Cummins Annual Report 2017

Plain-text annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-KANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Fiscal Year Ended December 31, 2017Commission File Number 1-4949CUMMINS INC.Indiana(State of Incorporation) 35-0257090(IRS Employer Identification No.)500 Jackson StreetBox 3005Columbus, Indiana 47202-3005(Address of principal executive offices)Telephone (812) 377-5000Securities registered pursuant to Section 12(b) of the Act:Title of each class Name of each exchange on whichregisteredCommon Stock, $2.50 par value New York Stock ExchangeSecurities 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 x No oIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No xIndicate 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 preceding12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No oIndicate 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 andposted 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 andpost such files). Yes x No oIndicate 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'sknowledge, 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. oIndicate 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 "largeaccelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer x Accelerated filer o Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company oIf an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financialaccounting standards provided pursuant to Section 13(a) of the Exchange Act. oIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No xThe aggregate market value of the voting stock held by non-affiliates was approximately $27.2 billion at July 2, 2017. This value includes all shares of the registrant's commonstock, except for treasury shares.As of February 2, 2018, there were 165,683,334 shares outstanding of $2.50 par value common stock.Documents Incorporated by ReferencePortions of the registrant's definitive Proxy Statement for its 2018 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission onSchedule 14A within 120 days after the end of 2017, will be incorporated by reference in Part III of this Form 10-K to the extent indicated therein upon such filing. Table of ContentsCUMMINS INC. AND SUBSIDIARIESTABLE OF CONTENTSPART ITEM PAGE Cautionary Statements Regarding Forward-Looking Information 3I 1 Business 5 Overview 5 Operating Segments 5 Engine Segment 5 Distribution Segment 6 Components Segment 7 Power Systems Segment 8 Joint Ventures, Alliances and Non-Wholly-Owned Subsidiaries 9 Supply 11 Patents and Trademarks 11 Seasonality 11 Largest Customers 11 Backlog 12 Research and Development 12 Environmental Sustainability 12 Environmental Compliance 13 Employees 14 Available Information 14 Executive Officers of the Registrant 15 1A Risk Factors 17 1B Unresolved Staff Comments 24 2 Properties 25 3 Legal Proceedings 26 4 Mine Safety Disclosures 26II 5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 27 6 Selected Financial Data 29 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 30 7A Quantitative and Qualitative Disclosures About Market Risk 61 8 Financial Statements and Supplementary Data 63 Index to Financial Statements 63 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 116 9A Controls and Procedures 116 9B Other Information 116III 10 Directors, Executive Officers and Corporate Governance 116 11 Executive Compensation 116 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 117 13 Certain Relationships, Related Transactions and Director Independence 117 14 Principal Accounting Fees and Services 117IV 15 Exhibits and Financial Statement Schedules 117 16 Form 10-K Summary (optional) 120 Signatures 1212Table of ContentsCummins Inc. and its consolidated subsidiaries are hereinafter sometimes referred to as "Cummins," "we," "our," or "us."CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATIONCertain parts of this annual report contain forward-looking statements intended to qualify for the safe harbors from liability established by the PrivateSecurities Litigation Reform Act of 1995. Forward-looking statements include those that are based on current expectations, estimates and projections aboutthe 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 arenot guarantees of future performance and involve certain risks, uncertainties and assumptions, which we refer to as "future factors," which are difficult topredict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Some futurefactors 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 notto place undue reliance on forward-looking statements, which speak only as of the date hereof. Future factors that could affect the outcome of forward-looking statements include the following:•a sustained slowdown or significant downturn in our markets;•changes in the engine outsourcing practices of significant customers;•the development of new technologies that reduce demand for our current products and services;•any significant additional problems in our engine platforms or aftertreatment systems;•product recalls;•lower than expected acceptance of new or existing products or services;•a slowdown in infrastructure development and/or depressed commodity prices;•unpredictability in the adoption, implementation and enforcement of emission standards around the world;•the actions of, and income from, joint ventures and other investees that we do not directly control;•changes in taxation;•exposure to potential security breaches or other disruptions to our information technology systems and data security;•a major customer experiencing financial distress;•our plan to reposition our portfolio of product offerings through exploring strategic acquisitions and divestitures and related uncertainties ofentering such transactions;•supply shortages and supplier financial risk, particularly from any of our single-sourced suppliers;•competitor activity;•increasing competition, including increased global competition among our customers in emerging markets; •policy changes in international trade;•foreign currency exchange rate changes;•variability in material and commodity costs;•failure to realize expected results from our investment in Eaton Cummins Automated Transmission Technologies joint venture;•political, economic and other risks from operations in numerous countries;•global legal and ethical compliance costs and risks;•aligning our capacity and production with our demand;•product liability claims;•increasingly stringent environmental laws and regulations;•future bans or limitations on the use of diesel-powered vehicles;•the price and availability of energy;3Table of Contents•the performance of our pension plan assets and volatility of discount rates;•labor relations;•changes in accounting standards;•our sales mix of products;•protection and validity of our patent and other intellectual property rights;•technological implementation and cost/financial risks in our increasing use of large, multi-year contracts;•the outcome of pending and future litigation and governmental proceedings;•continued availability of financing, financial instruments and financial resources in the amounts, at the times and on the terms required to supportour 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 arecautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are made only as of the date of thisannual report and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events orotherwise.4Table of ContentsPART IITEM 1. BusinessOVERVIEWWe were founded in 1919 as Cummins Engine Company, a corporation in Columbus, Indiana and one of the first diesel engine manufacturers. In 2001, wechanged our name to Cummins Inc. We are a global power leader that designs, manufactures, distributes and services diesel and natural gas engines andengine-related component products, including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems, transmissions andelectric power generation systems. We sell our products to original equipment manufacturers (OEMs), distributors and other customers worldwide. We serveour customers through a network of approximately 500 wholly-owned and independent distributor locations and over 7,500 dealer locations in more than190 countries and territories.OPERATING SEGMENTSWe have four complementary operating segments: Engine, Distribution, Components and Power Systems. These 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 ofour operating segments, we compete worldwide with a number of other manufacturers and distributors that produce and sell similar products. Our productscompete primarily on the basis of performance, fuel economy, speed of delivery, quality, customer support and price. Financial information about ouroperating segments, including geographic information, is incorporated by reference from Note 21, "OPERATING SEGMENTS," to our ConsolidatedFinancial Statements.Engine SegmentEngine segment sales and earnings before interest and taxes (EBIT) as a percentage of consolidated results were: Years ended December 31, 2017 2016 2015Percent of consolidated net sales(1) 34% 35% 36%Percent of consolidated EBIT(1) 40% 35% 30%___________________________________________________________(1) Measured before intersegment eliminationsOur Engine segment manufactures and markets a broad range of diesel and natural gas powered engines under the Cummins brand name, as well as certaincustomer brand names, for the heavy- and medium-duty truck, bus, recreational vehicle (RV), light-duty automotive, construction, mining, marine, rail, oiland 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.Our Engine segment is organized by engine displacement size and serves these end-user markets:•Heavy-duty truck - We manufacture diesel and natural gas engines that range from 310 to 605 horsepower serving global heavy-duty truckcustomers worldwide, primarily in North America, China, Latin America and Australia.•Medium-duty truck and bus - We manufacture diesel and natural gas engines ranging from 130 to 450 horsepower serving medium-duty truck andbus customers worldwide, with key markets including North America, Latin America, China, Europe and India. Applications include pickup anddelivery trucks, vocational truck, school bus, transit bus and shuttle bus. We also provide diesel engines for Class A motor homes (RVs), primarily inNorth America.•Light-duty automotive (Pickup and Light Commercial Vehicle (LCV)) - We manufacture 105 to 385 horsepower diesel engines, including enginesfor the pickup truck market for Fiat Chrysler Automobiles (Fiat Chrysler) and Nissan in North America, and LCV markets in Europe, Latin Americaand China.5Table of Contents•Off-highway - We manufacture diesel engines that range from 48 to 715 horsepower to key global markets including mining, marine, rail, oil andgas, defense, agriculture and construction equipment and also to the power generation business for standby, mobile and distributed powergeneration solutions throughout the world.The principal customers of our heavy-duty truck engines include truck manufacturers such as PACCAR Inc. (PACCAR), Navistar International Corporation(Navistar) and Daimler Trucks North America (Daimler). The principal customers of our medium-duty truck engines include truck manufacturers such asDaimler, PACCAR and Navistar. We sell our industrial engines to manufacturers of construction, agricultural and marine equipment, including Hyundai,Xuzhou Construction Machinery Group, Komatsu, John Deere and Wirtgen. The principal customers of our light-duty on-highway engines are 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 ownproducts. Our primary competitors in North America are Daimler, Caterpillar Inc. (CAT), Volvo Powertrain, Ford Motor Company (Ford), PACCAR and HinoPower. Our primary competitors in international markets vary from country to country, with local manufacturers generally predominant in each geographicmarket. Other engine manufacturers in international markets include Weichai Power Co. Ltd., Volvo AB (Volvo), Daimler AG, Volkswagen AG, MANNutzfahrzeuge AG (MAN), Scania AB, Fiat Power Systems, Guangxi Yuchai Group, Rolls-Royce Power Systems AG, CAT, Yanmar Co., Ltd. and Deutz AG.Distribution SegmentDistribution segment sales and EBIT as a percentage of consolidated results were: Years ended December 31, 2017 2016 2015Percent of consolidated net sales(1) 27% 28% 26%Percent of consolidated EBIT(1) 16% 20% 20%___________________________________________________________(1) Measured before intersegment eliminationsOur Distribution segment consists of 28 wholly-owned and 10 joint venture distributors that service and distribute the full range of our products and servicesto end-users at approximately 450 locations in over 90 distribution territories. Our wholly-owned distributors are located in key markets, including NorthAmerica, Australia, Europe, China, Africa, Russia, Japan, Brazil, Singapore and Central America, while our joint venture distributors are located in keymarkets, including South America, the Middle East, India, Thailand and Singapore.In the first quarter of 2017, our Distribution segment reorganized its regions to align with how the segment is managed. The Distribution segment consists ofthe 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 eight primary geographic regions:•North America;•Asia Pacific;•Europe;•Africa and Middle East;•China;•India;•Latin America and6Table of Contents•Russia.Asia Pacific is composed of six smaller regional distributor organizations (South Pacific, Korea, Japan, Philippines, Malaysia and Singapore) which allow usto 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. Thesefull-service solutions include maintenance contracts, engineering services and integrated products, where we customize our products to cater to specificneeds of end-users. Our