
39
5,174
86
9
148
4
491 (3)
5,774
2,030
7,804
163
226
148
10
138
686
1,620
427
200
6,733
1,937
8,670
187
263
146
11
60
202
17
636
2,107
445
345
7,462
1,505
8,967
163
265
118
9
1,031
2,401
415
268
$
$
$
3,514
1,322
4,836
133
208
41
4
—
641
1,868
176
143
3,745
1,427
5,172
109
236
35
4
—
9
13
727
1,891
150
137
3,791
1,327
5,118
106
230
36
4
684
2,152
164
162
2,064
1,453
3,517
115
189
42
5
—
263 (4)
2,629
139
92
2,434
1,633
4,067
110
226
56
5
—
—
26
335
2,736
188
137
$
— $
(4,829)
(4,829)
—
—
—
—
—
17
—
—
—
$
— $
(5,028)
(5,028)
—
—
—
—
—
—
11
(20)
—
—
—
17,509
—
17,509
527
636
301
23
138
1,999
8,721
946
531
19,110
—
19,110
511
735
315
24
60
211
90
2,090
9,064
975
744
$
— $
2,833
1,581
4,414
97
250
68
6
361 (7)
(4,452)
(4,452)
—
—
—
—
(69)
—
—
—
19,221
—
19,221
452
754
370
23
2,498
9,737
981
743
Depreciation and amortization (1)
Research, development and engineering expenses
Equity, royalty and interest income from investees
Interest income
Segment EBIT
Net assets
Investments and advances to equity investees
Capital expenditures
____________________________________________________
(1) Depreciation and amortization as shown on a segment basis excludes the amortization of debt discount and deferred costs that are included in the Consolidated
Statements of Income as "Interest expense." The amortization of debt discount and deferred costs were $3 million, $3 million and $3 million for the years ended
December 31, 2016, 2015 and 2014, respectively.
2,441
209
89
2,743
193
224
(2) See Note 12, "COMMITMENTS AND CONTINGENCIES," for additional information.
(3) Distribution segment EBIT included gains on the fair value adjustment resulting from the acquisition of controlling interests in North American distributors of $15
million, $18 million and $73 million for the years ended December 31, 2016, 2015 and 2014, respectively. See Note 18, "ACQUISITIONS," for additional
information.
(4) Power Systems segment EBIT included a $17 million gain on the sale of an equity investee.
(5) See Note 19, "IMPAIRMENT OF LIGHT-DUTY DIESEL ASSETS," for additional information.
(6) See Note 20, "RESTRUCTURING ACTIONS AND OTHER CHARGES," for additional information.
(7) Power Systems segment EBIT included $32 million of restructuring charges primarily related to the closure of a plant in Germany.
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A reconciliation of our segment information to the corresponding amounts in the Consolidated Statements of Income is shown in the
table below:
In millions
Total segment EBIT
Less: Interest expense
Income before income taxes
In millions
Net assets for operating segments
Liabilities deducted in arriving at net assets
Pension and other postretirement benefit adjustments excluded from net assets
Deferred tax assets not allocated to segments
Deferred debt costs not allocated to segments
Total assets
Years ended December 31,
2016
2015
2014
1,999
69
1,930
$
$
2,090
65
2,025
December 31,
2016
2015
8,721
6,152
(284)
420
2
15,011
$
$
9,064
5,920
(242)
390
2
15,134
$
$
$
$
2,498
64
2,434
2014
9,737
6,009
(319)
314
23
15,764
$
$
$
$
The tables below present certain segment information by geographic area. Net sales attributed to geographic areas were based on the
location of the customer.
In millions
Net Sales
United States
International
Total net sales
Years ended December 31,
2016
2015
2014
$
$
9,476
8,033
17,509
$
$
10,757
8,353
19,110
$
$
10,058
9,163
19,221
Long-lived assets include property, plant and equipment, net of depreciation, investments and advances to equity investees and other
assets, excluding deferred tax assets, refundable taxes and deferred debt expenses.
In millions
Long-lived assets
United States
China
India
United Kingdom
Netherlands
Brazil
Canada
Mexico
Other international countries
Total long-lived assets
December 31,
2016
2015
2014
$
$
3,092
652
475
254
197
149
132
131
236
5,318
$
$
2,968
668
450
349
172
124
133
108
261
5,233
$
$
2,949
692
391
339
156
161
126
96
274
5,184
Our largest customer is PACCAR Inc. Worldwide sales to this customer were $2,359 million in 2016, $2,949 million in 2015 and
$2,706 million in 2014, representing 13 percent, 15 percent and 14 percent, respectively, of our consolidated net sales. No other
customer accounted for more than 10 percent of consolidated net sales.