distributors also serve and develop dealers, predominantly OEM dealers, in their territories by providing new products, technicalsupport, tools, training, parts and product information.The distribution segment is responsible for managing the operations of our wholly-owned and partially owned distributors as well as our relationships withindependent distributors. Our Distribution segment serves a highly diverse customer base with approximately 38 percent of its 2017 and 2016 sales beinggenerated from new engines and power generation equipment, 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, oraffiliated with the companies that are listed as competitors of our Engine, Components or Power Systems segments. These competitors vary by geographicallocation.Components SegmentComponents segment sales and EBIT as a percentage of consolidated results were: Years ended December 31, 2017 2016 2015Percent of consolidated net sales(1) 23% 21% 21%Percent of consolidated EBIT(1) 32% 32% 34%___________________________________________________________(1) Measured before intersegment eliminationsOur Components segment supplies products which complement our Engine and Power Systems segments, including aftertreatment systems, turbochargers,transmissions, filtration products and fuel systems for commercial diesel applications. We manufacture filtration systems for on- and off-highway heavy-dutyand medium-duty equipment, and we are a supplier of filtration products for industrial vehicle applications. In addition, we develop aftertreatment systemsand turbochargers to help our customers meet increasingly stringent emission standards and fuel systems which have primarily supplied our Engine segmentand our joint venture partners Beijing Foton, Dongfeng, Scania and Tata.In the first quarter of 2017, our Components segment reorganized its reporting structure to move the electronics business out of the emission solutionsbusiness and into the fuel systems business to enhance operational, administrative and product development efficiencies. We renamed our fuel systemsbusiness to electronics and fuel systems.In the third quarter of 2017, we formed the Eaton Cummins Automated Transmission Technologies joint venture (ECJV), which was consolidated andincluded in our Components segment as the automated transmissions business. See Note 18, "ACQUISITIONS", in the Notes to our Consolidated FinancialStatements for additional information.Our Components segment is organized around the following businesses:•Emission solutions - We are a global leader in designing, manufacturing and integrating aftertreatment technology and solutions for the commercialon- and off-highway light, medium, heavy-duty and high-horsepower engine markets. Aftertreatment is the mechanism used to convert engineemissions 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, selectivecatalytic reduction systems and engineered components, including dosers. Our emission solutions business primarily serves markets in NorthAmerica, Europe, China, India, Brazil, Russia and Australia. We serve both OEM first fit and retrofit customers.•Turbo technologies - We design, manufacture and market turbochargers for light-duty, mid-range, heavy-duty and high-horsepower diesel marketswith worldwide sales and distribution. We provide critical air handling technologies for engines to meet challenging performance requirements andworldwide emission standards. We primarily serve markets in North America, Europe, China and India.7Table of Contents•Filtration - We design, manufacture and sell filters, coolant and chemical products. Our filtration business offers over 8,300 products for first fit andaftermarket applications including air filters, fuel filters, fuel water separators, lube filters, hydraulic filters, coolants, fuel additives and otherfiltration systems to OEMs, dealers/distributors and end users. We support a wide customer base in a diverse range of markets including on- and off-highway segments such as oil and gas, agriculture, mining, construction, power generation, marine and industrial markets. We produce and sellglobally recognized Fleetguard® branded products in over 160 countries including countries in North America, Europe, South America, Asia andAfrica. Fleetguard products are available through thousands of distribution points worldwide.•Electronics and fuel systems - We design and manufacture new, replacement and remanufactured fuel systems primarily for heavy-duty on-highwaydiesel engine applications, as well as develop and supply electronic control modules (ECMs), sensors and harnesses for the on-highway, off-highwayand power generation applications.We primarily serve markets in North America, China, India and Europe.•Automated transmissions - We develop and supply automated transmissions to the heavy-duty and medium-duty commercial vehicle markets.Formed in 2017, the Eaton Cummins Automated Transmission Technologies joint venture is a consolidated 50/50 joint venture between CumminsInc. and Eaton Corporation Plc. and primarily serves the North American market.Customers of our Components segment generally include our Engine, Distribution and Power Systems segments, truck manufacturers and other OEMs, manyof which are also customers of our Engine segment, such as PACCAR, Daimler, Navistar, Volvo, Komatsu, Scania, Fiat Chrysler and other manufacturers thatuse our components in their product platforms.Our Components segment competes with other manufacturers of aftertreatment systems, filtration, turbochargers and fuel systems. Our primary competitors inthese markets include Robert Bosch GmbH, Donaldson Company, Inc., Parker Hannifin Corporation, Mann+Hummel Group, Honeywell International, Borg-Warner Inc., Tenneco Inc., Eberspacher Holding GmbH & Co. KG and Denso Corporation.Power Systems SegmentPower Systems segment sales and EBIT as a percentage of consolidated results were: Years ended December 31, 2017 2016 2015Percent of consolidated net sales(1) 16% 16% 17%Percent of consolidated EBIT(1) 12% 13% 16%___________________________________________________________(1) Measured before intersegment eliminationsIn the first quarter of 2017, our Power Systems segment reorganized its product lines to better reflect how the segment is managed. Our Power Systemssegment is organized around 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, aswell 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 managementapplications 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 ofequipment in the mining, rail, defense, oil and gas, and commercial marine applications throughout the world. Across these markets, we have majorcustomers in North America, Europe, the Middle East, Africa, China, Korea, Japan, Latin America, India, Russia, Southeast Asia, South Pacific andMexico.•Generator technologies - We design, manufacture, sell and support A/C generator/alternator products for internal consumption and for externalgenerator set assemblers. Our products are sold under the Stamford, AVK and Markon brands and range in output from 3 kilovolt-amperes (kVA) to12,000 kVA.This segment continuously explores emerging technologies and provides integrated power generation products. We use our own research and developmentcapabilities as well as those of our business partnerships to develop cost-effective and environmentally sound power solutions.8Table of ContentsOur customer base for our Power Systems offerings is highly diversified, with customer groups varying based on their power needs. India, China, the UnitedKingdom (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 theirown products. We compete with a variety of engine manufacturers and generator set assemblers across the world. Our primary competitors are CAT, MTUFriedrichshafen 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 alternator business competes globally with Marathon Electric and Meccalte,among others.JOINT VENTURES, ALLIANCES AND NON-WHOLLY-OWNED SUBSIDIARIESWe have entered into a number of joint venture agreements and alliances with business partners around the world. Our joint ventures are either distribution ormanufacturing 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 includingautomatic termination and liquidation of the venture, exercise of "put" or "call" rights of ownership by the non-acquired partner, termination or transfer oftechnology license rights to the non-acquired partner and increases in component transfer prices to the acquired partner. We will continue to evaluate jointventure 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 3, "INVESTMENTS IN EQUITYINVESTEES," to the Consolidated Financial Statements.Our equity income from these investees was as follows: Years ended December 31,In millions2017 2016 2015Distribution entities Komatsu Cummins Chile, Ltda.$30 10% $34 13% $31 11%North American distributors— —% 21 8% 33 12%All other distributors(1) —% — —% 3 1%Manufacturing entities Beijing Foton Cummins Engine Co., Ltd.94 30% 52 20% 62 23%Dongfeng Cummins Engine Company, Ltd.73 24% 46 18% 51 19%Chongqing Cummins Engine Company, Ltd.41 13% 38 15% 41 15%Dongfeng Cummins Emission Solutions Co., Ltd.13 4% 9 3% 6 2%Shanghai Fleetguard Filter Co., Ltd.12 4% 10 4% 10 4%Cummins Westport, Inc.9(1) 3% 11 4% 18 7%All other manufacturers37(1) 12% 39 15% 18 6%Cummins share of net income(2)$308 100% $260 100% $273 100%___________________________________________________________(1) U.S. tax legislation passed in December 2017 decreased our equity earnings at certain equity investees, including a $7 million unfavorable impact to Cummins Westport, Inc. dueto the remeasurement of deferred taxes and a $32 million unfavorable impact to "All other manufacturers" due to withholding tax adjustments on foreign earnings. See Note 2,"INCOME TAXES," to our Consolidated Financial Statements for additional information.(2) 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 reconcilesto "Equity, royalty and interest income from investees" in the Consolidated Statements of Income, see Note 3, "INVESTMENTS IN EQUITY INVESTEES," to our ConsolidatedFinancial 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 adistributor that offers the full range of our products and services to customers and end-users in Chile and Peru.9Table of Contents•North American Distributors - During 2016, we acquired the remaining interest in the final unconsolidated North American distributor jointventure.See further discussion of our distribution network under the Distribution segment section above.Manufacturing EntitiesOur manufacturing joint ventures have generally been formed with customers and generally are intended to allow us to increase our market penetration ingeographic regions, reduce capital spending, streamline our supply chain management and develop technologies. Our largest manufacturing joint venturesare based in China and are included in the list below. Our engine manufacturing joint ventures are supplied by our Components segment in the same manneras it supplies our wholly-owned Engine segment and Power Systems segment manufacturing facilities. Our Components segment joint ventures and whollyowned entities provide fuel systems, filtration, aftertreatment systems, turbocharger products and transmissions that are used with our engines as well as somecompetitors' 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 Incomeand 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., acommercial vehicle manufacturer, which consists of two distinct lines of business, a light-duty business and a heavy-duty business. The light-dutybusiness produces our families of ISF 2.8 liter to 4.5 liter high performance light-duty diesel engines in Beijing. These engines are used in light-dutycommercial trucks, pickup trucks, buses, multipurpose and sport utility vehicles with main markets in China, Brazil and Russia. Certain types ofmarine, small construction equipment and industrial applications are also served by these engine families. The heavy-duty business produces ISG10.5 liter and ISG 11.8 liter families of our high performance heavy-duty diesel engines in Beijing. These engines are used in heavy-dutycommercial trucks in China and will be used by Cummins either directly sourced from China and/or locally assembled in other markets. Certaintypes 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 DongfengAutomotive Co. Ltd., a subsidiary of Dongfeng Motor Corporation, one of the largest medium-duty and heavy-duty truck manufacturers in China.DCEC produces Cummins 3.9 to 13-liter mechanical engines, full-electric diesel engines, with a power range from 80 to 680 horsepower, and naturalgas engines.•Chongqing Cummins Engine Company, Ltd. - Chongqing Cummins Engine Company, Ltd. is a joint venture in China with Chongqing Machineryand Electric Co. Ltd. This joint venture manufactures several models of our heavy-duty and high-horsepower diesel engines, primarily serving theindustrial and stationary power markets in China.•Dongfeng Cummins Emission Solutions Co., Ltd. - Dongfeng Cummins Emission Solutions Co. Ltd. is a joint venture in China with DongfengIndustrial Company, a subsidiary of Dongfeng Motor Group Company Limited, a manufacturer of numerous on-highway vehicles. This joint ventureproduces, purchases and sells advanced diesel engine aftertreatment solutions to support the full line of Dongfeng's commercial vehicles.•Shanghai Fleetguard Filter Co., Ltd. - Shanghai Fleetguard Filter Co. Ltd. is a joint venture in China with Dongfeng Motor Co., Ltd., amanufacturer of numerous on-highway vehicles. This joint venture produces and sells filters and filter parts to support the full line of Dongfeng'scommercial vehicles.