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SELECTED QUARTERLY FINANCIAL DATA
UNAUDITED
In millions, except per share amounts
Net sales
Gross margin
Net income attributable to Cummins Inc.
Earnings per common share attributable to Cummins Inc.—basic (2)
Earnings per common share attributable to Cummins Inc.—diluted (2)
Cash dividends per share
Stock price per share
High
Low
Net sales
Gross margin
Net income attributable to Cummins Inc.
Earnings per common share attributable to Cummins Inc.—basic (2)
Earnings per common share attributable to Cummins Inc.—diluted (2)
Cash dividends per share
Stock price per share
High
Low
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
$
$
$
$
$
$
$
$
$
$
$
4,291
1,056
321
1.87
1.87
0.975
111.29
79.88
4,709
1,195
387
2.14
2.14
0.78
148.04
133.50
2016
$
4,528
1,197
406 (1)
2.41 (1) $
2.40 (1)
0.975
$
4,187
1,079
289 (1)
1.72 (1) $
1.72 (1)
1.025
120.00
104.30
$
128.60
107.51
2015
$
$
$
5,015
1,332
471
2.63
2.62
0.78
143.40
133.36
4,620
1,208
380
2.15
2.14
0.975
132.96
108.27
$
$
$
$
4,503
1,120
378
2.26
2.25
1.025
147.10
121.22
4,766
1,212
161 (3)
0.92 (3)
0.92 (3)
0.975
115.37
84.99
___________________________________________________
(1) The second quarter of 2016, included an additional $39 million loss contingency charge ($24 million after-tax). The third quarter of 2016 included an
additional $99 million loss contingency charge ($50 million net of favorable compensation impact and after-tax).
(2) Earnings per share in each quarter is computed using the weighted-average number of shares outstanding during that quarter while earnings per share for the
full year is computed using the weighted-average number of shares outstanding during the year. Thus, the sum of the four quarters earnings per share may
not equal the full year earnings per share.
(3) The fourth quarter of 2015, included a $211 million impairment of light-duty diesel assets ($133 million after-tax), a $90 million restructuring charge ($61
million after-tax) and a $60 million charge for a loss contingency ($38 million after-tax).
At December 31, 2016, there were approximately 3,536 holders of record of Cummins Inc.'s $2.50 par value common stock.
111
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ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, our management evaluated, with the participation of
our Chief Executive Officer and Chief Financial Officer, 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 as of the end of
the period covered by this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter ended December 31, 2016, that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management's Report on Internal Control Over Financial Reporting
The information required by Item 9A relating to Management's Annual Report on Internal Control Over Financial Reporting
and Attestation Report of the Registered Public Accounting Firm is incorporated herein by reference to the information set forth
under the captions "Management's Report on Internal Control Over Financial Reporting" and "Report of Independent
Registered Public Accounting Firm," respectively, under Item 8.
ITEM 9B. Other Information
None.
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
The information required by Item 10 is incorporated by reference to the relevant information under the captions "Corporate
Governance," "Election of Directors" and "Other Information—Section 16(a) Beneficial Ownership Reporting Compliance" in
our 2017 Proxy Statement, which will be filed within 120 days after the end of 2016. Information regarding our executive
officers may be found in Part 1 of this annual report under the caption "Executive Officers of the Registrant." Except as
otherwise specifically incorporated by reference, our Proxy Statement is not deemed to be filed as part of this annual report.
ITEM 11. Executive Compensation
The information required by Item 11 is incorporated by reference to the relevant information under the caption "Executive
Compensation" in our 2017 Proxy Statement, which will be filed within 120 days after the end of 2016.
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Table of Contents
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information concerning our equity compensation plans at December 31, 2016, was as follows:
Plan Category
Equity compensation plans approved by
security holders
Equity compensation plans not approved by
security holders
Total
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights(1)
Weighted-average
exercise price of
outstanding options,
warrants and rights(2)
Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in the first column)
3,149,099
$
—
3,149,099
$
115.02
—
115.02
4,249,124
—
4,249,124
________________________________________________
(1) The number is comprised of 2,734,764 stock options, 404,494 performance shares and 9,841 restricted shares. See NOTE 15, "STOCK INCENTIVE AND
STOCK OPTION PLANS," to the Consolidated Financial Statements for a description of how options and shares are awarded.
(2) The weighted-average exercise price relates only to the 2,734,764 stock options. Performance and restricted shares do not have an exercise price and,
therefore, are not included in this calculation.
The remaining information required by Item 12 is incorporated by reference to the relevant information under the caption
"Stock Ownership of Directors, Management and Others" in our 2017 Proxy Statement, which will be filed within 120 days
after the end of 2016.
ITEM 13. Certain Relationships, Related Transactions and Director Independence
The information required by Item 13 is incorporated by reference to the relevant information under the captions "Corporate
Governance" and "Other Information—Related Party Transactions" in our 2017 Proxy Statement, which will be filed within
120 days after the end of 2016.
ITEM 14. Principal Accounting Fees and Services
The information required by Item 14 is incorporated by reference to the relevant information under the caption "Selection of
Independent Public Accountants" in our 2017 Proxy Statement, which will be filed within 120 days after the end of 2016.
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
(a) The following Consolidated Financial Statements and schedules filed as part of this report can be found in Item 8
"Financial Statements and Supplementary Data":
• Management's Report to Shareholders
• Report of Independent Registered Public Accounting Firm
• Consolidated Statements of Income for the years ended December 31, 2016, 2015 and 2014
• Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015 and 2014
• Consolidated Balance Sheets at December 31, 2016 and 2015
• Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
• Consolidated Statements of Changes in Equity for the years ended December 31, 2016, 2015 and 2014
• Notes to Consolidated Financial Statements
•
Selected Quarterly Financial Data (Unaudited)
(b) See Exhibit Index at the end of this Annual Report on Form 10-K.
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ITEM 16. Form 10-K Summary (optional)
Not Applicable.
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Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
CUMMINS INC.
By:
/s/ PATRICK J. WARD
Patrick J. Ward
Vice President and Chief Financial Officer
(Principal Financial Officer)
Date:
February 13, 2017
By:
/s/ MARSHA L. HUNT
Marsha L. Hunt
Vice President—Corporate Controller
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures
Title
Date
/s/ N. THOMAS LINEBARGER
N. Thomas Linebarger
Chairman of the Board of Directors and Chief Executive Officer
(Principal Executive Officer)
February 13, 2017
/s/ PATRICK J. WARD
Patrick J. Ward
/s/ MARSHA L. HUNT
Marsha L. Hunt
*
Vice President and Chief Financial Officer
(Principal Financial Officer)
Vice President—Corporate Controller
(Principal Accounting Officer)
Robert J. Bernhard
Director
*
Franklin R. ChangDiaz
Director
*
Bruno V. Di Leo Allen
Director
*
Stephen B. Dobbs
Director
*
Robert K. Herdman
Director
*
Alexis M. Herman
Director
*
Thomas J. Lynch
Director
*
William I. Miller
Director
*
Georgia R. Nelson
Director
*By:
/s/ PATRICK J. WARD
Patrick J. Ward
Attorney-in-fact
115
February 13, 2017
February 13, 2017
February 13, 2017
February 13, 2017
February 13, 2017
February 13, 2017
February 13, 2017
February 13, 2017
February 13, 2017
February 13, 2017
February 13, 2017
Table of Contents
CUMMINS INC.
EXHIBIT INDEX
Exhibit No.
3 (a)
3 (b)
4 (a)
4 (b)
4 (c)
10 (a)#
10 (b)#
10 (c)#
10 (d)#
10 (e)
10 (f)#
10 (g)#
10 (h)#
10 (i)#
10 (j)#
10 (k)#
10 (l)#
Description of Exhibit
Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 3(a) to Cummins Inc.'s Quarterly Report
on Form 10-Q for the quarter ended June 28, 2009).
By-laws, as amended and restated effective as of October 11, 2016 (incorporated by reference to Exhibit 3.1 to
Cummins Inc.'s Current Report on Form 8-K filed within the Securities and Exchange Commission on October 17, 2016).
Indenture, dated as of September 16, 2013, by and between Cummins Inc. and U.S. Bank National Association (incorporated
by reference to Exhibit 4.3 to the Registration Statement on Form S-3 filed with the Securities and Exchange Commission on
September 16, 2013 (Registration Statement No. 333-191189)).
First Supplemental Indenture, dated as of September 24, 2013, between Cummins Inc. and U.S. Bank National Association
(incorporated by reference to Exhibit 4.1 of the Current Report on 8-K, filed by Cummins Inc. with the Securities and
Exchange Commission on September 24, 2013 (File No. 001-04949)).