•Cummins Westport, Inc. - Cummins Westport Inc. is a joint venture in Canada with Westport Innovations Inc. to market and sell automotive spark-ignited natural gas engines worldwide and to participate in joint technology projects on low-emission technologies.Non-Wholly-Owned SubsidiaryWe 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 diesel engines, generators for the Indian and export markets and natural gas spark-ignited engines for powergeneration, automotive and industrial applications. CIL also has distribution and power generation operations.In the third quarter of 2017, we formed the Eaton Cummins Automated Transmission Technologies joint venture, which was consolidated and included in ourComponents segment as the automated transmissions business. See Note 18, "ACQUISITIONS", to the Consolidated Financial Statements for additionalinformation.10Table of ContentsSUPPLYThe performance of the end-to-end supply chain, extending through to our suppliers, is foundational to our ability to meet customers' expectations andsupport 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 onwhat we make internally and what we purchase externally. For the items we decide to purchase externally, the strategies also identify the suppliers we shouldpartner with long-term to provide the best technology, the lowest total cost and highest supply chain performance. We design and/or manufacture ourstrategic 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 manufacturedcomponents from leading global suppliers. Many key suppliers are managed through long-term supply agreements that assure capacity, delivery, quality andcost requirements are met over an extended period. Approximately 20 percent of the direct material in our product designs are single sourced to externalsuppliers. We have an established sourcing strategy and supplier management process to evaluate and mitigate risk. These processes are leading us todetermine our need for dual sourcing and increase our use of dual and parallel sources to minimize risk and increase supply chain responsiveness. Our currenttarget for dual and parallel sourcing is approximately 90 percent of our direct material spend. As of December 31, 2017, our analysis indicates that we haveapproximately 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:•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 TRADEMARKSWe own or control a significant number of patents and trademarks relating to the products we manufacture. These patents and trademarks were granted andregistered 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.SEASONALITYWhile individual product lines may experience modest seasonal variation in production, there is no material effect on the demand for the majority of ourproducts on a quarterly basis with the exceptions that our Power Systems segment normally experiences seasonal declines in the first quarter due to generaldeclines in construction spending during this period and our Distribution segment normally experiences seasonal declines in its first quarter business activitydue to holiday periods in Asia and Australia.LARGEST CUSTOMERSWe have thousands of customers around the world and have developed long-standing business relationships with many of them. PACCAR is our largestcustomer, accounting for 14 percent of our consolidated net sales in 2017, 13 percent in 2016 and 15 percent in 2015. We have long-term supply agreementswith 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 toPACCAR are under long-term supply agreements, these agreements provide for particular engine requirements for specific vehicle models and not a specificvolume of engines. PACCAR is our only customer accounting for more than 10 percent of our net sales in 2017. The loss of this customer or a significantdecline 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 73 years. A summary of principal customers for each operating segment is included in our segmentdiscussion.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-rangesupply agreement with Daimler. We also have an agreement with Fiat Chrysler to supply engines for its Ram trucks. Collectively, our net sales to these fourcustomers, including PACCAR, were 33 percent of our consolidated net sales in 2017, 33 percent in 2016 and 36 percent in 2015. Excluding PACCAR, netsales to any single11Table of Contentscustomer were less than 7 percent of our consolidated net sales in 2017, less than 7 percent in 2016 and less than 9 percent in 2015. These agreements containstandard purchase and sale agreement terms covering engine and engine parts pricing, quality and delivery commitments, as well as engineering productsupport obligations. The basic nature of our agreements with OEM customers is that they are long-term price and operations agreements that help assure theavailability of our products to each customer through the duration of the respective agreements. Agreements with most OEMs contain bilateral terminationprovisions 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.BACKLOGWe 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 andtherefore are not considered firm. At December 31, 2017, we did not have any significant backlogs.RESEARCH AND DEVELOPMENTIn 2017, we continued to invest in future critical technologies and products. We will continue to make investments to improve our current technologies, meetthe future emission requirements around the world and improve fuel economy.Our research and development program is focused on product improvements, product extensions, innovations and cost reductions for our customers. Researchand development expenditures include salaries, contractor fees, building costs, utilities, testing, technical IT, administrative expenses and allocation ofcorporate costs and are expensed, net of contract reimbursements, when incurred. From time to time, we enter into agreements with customers and governmentagencies to fund a portion of the research and development costs of a particular project. We generally account for these reimbursements as an offset to therelated research and development expenditure. Research and development expenses, net of contract reimbursements, were $734 million in 2017, $616million in 2016 and $718 million in 2015. Contract reimbursements were $137 million in 2017, $131 million in 2016 and $98 million in 2015.For 2017, 2016 and 2015, approximately $10 million, $77 million and $90 million, or 1 percent, 13 percent and 13 percent, respectively, of our research anddevelopment expenditures were directly related to compliance with 2017 U.S. Environmental Protection Agency (EPA) emission standards.ENVIRONMENTAL SUSTAINABILITYWe adopted our comprehensive environmental sustainability plan in 2014 after examining our entire environmental footprint, focusing on the key areas ofwater, waste, energy and greenhouse gases (GHG). As the concept and scope of environmental sustainability has matured and broadened, leaders have movedfrom initially working on environmental impacts within our direct control in our operations to an expanded view of fuel and raw materials that reaches acrossthe entire product life-cycle from design to manufacture to end of life. Our environmental sustainability plan is the way we carry out our priorities, goals andinitiatives in our action areas, including reducing our carbon footprint, using fewer natural resources and partnering to solve complex problems.Our Sustainability Report for 2016/2017 including goal progress and prior reports as well as a Data Book of more detailed environmental data in accordancewith the Global Reporting Initiative's Standard core compliance designation are available on our website at www.cummins.com, although such reports anddata book are not incorporated into this Form 10-K. 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 environmentalfootprint;"•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 ofcarbon 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 ofelectricity 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; and12Table of Contents•utilizing the most efficient methods and modes to move goods across our network to reduce carbon dioxide per kilogram of goods moved by 10percent by 2020.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 in the Top 25in Newsweek's 2017 Green Ranking of U.S. companies, while also being named "Best in Industry" in the "Machinery" category for U.S. Companies, as well asnamed to the Dow Jones North American Sustainability Index for the twelfth consecutive year in 2017 and rated AAA by MSCI ESG Research, included inthe “Disclosure Leadership Index” of the Carbon Disclosure Project’s climate report in 2015.ENVIRONMENTAL COMPLIANCEProduct Certification and ComplianceWe strive to have robust certification and compliance processes, adhering to all emissions regulations worldwide, including prohibiting the use of defeatdevices in all of our products. We are transparent with all governing bodies in these processes, from disclosure of the design and operation of the emissioncontrol system, to test processes and results, and later to any necessary reporting and corrective action processes if required.We work collaboratively and proactively with emission regulators globally to ensure emission standards are clear, appropriately stringent and enforceable, inan 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. Overthe past several years we have substantially increased our global environmental compliance presence and expertise to understand and meet emerging productenvironmental regulations around the world. Our ability to comply with these and future emission standards is an essential element in maintaining ourleadership position in regulated markets. We have made, and will continue to make, significant capital and research expenditures to comply with thesestandards. Our failure to comply with these standards could result in adverse effects on our future financial results.EU and EPA Engine CertificationsThe 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 withsubstantial 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 isachieved 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 wellpositioned 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 therequirement 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 diagnostictrouble codes, service tool interface, in-cab warning lamp and service information availability. The new GHG and fuel-efficiency regulations were requiredfor 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 usesthe same proven base engine with the XPI fuel system, variable geometry turbocharger (VGTTM) and Cummins aftertreatment system with DPF and SCRtechnology. 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 time frame for all power categories. These engines weredesigned for Tier 4 / Stage 4 standards and were based on our extensive on-highway experience developing SCR, high pressure fuel systems, DPF andVGTTM. Our products offer low fuel consumption, high torque rise and power output, extended maintenance intervals, reliable and durable operation and along life to overhaul period, all while13Table of Contentsmeeting 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.Other Environmental Statutes and RegulationsExpenditures for environmental control activities and environmental remediation projects at our facilities in the U.S. have not been a substantial portion ofour annual expenses and are not expected to be material in 2018. We believe we are in compliance in all material respects with laws and regulationsapplicable 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 beenidentified as a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended orsimilar state laws, at fewer than 20 waste disposal sites.Based upon our experiences at similar sites we believe that our aggregate future remediation costs will not be material. We have established accruals that webelieve are adequate for our expected future liability with respect to these sites. In addition, we have several other sites where we are working withgovernmental authorities on remediation projects. The costs for these remediation projects are not expected to be material.EMPLOYEESAt December 31, 2017, we employed approximately 58,600 persons worldwide. Approximately 20,830 of our employees worldwide are represented byvarious unions under collective bargaining agreements that expire between 2018 and 2022.AVAILABLE INFORMATIONWe 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 theSEC 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 iswww.