Second Supplemental Indenture, dated as of September 24, 2013, between Cummins Inc. and U.S. Bank National Association
(incorporated by reference to Exhibit 4.2 of the Current Report on 8-K, filed by Cummins Inc. with the Securities and
Exchange Commission on September 24, 2013 (File No. 001-04949)).
2003 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10(a) to Cummins Inc.'s Annual Report on
Form 10-K for the year ended December 31, 2009).
Target Bonus Plan (incorporated by reference to Exhibit 10(b) to Cummins Inc.'s Annual Report on Form 10-K for the year
ended December 31, 2009).
Deferred Compensation Plan, as amended (incorporated by reference to Exhibit 10(c) to Cummins Inc.’s Quarterly Report on
Form 10-Q for the quarter ended September 27, 2015).
Supplemental Life Insurance and Deferred Income Plan, as amended (incorporated by reference to Exhibit 10(d) to
Cummins Inc.'s Annual Report on Form 10-K for the year ended December 31, 2011).
Amended and Restated Credit Agreement, dated as of November 13, 2015, by and among Cummins Inc., the subsidiary
borrowers referred to therein and the Lenders party thereto (incorporated by reference to Exhibit 10 to Cummins Inc.'s Current
Report on Form 8-K dated November 13, 2015).
Deferred Compensation Plan for Non-Employee Directors, as amended (incorporated by reference to Exhibit 10(f) to
Cummins Inc.'s Annual Report on Form 10-K for the year ended December 31, 2013).
Excess Benefit Retirement Plan, as amended (incorporated by reference to Exhibit 10(g) to Cummins Inc.'s Quarterly Report
on Form 10-Q for the quarter ended September 28, 2014).
Employee Stock Purchase Plan, as amended (incorporated by reference to Annex B to Cummins Inc.'s definitive proxy
statement filed with the Securities and Exchange Commission on Schedule 14A on March 27, 2012 (File No. 001-04949)).
Longer Term Performance Plan (incorporated by reference to Exhibit 10(i) to Cummins Inc.'s Annual Report on Form 10-K
for the year ended December 31, 2009).
2006 Executive Retention Plan, as amended (incorporated by reference to Exhibit 10(j) to Cummins Inc.'s Annual Report on
Form 10-K for the year ended December 31, 2011).
Senior Executive Target Bonus Plan (incorporated by reference to Exhibit 10(k) to Cummins Inc.'s Annual Report on
Form 10-K for the year ended December 31, 2009).
Senior Executive Longer Term Performance Plan (incorporated by reference to Exhibit 10(l) to Cummins Inc.'s Annual Report
on Form 10-K for the year ended December 31, 2009).
10 (m)#
Form of Stock Option Agreement under the 2003 Stock Incentive Plan (incorporated by reference to Exhibit 10(m) to
Cummins Inc.'s Annual Report on Form 10-K for the year ended December 31, 2009).
10 (n)#
10 (o)#
10 (p)#
10 (q)#
Form of Long-Term Grant Notice under the 2012 Omnibus Incentive Plan (incorporated by reference to Exhibit 10(n) to
Cummins Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 29, 2015).
2012 Omnibus Incentive Plan (incorporated by reference to Annex A to Cummins Inc.'s definitive proxy statement filed with
the Securities and Exchange Commission on Schedule 14A on March 27, 2012 (File No. 001-04949)).
Form of Stock Option Agreement under the 2012 Omnibus Incentive Plan (incorporated by reference to Exhibit 10(p) to
Cummins Inc.'s Annual Report on Form 10-K for the year ended December 31, 2013).
Key Employee Stock Investment Plan (incorporated by reference to Exhibit 10(q) to Cummins Inc.’s Quarterly Report on
Form 10-Q for the quarter ended September 28, 2014).
Calculation of Ratio of Earnings to Fixed Charges (filed herewith).
Subsidiaries of the Registrant (filed herewith).
Consent of PricewaterhouseCoopers LLP (filed herewith).
Powers of Attorney (filed herewith).
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
XBRL Instance Document.
12
21
23
24
31 (a)
31 (b)
32
101 .INS
101 .SCH XBRL Taxonomy Extension Schema Document.
101 .CAL XBRL Taxonomy Extension Calculation Linkbase Document.
101 .DEF XBRL Taxonomy Extension Definition Linkbase Document.
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CUMMINS INC.
EXHIBIT INDEX
101 .LAB XBRL Taxonomy Extension Label Linkbase Document.
101 .PRE XBRL Taxonomy Extension Presentation Linkbase Document.
_______________________________________________
# A management contract or compensatory plan or arrangement.
117