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 "About"followed by the "Investor Overview" link. We make available, free of charge, on or through our Investors and Media webpage, our proxy statements, annualreports 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 theSecurities 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, byclicking on the heading "About" followed by "Corporate Governance" and then the "Governance Documents" link. Code of Conduct, Committee Chartersand other governance documents are included at this site. Our Code of Conduct applies to all employees, regardless of their position or the country in whichthey 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 waiversthat 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 ourinternet site is not incorporated by reference into this report.14Table of ContentsEXECUTIVE OFFICERS OF THE REGISTRANTFollowing are the names and ages of our executive officers, their positions with us at January 31, 2018 and summaries of their backgrounds and businessexperience:Name and Age Present Cummins Inc. position andyear appointed to position Principal position during the pastfive years other than Cummins Inc.position currently heldN. Thomas Linebarger (55) Chairman of the Board of Directors andChief Executive Officer (2012) Richard J. Freeland (60) Director, President and Chief OperatingOfficer (2014) Vice President and President— EngineBusiness (2010-2014)Sherry A. Aaholm (55) Vice President—Chief InformationOfficer (2013) Executive Vice President,Information Technology, FedExServices (2006-2013)Peter W. Anderson (51) Vice President—Global Supply Chainand Manufacturing (2017) Principal/Partner, Ernst & Young LLP(2006-2017)Sharon R. Barner (60) Vice President—General Counsel (2012) Steven M. Chapman (63) Group Vice President—China and Russia(2009) Christopher C. Clulow (46) Vice President - Corporate Controller(2017) Controller, Components Segment (2015-2017)Executive Director—Heavy, Medium andLight Duty Finance (2011-2015)Jill E. Cook (54) Vice President—Chief Human ResourcesOfficer (2003) Tracy A. Embree (44) Vice President and President—Components Group (2015) Vice President and President— TurboTechnologies (2012-2014)Thaddeus B. Ewald (50) Vice President—Corporate Strategy andBusiness Development (2010) Donald G. Jackson (48) Vice President—Treasurer (2015) Executive Director—Assistant Treasurer(2013-2015)Vice President—Americas Finance,Hewlett-Packard Co. (2010-2013)Norbert Nusterer (49) Vice President and President—PowerSystems (2016) Vice President—New and ReCon Parts(2011-2016)Mark J. Osowick (50) Vice President—Human ResourcesOperations (2014) Executive Director—Human Resources,Components Segment & India ABO (2010-2014)Srikanth Padmanabhan (53) Vice President and President—EngineBusiness (2016) Vice President—Engine Business (2014-2016)Vice President and General Manager—Cummins Emission Solutions (2008-2014)Marya M. Rose (55) Vice President—Chief AdministrativeOfficer (2011) Jennifer Rumsey (44) Vice President—Chief Technical Officer(2015) Vice President—Engineering, EngineBusiness (2014-2015)Vice President—Heavy, Medium andLight Duty Engineering (2013-2014)Executive Director—HD Engineering(2010-2013)15Table of ContentsLivingston L. Satterthwaite (57) Vice President and President—Distribution Business (2015) Vice President and President—PowerGeneration (2008-2015)Mark A. Smith (50) Vice President—Financial Operations(2016) Vice President—Investor Relations andBusiness Planning and Analysis (2014-2016)Executive Director—Investor Relations(2011-2014)Patrick J. Ward (54) Vice President—Chief Financial Officer(2008) 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 whichhis election is next considered. Other officers are appointed by the Chairman and Chief Executive Officer, are ratified by our Board of Directors and holdoffice for such period as the Chairman and Chief Executive Officer or the Board of Directors may prescribe.16Table of ContentsITEM 1A. Risk FactorsSet 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 businessresults to differ materially from any forward-looking statements contained in this Report and could individually, or in combination, have a material adverseeffect on our results of operations, financial position or cash flows. These risk factors should be considered in addition to our cautionary commentsconcerning forward-looking statements in this Report, including statements related to markets for our products and trends in our business that involve anumber 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 significant downturn in our markets could materially and adversely affect our results of operations, financial condition or cashflows.Many of our on- and off-highway markets are cyclical in nature and experience volatility in demand throughout these cycles. Although in 2017 weexperienced demand growth in most of our North American and Chinese on-highway markets and certain off-highway markets as well as growth in many ofour international markets, if the North American or Chinese markets suffer a significant downturn or if a slower pace of economic growth and weaker demandin our other significant international markets were to occur, 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.Our truck manufacturers and OEM customers may discontinue outsourcing their engine supply needs.Several of our engine customers, including PACCAR, Volvo , Navistar, Fiat Chrysler, Daimler and Dongfeng, are truck manufacturers or OEMs thatmanufacture engines for some of their own vehicles. Despite their own engine manufacturing abilities, these customers have historically chosen to outsourcecertain types of engine production to us due to the quality of our engine products, our emission compliance capabilities, our systems integration, theircustomers' 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 ofthese 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 acustomer of another engine manufacturer, the inability of third-party suppliers to meet product specifications and the emergence of low-cost productionopportunities in foreign countries. Any significant reduction in the level of engine production outsourcing from our truck manufacturer or OEM customerscould have a material adverse effect on our results of operations.The development of new technologies may materially reduce the demand for our current products and services.We are investing in new products and technologies, including electrified powertrains, for planned introduction into certain existing and new markets. Giventhe early stages of development of some of these new products and technologies, there can be no guarantee of the future market acceptance and investmentreturns with respect to these planned products. The increased adoption of electrified powertrains in some market segments could result in lower demand forcurrent diesel or natural gas engines and components and, over time, reduce the demand for related parts and service revenues from diesel or natural gaspowertrains. Furthermore, it is possible that we may not be successful in developing segment-leading electrified powertrains and some of our existingcustomers could choose to develop their own electrified or alternate fuel powertrains, or source from other manufacturers, and any of these factors couldmaterially adversely impact our results of operations, financial condition and cash flows.The discovery of any significant additional problems with our engine platforms or aftertreatment systems in North America could further materiallyadversely impact our results of operations, financial condition or cash flows.During 2017, the CARB and U.S. EPA selected certain of our pre-2013 model year engine systems for additional emissions testing. Some of these enginesystems failed CARB and EPA's tests as a result of degradation of an aftertreatment component. We have not been issued an official notice from the CARB orEPA regarding these particular engine systems. We are working with the agencies and will meet with them beginning in the first quarter of 2018, to develop aresolution of these matters. We are developing and testing a variety of solutions to address the technical issues, which could include a combination ofcalibration changes, service practices and hardware changes.In addition, we continue to evaluate other engine systems for model years 2010 through 2015 that could potentially be subject to similar aftertreatmentcomponent degradation issues. At the close of 2017, we had not yet determined the impact to other model years or engine systems or the percentage of theengine system populations that could be affected.17Table of ContentsSince there are many unresolved variables with respect to these degradation issues, we are not yet able to estimate the financial impact of these matters. It ispossible that they could have a material impact on our results of operations in the periods in which these degradation issues are resolved and a solution isdetermined.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 futurecustomers, reduced revenue and product recall costs. Product recall costs are incurred when we decide, either voluntarily or involuntarily, to recall a productthrough a formal campaign to solicit the return of specific products due to a known or suspected performance issue. Any significant product recalls couldhave a material adverse effect on our results of operations, financial condition and cash flows. See Note 12, "COMMITMENTS AND CONTINGENCIES" tothe Consolidated Financial Statements for additional information.Lower-than-anticipated market acceptance of our new or existing products or services, including reductions in demand for diesel engines, could materiallyadversely impact our results of operations, financial condition or cash flows.Although we conduct market research before launching new or refreshed engines and introducing new services, many factors both within and outside ourcontrol affect the success of new or existing products and services in the marketplace. Offering engines and services that customers desire and value canmitigate the risks of increasing price competition and declining demand, but products and services that are perceived to be less than desirable (whether interms of price, quality, overall value, fuel efficiency or other attributes) can exacerbate these risks. With increased consumer interconnectedness through theinternet, social media and other media, mere allegations relating to poor quality, safety, fuel efficiency, corporate responsibility or other key attributes cannegatively impact our reputation or market acceptance of our products or services, even if such allegations prove to be inaccurate or unfounded.A slowdown in infrastructure development and/or 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 infrastructureslowed in recent years (especially in China and Brazil), commodity prices were significantly lower and demand for our products in off-highway markets wasweak. Weakness in commodities, such as oil, gas and coal, adversely impacted mining industry participants’ demand for vehicles and equipment that containour engines and other products over the past several years. Although many of our off-highway markets began to recover in 2017, additional deterioration, orrenewed weakness, in infrastructure and commodities markets could adversely affect our customers’ demand for vehicles and equipment and could adverselyaffect our business.Unpredictability in the adoption, implementation and enforcement of increasingly stringent emission standards by multiple jurisdictions around the worldcould 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 meetnumerous changing government regulatory requirements, with different implementation timelines and emission requirements, makes developing enginesefficiently 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 marketswe serve. The successful development and introduction of new and enhanced products in order to comply with new regulatory requirements are subject toother 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 emergingmarkets are unpredictable and subject to change. Any delays in implementation or enforcement could result in the products we developed or modified tocomply 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 mayadversely affect our perceived competitive advantage in being an early, advanced developer of compliant engines.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 2017, we recognized $357 million of equity, royalty and interest income from investees, compared to $301 million in 2016. More than half of our equity,royalty and interest income from investees is from three of our 50 percent owned joint ventures in18Table of ContentsChina - 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 theiroperations, 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 ofcontribution by these entities to our net income would likely have a material adverse effect on our results of operations and cash flows.The adoption of new tax legislation, changes in our provisional estimates or exposure to additional income tax liabilities could adversely affect ourprofitability.On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (Tax Legislation). The estimated effects based upon current interpretation of the TaxLegislation have been incorporated into our financial results. As additional data is prepared and analyzed and as additional clarification and implementationguidance is issued on the new tax law, it may be necessary to adjust the provisional amounts. Any adjustments could have a material impact on provisionalamounts. In addition, there is a risk that states or foreign jurisdictions may amend their tax laws in response to the Tax Legislation, which could have amaterial impact on our future results.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 beadversely affected by changes in earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changesin 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 arepredominantly 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 auditscan involve complex issues, which may require an extended period of time to resolve and can be highly judgmental. Tax authorities may disagree withcertain 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 orderto determine the appropriateness of our tax provision. The amounts ultimately paid upon resolution of these or subsequent tax audits could be materiallydifferent from the amounts previously included in our income tax provision and, therefore, could have a material impact on our tax provision.We are exposed to, and may be adversely affected by, potential security breaches or other disruptions to our information technology systems and datasecurity.We rely on the capacity, reliability and security of our information technology systems and data security infrastructure in connection with various aspects ofour business activities. We also rely on our ability to expand and continually update these systems and related infrastructure in response to the changingneeds of our business. As we implement new systems, they may not perform as expected. We also face the challenge of supporting our older systems andimplementing necessary upgrades. In addition, some of these systems are managed by third party service providers and are not under our direct control. If weexperience a problem with an important information technology system, including during system upgrades and/or new system implementations, the resultingdisruptions could have an adverse effect on our business and reputation. As customers adopt and rely on the cloud-based digital technologies and services weoffer, any disruption of the confidentiality, integrity or availability of those services could have an adverse effect on our business and reputation.The data handled by our information technology systems is vulnerable to security threats. Our operations routinely involve receiving, storing, processing andtransmitting sensitive information pertaining to our business, customers, dealers, suppliers, employees and other sensitive matters. Information technologysecurity threats, such as security breaches, computer malware and other "cyber attacks," which are increasing in both frequency and sophistication, couldresult in unauthorized disclosures of information and create financial liability, subject us to legal or regulatory sanctions, or damage our reputation withcustomers, dealers, suppliers and other stakeholders. We continuously seek to maintain a robust program of information security and controls, but the impactof a material information technology event could have a material adverse effect on our competitive position, reputation, results of operations, financialcondition and cash flow.Financial distress or a change-in-control 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 integralpart of our positive business results for several years. If one of our large truck OEM customers experiences financial distress, bankruptcy or a change-in-control, such circumstance could likely lead to significant reductions in our revenues and earnings, commercial disputes, receivable collection issues, andother negative consequences that could have a material adverse impact on our results of operations.19Table of ContentsOur plan to reposition our portfolio of product offerings through exploring strategic acquisitions and divestitures may expose us to additional costs andrisks.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 thepursuit 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 successfulidentification and completion of any strategic transaction depends on a number of factors that are not entirely within our control, including the availabilityof suitable candidates and our ability to negotiate terms acceptable to all parties involved, conclude satisfactory agreements and obtain all necessaryregulatory approvals. Accordingly, we may not be able to successfully negotiate and complete specific transactions. The exploration, negotiation andconsummation of strategic transactions may involve significant expenditures by us, which may adversely affect our results of operations at the time suchexpenses are incurred, and may divert management’s attention from our existing business. Strategic transactions also may have adverse effects on our existingbusiness 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. Anyacquisition may not be accretive to us for a significant period of time following the completion of such acquisition. Also, our ability to effectively integrateany potential acquisition into our existing business and culture may not be successful, which could jeopardize future financial and operational performancefor the combined businesses. In addition, if an acquisition results in any additional goodwill or increase in other intangible assets on our balance sheet andsubsequently becomes impaired, we would be required to record a non-cash impairment charge, which could result in a material adverse effect on ourfinancial 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 insubstantial 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 2017, we single sourced approximately 20 percent of the total types of parts in our product designs, compared to approximately 56 percent in 2016.Any delay in our suppliers' deliveries may adversely affect our operations at multiple manufacturing locations, forcing us to seek alternative supply sourcesto 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, naturaldisasters or acts of war or terrorism. Any extended delay in receiving critical supplies could impair our ability to deliver products to our customers and ourresults of operations.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 sellsimilar products. We primarily compete in the market with diesel engines and related diesel products; however, new technologies continue to be developedfor gasoline, natural gas, electrification and other technologies and we will continue to face new competition from these expanding technologies. Ourproducts primarily compete on the basis of price, performance, fuel economy, speed of delivery, quality and customer support. We also face competitors insome emerging markets who have established local practices and long standing relationships with participants in these markets. There can be no assurancethat 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 ourcustomers' 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 hasmeant greater demand for our advanced engine technologies to help these customers meet the more stringent emissions requirements of developed markets, aswell as greater demand for access to our distribution systems for purposes of equipment servicing. As these emerging market customers enter into, and beginto compete in more developed markets, they may increasingly begin to compete with our existing customers in these markets. Our further aid to emergingmarket customers could adversely affect our relationships with developed market customers. In addition, to the extent the competition does not correspond tooverall growth in demand, we may see little or no benefit from this type of expansion by our emerging market customers.20Table of ContentsPolicy changes affecting international trade could adversely impact the demand for our products and our competitive position.Changes in government policies on foreign trade and investment can affect the demand for our products and services, impact the competitive position of ourproducts or prevent us from being able to sell products in certain countries. Our business benefits from free trade agreements, such as the North American FreeTrade Agreement, and efforts to withdraw from, or substantially modify such agreements, in addition to the implementation of more restrictive trade policies,such as more detailed inspections, higher tariffs, import or export licensing requirements, exchange controls or new barriers to entry, could have a materialadverse effect on our results of operations, financial condition or cash flows.Additionally, the results of the United Kingdom’s referendum on EU membership, advising for the exit from the EU, has caused and may continue to causesignificant volatility in global stock markets, currency exchange rate fluctuations and global economic uncertainty. Although it is unknown what the termsof the United Kingdom’s future relationship with the EU will be, it is possible that there will be greater restrictions on imports and exports between the UnitedKingdom and EU and increased regulatory complexities. Any of these factors could adversely impact customer demand, our relationships with customers andsuppliers and our results of operations.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 currencyexchange rate risk to the extent that our costs are denominated in currencies other than those in which we earn revenues. In addition, since our financialstatements are denominated in U.S. dollars, changes in foreign currency exchange rates between the U.S. dollar and other currencies have had, and willcontinue to have, an impact on our results of operations. Although the U.S. dollar weakened in 2017, the U.S. dollar strengthened in recent years through2016 and resulted in material unfavorable impacts on our revenues in those years. If the U.S. dollar returns to strengthening against other currencies, we willexperience 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 foreigncurrency exchange rate adjustment provisions, there can be no assurance that foreign currency exchange rate fluctuations will not adversely affect our futureresults of operations. In addition, while the use of currency hedging instruments may provide us with some protection from adverse fluctuations in foreigncurrency exchange rates, by utilizing these instruments we potentially forego the benefits that might result from favorable fluctuations in foreign currencyexchange rates. We also face risks arising from the imposition of foreign exchange controls and currency devaluations. Foreign exchange controls may limit our ability toconvert foreign currencies into U.S. dollars or to remit dividends and other payments by our foreign subsidiaries or businesses located in or conducted withina country imposing controls. Currency devaluations result in a diminished value of funds denominated in the currency of the country instituting thedevaluation. See Management's Discussion and Analysis for additional information.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 priceincreases may prevent us from passing these additional costs on to our customers through timely pricing actions. Additionally, higher material andcommodity costs around the world may offset our efforts to reduce our cost structure. While we customarily enter into financial transactions and contractualpricing adjustment provisions with our customers that attempt to address some of these risks (notably with respect to copper, platinum and palladium), therecan be no assurance that commodity price fluctuations will not adversely affect our results of operations. In addition, while the use of commodity pricehedging instruments and contractual pricing adjustments may provide us with some protection from adverse fluctuations in commodity prices, by utilizingthese instruments we potentially forego the benefits that might result from favorable fluctuations in price. As a result, higher material and commodity costs, aswell as hedging these commodity costs during periods of decreasing prices, could result in declining margins.We may fail to realize all of the expected enhanced revenue, earnings, and cash flow from our investment in the Eaton Cummins Automated TransmissionTechnologies joint venture. Our ability to realize all of the expected enhanced revenue, earnings, and cash flow from our recent investment in the Eaton Cummins AutomatedTransmission Technologies joint venture will depend, in substantial part, on our ability to successfully launch the automated transmission products in NorthAmerica and achieve our projected market penetration. While we believe21Table of Contentswe will ultimately achieve these objectives, it is possible that we will be unable to achieve all of the goals within our anticipated time frame or in theanticipated amounts. If we are not able to successfully complete our automated transmission strategy, the anticipated enhanced revenue, earnings, and cashflows resulting from this joint venture may not be realized fully or may take longer to realize than expected. As part of the purchase accounting associated with the formation of the joint venture, significant goodwill and intangible asset balances were recorded on theconsolidated balance sheet. If cash flows from the joint venture fall short of our anticipated amounts, these assets could be subject to impairment charges,negatively impacting our earnings.We are exposed to political, economic and other risks that arise from operating a multinational business.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 relatedrisks. There can be no assurance that the consequences of these and other factors relating to our multinational operations will not have a material adverseeffect upon us.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 haveseen an increase in the development and enforcement of laws regarding trade compliance and anti-corruption, such as the U.S. Foreign Corrupt Practices Actand similar laws from other countries, as well as new regulatory requirements regarding data privacy, such as the European Union General Data ProtectionRegulation. Our numerous foreign subsidiaries, affiliates and joint venture partners are governed by laws, rules and business practices that differ from those ofthe 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 mayresult in severe criminal or civil sanctions, could disrupt our business, and result in an adverse effect on our reputation, business and results of operations orfinancial condition. We cannot predict the nature, scope or effect of future regulatory requirements to which our operations might be subject or the manner inwhich existing laws might be administered or interpreted.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 appropriatelyadjusting our capacity have been, and will continue to be, important factors in determining our results of operations. If we overestimate our demand andoverbuild our capacity, we may have significantly underutilized assets and we may experience reduced margins. If we do not accurately align ourmanufacturing 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 allegedto 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 suchclaim is recognized. While we maintain insurance coverage with respect to certain product liability claims, we may not be able to obtain such insurance onacceptable terms in the future, if at all, and any such insurance may not provide adequate coverage against product liability claims. In addition, productliability claims can be expensive to defend and can divert the attention of management and other personnel for significant periods of time, regardless of theultimate outcome. Furthermore, even if we are successful in22Table of Contentsdefending 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 lawsand 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 notbe adversely impacted by costs, liabilities or claims with respect to existing or subsequently acquired operations, under either present laws and regulations orthose 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 hazardoussubstances 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 maybe held liable for the contamination and the amount of such liability could be material.Future bans or limitations on the use of diesel-powered vehicles, in an effort to limit greenhouse gas emissions, could materially adversely affect ourbusiness over the long term.In an effort to limit greenhouse gas emissions, mayors of several large international cities announced that they plan to implement a ban on the use in theircities of diesel-powered vehicles by 2025. These cities include Athens, Madrid, Mexico City and Paris. Similarly, Germany adopted legislation to ban newinternal combustion engine vehicles by 2030, and China is considering a ban on the production and sale of diesel-powered vehicles to be adopted in the nearfuture. In addition, California government officials have called for the state to phase out sales of diesel-powered vehicles by 2040. To the extent that thesetypes 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 bematerially adversely affected.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 drivegreater demand for better fuel economy in almost all countries in which we operate. Some of our engine products have been developed with a primarypurpose of offering fuel economy improvements, and if energy costs decrease or increase less than expected, demand for these products may likewisedecrease. The relative unavailability of electricity in some emerging market countries also influences demand for our electricity generating products, such asour 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 ofoperations, 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 requiredcontributions 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 actuarialassumptions we use to measure our defined benefit pension plan obligations, including the discount rate at which future projected and accumulated pensionobligations are discounted to a present value. We could experience increased pension cost due to a combination of factors, including the decreasedinvestment 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 increasedpension cost in future years and adversely impact our results of operations, financial condition and cash flow. Depending upon the severity of marketdeclines and government regulatory changes, we may be legally obligated to make pension payments in the U.S. and perhaps other countries and thesecontributions could be material.We may be adversely impacted by work stoppages and other labor matters.At December 31, 2017, we employed approximately 58,600 persons worldwide. Approximately 20,830 of our employees worldwide are represented byvarious unions under collective bargaining agreements that expire between 2018 and 2022. While we have no reason to believe that we will be materiallyimpacted 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 wewill not encounter future strikes, work stoppages, or other types of conflicts with labor unions or our employees. Any of these consequences may have anadverse effect on us or may limit our flexibility in dealing with our workforce. In addition, many of our customers and suppliers have23Table of Contentsunionized work forces. Work stoppages or slowdowns experienced by our customers or suppliers could result in slowdowns or closures that would have amaterial 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 areperiodically revised and/or expanded. Accordingly, from time to time, we are required to adopt new or revised accounting standards issued by recognizedauthoritative bodies, including the Financial Accounting Standards Board. Recently, accounting standard setters issued new guidance which furtherinterprets or seeks to revise accounting pronouncements related to revenue recognition and lease accounting as well as to issue new standards expandingdisclosures. The impact of accounting pronouncements that have been issued but not yet implemented is disclosed in our annual and quarterly reports onForm 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 adoptcould change the current accounting treatment that we apply to our consolidated financial statements and that such changes could have a material adverseeffect on our reported results of operations and financial position.ITEM 1B. Unresolved Staff CommentsNone.24Table of ContentsITEM 2. PropertiesManufacturing FacilitiesOur principal manufacturing facilities include our plants used by the following segments in the following locations:Segment U.S. Facilities Facilities Outside the U.S.Engine Indiana: Columbus Brazil: Sao Paulo New York: Lakewood India: Phaltan North Carolina: Whitakers U.K.: DarlingtonComponents Indiana: Columbus Australia: Kilsyth South Carolina: Charleston Brazil: Sao Paulo Tennessee: Cookeville China: Beijing, Shanghai, Wuxi, Wuhan Wisconsin: Mineral Point, Neillsville France: Quimper Germany: Marktheidenfeld India: Pune, Dewas, Pithampur, Phaltan, Rudrapur Mexico: Ciudad Juarez, San Luis Potosi South Africa: Johannesburg South Korea: Suwon U.K.: Darlington, HuddersfieldPower Systems Indiana: Elkhart, Seymour Brazil: Sao Paulo Minnesota: Fridley China: Wuxi, Wuhan New Mexico: Clovis India: Pune, Ahmendnagar, Ranjangaon, Phaltan Mexico: San Luis Potosi Romania: Craiova U.K.: Daventry, Margate, Manston, Stamford Nigeria: LagosIn addition, engines and engine components are manufactured by joint ventures or independent licensees at manufacturing plants in the U.S., China, India,Russia, Japan, Sweden and Mexico.Distribution FacilitiesThe 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 Canada: VancouverColorado: Henderson China: BeijingGeorgia: Atlanta Russia: MoscowMichigan: New Hudson Singapore: SingaporeMinnesota: White Bear Lake South Africa: JohannesburgNebraska: Omaha Tennessee: Memphis Texas: Dallas 25Table of ContentsHeadquarters and Other OfficesOur Corporate Headquarters are located in Columbus, Indiana. Additional marketing, operational headquarters and supply chain facilities are in thefollowing locations:U.S. Facilities Facilities Outside the U.S.Indiana: Columbus, Indianapolis Belgium: RumstKentucky: Walton Brazil: GuarulhosTennessee: Memphis, Nashville China: Beijing, Shanghai, WuhanWashington, D.C. India: Pune Mexico: San Luis Potosi Russia: Moscow Singapore: Singapore South Africa: Johannesburg U.K.: Staines, Stockton United Arab Emirates: DubaiITEM 3. Legal ProceedingsWe are subject to numerous lawsuits and claims arising out of the ordinary course of our business, including actions related to product liability; personalinjury; the use and performance of our products; warranty matters; product recalls; patent, trademark or other intellectual property infringement; contractualliability; the conduct of our business; tax reporting in foreign jurisdictions; distributor termination; workplace safety; and environmental matters. We alsohave been identified as a potentially responsible party at multiple waste disposal sites under U.S. federal and related state environmental statutes andregulations and may have joint and several liability for any investigation and remediation costs incurred with respect to such sites. We have denied liabilitywith respect to many of these lawsuits, claims and proceedings and are vigorously defending such lawsuits, claims and proceedings. We carry various formsof commercial, property and casualty, product liability and other forms of insurance; however, such insurance may not be applicable or adequate to cover thecosts associated with a judgment against us with respect to these lawsuits, claims and proceedings. We do not believe that these lawsuits are materialindividually or in the aggregate. While we believe we have also established adequate accruals pursuant to U.S. generally accepted accounting principles forour expected future liability with respect to pending lawsuits, claims and proceedings, where the nature and extent of any such liability can be reasonablyestimated based upon then presently available information, there can be no assurance that the final resolution of any existing or future lawsuits, claims orproceedings 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 FinancialStatements 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 customslaws. While we believe we comply with such laws, they are complex, subject to varying interpretations and we are often engaged in litigation regarding theapplication of these laws to particular circumstances.ITEM 4. Mine Safety DisclosuresNot Applicable.26Table of ContentsPART IIITEM 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, informationregarding dividend payments and the number of common stock shareholders, see "Selected Quarterly Financial Data" in this report. For other matters relatedto 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: Issuer Purchases of Equity SecuritiesPeriod (a) TotalNumber ofSharesPurchased(1) (b) AveragePrice Paidper Share (c) Total Number ofShares Purchasedas Part of PubliclyAnnouncedPlans or Programs (d) MaximumNumber of Sharesthat May Yet BePurchased Under thePlans or Programs(2)October 2 - November 5 538 $173.90 — 39,622November 6 - December 3 349,637 166.01 348,837 40,522December 4 - December 31 15,584 167.66 12,020 36,058Total 365,759 166.10 360,857 _____________________________________________________________(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 ofDirectors 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 notlimit 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 ofDecember 31, 2017, was $1.0 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 repurchaseplan. During the three months ended December 31, 2017, we repurchased $60 million of common stock under the 2015 Board of Directors authorized plan.During the three months ended December 31, 2017, we repurchased 4,902 shares from employees in connection with the Key Employee Stock InvestmentPlan which allows certain employees, other than officers, to purchase shares of common stock on an installment basis up to an established credit limit. Loansare 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 anadditional 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 effectrepurchase shares if the participant defaulted in repayment of the loan. There is no maximum amount of shares that we may purchase under this plan.27Table of ContentsPerformance Graph (Unaudited)The following Performance Graph and related information shall not be deemed "soliciting material" or to be "filed" with the SEC, nor shall suchinformation be incorporated by reference into any of our future filings under the Securities Act of 1933 or Securities Exchange Act of 1934, each asamended, 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 theS&P 500 Index and an index of peer companies selected by us. In 2017 the Board of Directors updated their benchmark criteria for peer companies, re-evaluated our peer group based on the updated criteria and updated our group to include current companies that participate in similar end-markets and havesimilar businesses. Our revised group includes BorgWarner Inc., Caterpillar, Inc., Daimler AG, Deere & Company, Donaldson Company Inc., EatonCorporation, Emerson Electric Co., Fortive Corporation, W.W. Grainger Inc., Honeywell International, Illinois Tool Works Inc., Navistar, PACCAR, Parker-Hannifin Corporation, Textron Inc. and Volvo AB. Each of the measures of cumulative total return assumes reinvestment of dividends. The comparisons inthis 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 RETURNAMONG CUMMINS INC., S&P 500 INDEX AND CUSTOM PEER GROUPASSUMES $100 INVESTED ON DEC. 31, 2012ASSUMES DIVIDENDS REINVESTEDFISCAL YEAR ENDING DEC. 31, 201728Table of ContentsITEM 6. Selected Financial DataThe selected financial information presented below for each of the last five years ended December 31, beginning with 2017, was derived from ourConsolidated 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 2017 2016 2015 2014 2013For the years ended December 31, Net sales $20,428 $17,509 $19,110 $19,221 $17,301U.S. percentage of sales 54% 54% 56% 52% 48%Non-U.S. percentage of sales 46% 46% 44% 48% 52%Gross margin 5,090 4,452 4,947 4,861 4,280Research, development and engineering expenses 752 636 735 754 713Equity, royalty and interest income from investees 357 301 315 370 361Interest expense 81 69 65 64 41Net income attributable to Cummins Inc.(1) 999 1,394 1,399 1,651 1,483Earnings per common share attributable to Cummins Inc. (2) Basic $5.99 $8.25 $7.86 $9.04 $7.93Diluted 5.97 8.23 7.84 9.02 7.91Cash dividends declared per share 4.21 4.00 3.51 2.81 2.25Net cash provided by operating activities $2,277 $1,935 $2,059 $2,266 $2,089Capital expenditures 506 531 744 743 676At December 31, Cash and cash equivalents $1,369 $1,120 $1,711 $2,301 $2,699Total assets 18,075 15,011 15,134 15,764 14,728Long-term debt(3) 1,588 1,568 1,576 1,577 1,672Total equity(4) 8,164 7,174 7,750 8,093 7,870_____________________________________________________________(1) For the year ended December 31, 2017, net income attributable to Cummins Inc. was reduced by $777 million due to tax reform. For the year ended December 31, 2016, netincome attributable to Cummins Inc. included a $138 million charge for a loss contingency ($74 million net of favorable variable compensation impact and after-tax). For the yearended December 31, 2015, net income attributable to Cummins Inc. included $211 million for an impairment of light-duty diesel assets ($133 million after-tax), $90 million ofrestructuring 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, netincome attributable to Cummins Inc. included $32 million of restructuring and other charges ($21 million after-tax) for operating actions related to the Power Systems segment.(2) For the year ended December 31, 2017, results for basic and diluted earnings per share were reduced by $4.66 per share and $4.65 per share, respectively, due to tax reform.(3) 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-termdebt by $12 million. In September 2013, we issued $1 billion of senior unsecured debt.(4) For the years ended December 31, 2017, 2016, 2015, 2014 and 2013, we recorded non-cash charges (credits) to equity of ($28) million, $65 million, $63 million, $78 million and($102) 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 onour pension trust assets and the effects of economic factors on the valuation of the pension liability. For the years ended December 31, 2017, 2016, 2015, 2014 and 2013, werecorded non-cash charges (credits) to equity of ($315) million, $431 million, $290 million, $227 million and $18 million, respectively, to record unrealized losses (gains)associated with the foreign currency translation adjustments.29Table of ContentsITEM 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsORGANIZATION OF INFORMATIONThe following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) was prepared to provide the reader with aview and perspective of our business through the eyes of management and should be read in conjunction with our Consolidated Financial Statements andthe accompanying notes to those financial statements. Our MD&A is presented in the following sections:•Executive Summary and Financial Highlights•2018 Outlook•Results of Operations•Operating Segment Results•Liquidity and Capital Resources•Contractual Obligations and Other Commercial Commitments•Application of Critical Accounting Estimates•Recently Adopted and Recently Issued Accounting PronouncementsEXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTSWe are a global power leader that designs, manufactures, distributes and services diesel and natural gas engines and engine-related component products,including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems, transmissions and electric power generationsystems. We sell our products to original equipment manufacturers (OEMs), distributors and other customers worldwide. We have long-standing relationshipswith many of the leading manufacturers in the markets we serve, including PACCAR Inc, Daimler Trucks North America, Navistar International Corporationand Fiat Chrysler Automobiles. We serve our customers through a network of approximately 500 wholly-owned and independent distributor locations andover 7,500 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 theproducts 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 industrialapplications, 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 repairactivities on our products and maintaining relationships with various OEMs throughout the world. The Components segment sells filtration products,aftertreatment systems, turbochargers, fuel systems and transmissions. The Power Systems segment is an integrated power provider, which designs,manufactures and sells engines (16 liters and larger) for industrial applications (including mining, oil and gas, marine and rail), standby and prime powergenerator 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 generalindustrial markets. Demand in these markets tends to fluctuate in response to overall economic conditions. Our sales may also be impacted by OEMinventory levels, production schedules and stoppages. Economic downturns in markets we serve generally result in reduced sales of our products and canresult in price reductions in certain products and/or markets. As a worldwide business, our operations are also affected by currency, political, economic andregulatory 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 Eastand 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 anyone industry or customer or the economy of any single country on our consolidated results.Worldwide revenues improved 17 percent in 2017 compared to 2016, with all operating segments reporting higher revenue. Revenue in the U.S. and Canadaimproved by 15 percent primarily due to increased demand in the North American on-highway markets, increased industrial demand (especially in oil andgas, construction and mining markets) and organic growth and higher sales related to the acquisition of a North American distributor in the fourth quarter of2016. International demand growth (excludes the U.S. and Canada) in 2017 improved revenues by 19 percent, with sales up in most of our markets,30Table of Contentsespecially in China, Russia, India and the U.K. The increase in international sales was primarily due to increased demand in the truck market in China, newemission regulations in India and increased demand in industrial markets (especially construction markets in China and mining markets in Europe).On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (Tax Legislation). Among other things, the Tax Legislation changed the U.S. statutoryrate to 21 percent effective January 1, 2018. The impact of the Tax Legislation resulted in a net incremental charge to our Consolidated Statements ofIncome of $777 million. The components of the 2017 charge were as follows:In millionsImpact of Tax Legislation(1)Increase in income tax expense$781Decrease in equity, royalty and other income from investees39Increase in income attributable to noncontrolling interests(2)(43)Net impact of Tax Legislation$777_____________________________________________________(1) See Note 2, "INCOME TAXES," Note 3, "INVESTMENTS IN EQUITY INVESTEES" and Note 16,"NONCONTROLLING INTERESTS," to our Consolidated Financial Statements for additional information.(2) Noncontrolling interest was reduced for withholding taxes on foreign earnings which reduced the income eliminated for non-Cummins ownership interest attributable to Cummins India, Ltd.The $781 million increase in tax expense is composed of three elements - the remeasurement of deferred taxes, a one-time transitional tax on unrepatriatedearnings and withholding taxes on foreign earnings.The following table contains sales and earnings before interest expense, income tax expense and noncontrolling interests (EBIT) results by operatingsegment for the years ended December 31, 2017 and 2016. See the section titled "Operating Segment Results" for a more detailed discussion of net sales andEBIT by operating segment including the reconciliation of segment EBIT to net income attributable to Cummins, Inc. Operating Segments 2017 2016 Percent change Percentof Total Percentof Total 2017 vs. 2016In millions Sales EBIT Sales EBIT Sales EBITEngine $8,953 44 % $959 $7,804 45 % $686(1) 15% 40 %Distribution 7,058 34 % 384 6,181 35 % 392 14% (2)%Components 5,889 29 % 754 4,836 28 % 641 22% 18 %Power Systems 4,058 20 % 294 3,517 20 % 263 15% 12 %Intersegment eliminations (5,530) (27)% — (4,829) (28)% — 15% —Non-segment — — 55 — — 17 — NMTotal $20,428 100 % $2,446 $17,509 100 % $1,999 17% 22 %_____________________________________________________"NM" - not meaningful information(1) The year ended December 31, 2016, included $138 million for loss contingency charges. See the "Results of Operations" section for additional information.Net income attributable to Cummins Inc. for 2017 was $999 million, or $5.97 per diluted share, on sales of $20.4 billion, compared to 2016 net incomeattributable to Cummins Inc. of $1.4 billion, or $8.23 per diluted share, on sales of $17.5 billion. The decrease in net income attributable to Cummins Inc.and earnings per diluted share was driven by a $777 million reduction for tax adjustments related to the Tax Legislation, increased selling, general andadministrative expenses and higher research, development and engineering expenses, partially offset by higher net sales and gross margin, lower charges for aloss contingency and higher equity, royalty and interest income from investees. The increase in gross margin was primarily due to higher volumes, improvedleverage and lower material costs, partially offset by higher warranty costs ($264 million primarily due to campaigns in the Engine, Components and PowerSystems segments and changes in estimates in the Engine and Components segments) and increased variable compensation expense of $150 million. Dilutedearnings per share for 2017 was negatively impacted $4.65 per share due to the Tax Legislation, partially offset by a benefit of $0.04 per share from fewerweighted-average shares outstanding, primarily due to purchases under the stock repurchase program. See Income Tax Expense section for additionalinformation on the new Tax Legislation.31Table of ContentsNet income and diluted earnings per share attributable to Cummins, Inc., excluding special items were as follows: Years ended December 31, 2017 2016 2015In millions NetIncome DilutedEPS NetIncome DilutedEPS NetIncome DilutedEPSNet income attributable to Cummins Inc. $999 $5.97 $1,394 $8.23 $1,399 $7.84Add Impact of Tax Legislation(1) 777 4.65 — — — —Impairment of light-duty diesel assets, net of tax(2) — — — — 133 0.75Restructuring actions and other charges, net oftax(3) — — — — 61 0.34Net income attributable to Cummins Inc. excludingspecial items(4) $1,776 $10.62 $1,394 $8.23 $1,593 $8.93____________________________________________________(1) See Note 2, "INCOME TAXES," to our Consolidated Financial Statements for additional information.(2) See Note 19, "IMPAIRMENT OF LIGHT-DUTY DIESEL ASSETS," to our Consolidated Financial Statements for additional information.(3) See Note 20, "RESTRUCTURING ACTIONS AND OTHER CHARGES," to our Consolidated Financial Statements for additional information.(4) These measures are not in accordance with, or an alternative for, accounting principles generally accepted in the United States of America (GAAP) andmay not be consistent with measures used by other companies. It should be considered supplemental data.We generated $2.3 billion of operating cash flows in 2017, compared to $1.9 billion in 2016. See the section titled "Cash Flows" in the "LIQUIDITY ANDCAPITAL RESOURCES" section for a discussion of items impacting cash flows.During 2017 we repurchased $451 million, or 2.9 million shares of common stock. See Note 13, "SHAREHOLDERS' EQUITY," to the ConsolidatedFinancial Statements for additional information.On July 31, 2017, we formed a joint venture with Eaton Corporation PLC by purchasing a 50 percent interest in the new venture named Eaton CumminsAutomated Transmission Technologies (ECJV) for $600 million in cash. In addition, each partner contributed $20 million for working capital. The jointventure will design, assemble, sell and support medium-duty and heavy-duty automated transmissions for the commercial vehicle market, including newproduct launches. We consolidated the results of the joint venture in our Components segment as we have a majority voting interest in the venture by virtueof a tie-breaking vote on the joint venture's board of directors. See Note 18 "ACQUISITIONS," to the Consolidated Financial Statements for additionalinformation.On September 5, 2017, we entered into a 364-day credit facility that allows us to borrow up to $1 billion of additional unsecured funds at any time throughSeptember 2018. Revolving credit facilities are maintained primarily to provide backup liquidity for our commercial paper borrowings, letters of credit andgeneral corporate purposes.Our debt to capital ratio (total capital defined as debt plus equity) at December 31, 2017, was 19.7 percent, compared to 20.6 percent at December 31, 2016.At December 31, 2017, we had $1.6 billion in cash and marketable securities on hand and access to our credit facilities, if necessary, to meet currentlyanticipated investment and funding needs. As of the date of filing this Annual Report on Form 10-K, our credit ratings were as follows: Long-Term Short-Term Credit Rating AgencySenior DebtRating Debt Rating OutlookStandard & Poor’s Rating ServicesA+ A1 StableMoody’s Investors Service, Inc.A2 P1 StableIn July 2017, our Board of Directors authorized an increase to our quarterly dividend of 5.4 percent from $1.025 per share to $1.08 per share.Our global pension plans, including our unfunded and non-qualified plans, were 116 percent funded at December 31, 2017. Our U.S. qualified plans, whichrepresent approximately 55 percent of the worldwide pension obligation, were 131 percent funded and our U.K. plans were 118 percent funded. We expect tocontribute approximately $38 million to our global pension plans in 2018. In addition, we expect our 2018 net periodic pension cost to approximate $79million. See application of critical accounting estimates within MD&A and Note 10, "PENSION AND OTHER POSTRETIREMENT BENEFITS," to theConsolidated Financial Statements, for additional information concerning our pension and other post-retirement benefit plans.32Table of ContentsIn the first quarter of 2018, we will expand our segment reporting and add an additional segment called Electrified Power. The segment will include BrammoInc., a low voltage battery designer acquired in 2017, and our internally developed electrification business. We will begin reporting the new segmenteffective with our first quarter Form 10-Q.33Table of Contents2018 OUTLOOKOur outlook reflects the following positive trends and challenges to our business that we expect could impact our revenue and earnings potential in 2018:Positive Trends•North American heavy-duty truck demand is expected to improve.•North American medium-duty truck demand will remain strong.•Demand for pick up trucks in North America will remain strong.•Industry production of medium-duty trucks in North America will remain strong.•Market demand may continue to improve in global mining.•Global construction markets could continue to improve.•Economic conditions in Brazil may begin to improve, which could contribute to improved demand in our end-markets.Challenges•Market demand in truck markets in China is expected to decline.•Marine markets are expected to remain weak.In summary, we expect demand to improve or remain strong in many of our most important markets.34Table of ContentsRESULTS OF OPERATIONS Favorable/(Unfavorable) Years ended December 31, 2017 vs. 2016 2016 vs. 2015In millions (except per share amounts) 2017 2016 2015 Amount Percent Amount PercentNET SALES $20,428 $17,509 $19,110 $2,919 17 % $(1,601) (8)%Cost of sales 15,338 13,057 14,163 (2,281) (17)% 1,106 8 %GROSS MARGIN 5,090 4,452 4,947 638 14 % (495) (10)%OPERATING EXPENSES AND INCOME Selling, general and administrative expenses 2,390 2,046 2,092 (344) (17)% 46 2 %Research, development and engineering expenses 752 636 735 (116) (18)% 99 13 %Equity, royalty and interest income from investees 357 301 315 56 19 % (14) (4)%Loss contingency charges 5 138 60 133 96 % (78) NMImpairment of light-duty diesel assets — — 211 — — % 211 100 %Restructuring actions and other charges — — 90 — — % 90 100 %Other operating income (expense), net 65 (5) (17) 70 NM 12 71 %OPERATING INCOME 2,365 1,928 2,057 437 23 % (129) (6)%Interest income 18 23 24 (5) (22)% (1) (4)%Interest expense 81 69 65 (12) (17)% (4) (6)%Other income, net 63 48 9 15 31 % 39 NMINCOME BEFORE INCOME TAXES 2,365 1,930 2,025 435 23 % (95) (5)%Income tax expense 1,371 474 555 (897) NM 81 15 %CONSOLIDATED NET INCOME 994 1,456 1,470 (462) (32)% (14) (1)%Less: Net (loss) income attributable to noncontrollinginterests (5) 62 71 67 NM 9 13 %NET INCOME ATTRIBUTABLE TO CUMMINS INC. $999 $1,394 $1,399 $(395) (28)% $(5) — %Diluted earnings per common share attributable to CumminsInc. $5.97 $8.23 $7.84 $(2.26) (27)% $0.39 5 %______________________________________"NM" - not meaningful information Favorable/(Unfavorable) PercentagePointsPercent of sales 2017 2016 2015 2017 vs. 2016 2016 vs. 2015Gross margin 24.9% 25.4% 25.9% (0.5) (0.5)Selling, general and administrative expenses 11.7% 11.7% 10.9% — (0.8)Research, development and engineering expenses 3.7% 3.6% 3.8% (0.1) 0.22017 vs. 2016Net SalesNet sales increased $2.9 billion versus 2016, primarily driven by the following:•Engine segment sales increased 15 percent primarily due to higher demand in most North American on-highway markets and improved demand inmost global construction markets.•Components segment sales increased 22 percent due to higher demand across all businesses, especially the emission solutions business, due tostrong on-highway sales in India, North America and China.•Distribution segment sales increased 14 percent primarily due to an increase in organic sales and higher sales related to the acquisition of a NorthAmerican distributor in the fourth quarter of 2016.•Power Systems segment sales increased 15 percent due to higher demand in all product lines, especially in industrial markets, due to higher demandin global mining and North American oil and gas markets.35Table of ContentsSales to international markets (excluding the U.S. and Canada), based on location of customers, were 42 percent of total net sales in 2017, compared with 42percent of total net sales in 2016.A more detailed discussion of sales by segment is presented in the "Operating Segment Results" section.Gross MarginGross margin increased $638 million, primarily due to higher volumes, improved leverage and lower material costs, partially offset by higher warranty costs($264 million primarily due to campaigns in the Engine, Components and Power Systems segments and changes in estimates in the Engine and Componentssegments) and increased variable compensation expense of $150 million. Gross margin decreased 0.5 points as a percentage of sales due to increasedwarranty costs and increased variable compensation expense.The provision for warranties issued, excluding campaigns, as a percentage of sales, was 1.8 percent in 2017 and 1.7 percent in 2016. A more detaileddiscussion of margin by segment is presented in the "Operating Segment Results" section.Selling, General and Administrative ExpensesSelling, general and administrative expenses increased $344 million, primarily due to higher compensation expenses ($257 million), especially variablecompensation, and higher consulting expenses ($52 million). Overall, selling, general and administrative expenses, as a percentage of sales, remained flat at11.7 percent in 2017 and 2016.Research, Development and Engineering ExpensesResearch, development and engineering expenses increased $116 million, primarily due to increased compensation expense ($76 million), especiallyvariable compensation, and higher consulting expenses ($20 million). Overall, research, development and engineering expenses, as a percentage of sales,increased to 3.7 percent in 2017 from 3.6 percent in 2016. Research activities continue to focus on development of new products to meet future emissionstandards around the world and improvements in fuel economy performance.Equity, Royalty and Interest Income From InvesteesEquity, royalty and interest income from investees increased $56 million, primarily due to higher earnings at Beijing Foton Cummins Engine Co. andDongfeng Cummins Engine Company, Ltd., despite $39 million of unfavorable impacts from Tax Legislation related to withholding taxes on foreignearnings and remeasurement of deferred taxes. See Note 2, "INCOME TAXES," to our Consolidated Financial Statements for additional information. Loss Contingency ChargesIn 2017, we recorded a charge of $5 million in addition to the 2016 charge of $138 million for a loss contingency. See Note 12, "COMMITMENTS ANDCONTINGENCIES," to the Consolidated Financial Statements for additional information.Other Operating Income (Expense), NetOther operating income (expense), net was as follows: Years ended December 31,In millions 2017 2016Royalty income, net $50 $28Gain on sale of assets, net 20 2Loss on write off of assets (4) (18)Amortization of intangible assets (12) (9)Other, net 11 (8)Total other operating income (expense), net $65 $(5)Interest IncomeInterest income decreased $5 million primarily due to lower investment balances in China and Brazil.Interest ExpenseInterest expense increased $12 million primarily due to higher weighted-average debt outstanding and hedge ineffectiveness on our interest rate swap.36Table of ContentsOther Income, NetOther income, net was as follows: Years ended December 31,In millions 2017 2016Change in cash surrender value of corporate owned life insurance $50 $18Rental income 7 5Dividend income 5 5Gain on sale of equity investee (1) — 17Gains on fair value adjustment for consolidated investees (2) — 15Foreign currency, net (6) (12)Bank charges (10) (9)Other, net 17 9Total other income, net $63 $48____________________________________________________________(1) See Note 3, "INVESTMENTS IN EQUITY INVESTEES," to the Consolidated Financial Statements for additional information.(2) See Note 18, "ACQUISITIONS," to the Consolidated Financial Statements for additional information.Income Tax ExpenseOur 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 researchtax credits. On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (Tax Legislation). The Tax Legislation changed the U.S. statutory rate to 21percent effective January 1, 2018. Our effective tax rate for 2017 was 58.0 percent compared to 24.6 percent for 2016. The impacts of the Tax Legislationresulted in additional income tax expense of $781 million to our tax provision (excluding the noncontrolling interest and equity investee adjustments). SeeNote 2, "INCOME TAXES," to our Consolidated Financial Statements for additional information.We expect our 2018 effective tax rate to be 23 percent, excluding any discrete items (including adjustments to provisional estimates) that may arise.Noncontrolling InterestsNoncontrolling interests eliminate the income or loss attributable to non-Cummins ownership interests in our consolidated entities. Noncontrolling interestsin income of consolidated subsidiaries decreased $67 million primarily due to the $43 million impact of Tax Legislation on Cummins India Ltd. regardingwithholding taxes on foreign earnings, the acquisition of the remaining interest in Wuxi Cummins Turbo Technologies Co. Ltd. in the fourth quarter of 2016and elimination of the net loss of ECJV.Net Income Attributable to Cummins Inc. and Diluted Earnings Per Common Share Attributable to Cummins Inc.Net income decreased primarily due to the $777 million impact of Tax Legislation, increased selling, general and administrative expenses and higherresearch, development and engineering expenses, partially offset by higher net sales and gross margin, lower charges for a loss contingency and higherequity, royalty and interest income from investees. Diluted earnings per share for 2017 was negatively impacted $4.65 per share due to the Tax Legislation,partially offset by a benefit of $0.04 per share from fewer weighted-average shares outstanding, primarily due to purchases under the stock repurchaseprogram. See Note 2, "INCOME TAXES," to our Consolidated Financial Statements for additional information.2016 vs. 2015Net SalesNet 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 marketsand 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 thelargest declines in North America, Asia, China, Latin America, the Middle East, Africa and Western Europe.37Table of Contents•Components segment sales decreased 6 percent primarily due to lower demand in most lines of business, principally in North American on-highwaymarkets, partially offset by higher demand in China.•Foreign currency fluctuations unfavorably impacted sales by approximately 2 percent primarily in the British pound, Chinese renminbi, Indianrupee, Brazilian real, South African rand, Canadian dollar and Australian dollar.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 39percent of total net sales in 2015.A more detailed discussion of sales by segment is presented in the "Operating Segment Results" section.Gross MarginGross margin decreased $495 million and 0.5 points as a percentage of sales, primarily due to lower volumes, unfavorable mix and unfavorable foreigncurrency 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 detaileddiscussion of margin by segment is presented in the "Operating Segment Results" section.Selling, General and Administrative ExpensesSelling, general and administrative expenses decreased $46 million, primarily due to lower compensation expenses of $56 million as a result of restructuringactions 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 ExpensesResearch, development and engineering expenses decreased $99 million, primarily due to reduced project spending in most of our segments, decreasedcompensation expenses as a result of restructuring actions taken in the fourth quarter of 2015, and lower consulting expenses. Overall, research, developmentand 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 ondevelopment 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 distributorsof $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 ChargesIn 2016, we recorded charges of $138 million in addition to the 2015 charge of $60 million for a loss contingency. See Note 12, "COMMITMENTS ANDCONTINGENCIES," to the Consolidated Financial Statements for additional information.Impairment of Light-duty Diesel AssetsIn 2015, we recognized an impairment charge of $211 million on our light-duty diesel assets. See Note 19, "IMPAIRMENT OF LIGHT-DUTY DIESELASSETS," to the Consolidated Financial Statements for additional information.Restructuring Actions and Other ChargesIn 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 FinancialStatements for additional information.38Table of ContentsOther Operating Income (Expense), NetOther operating income (expense), net was as follows: Years ended December 31,In millions 2016 2015Loss on write off of assets $(18) $(15)Amortization of intangible assets (9) (18)Royalty income, net 28 20Other, net (6) (4)Total other operating income (expense), net $(5) $(17)Interest IncomeInterest income was relatively flat compared to 2015.Interest ExpenseInterest expense increased $4 million versus the comparable period in 2015, primarily due to an increase in total weighted-average debt outstanding.Other Income, NetOther income, net was as follows: Years ended December 31,In millions 2016 2015Change in cash surrender value of corporate owned life insurance $18 $(3)Gain on sale of equity investee (1) 17 —Gains on fair value adjustment for consolidated investees (2) 15 18Dividend income 5 3Bank charges (9) (9)Foreign currency, net (12) (18)Other, net 14 18Total other income, net $48 $9____________________________________________________________(1) See Note 3, "INVESTMENTS IN EQUITY INVESTEES," to the Consolidated Financial Statements for additional information.(2) See Note 18, "ACQUISITIONS," to the Consolidated Financial Statements for additional information.Income Tax ExpenseOur 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 wasprimarily due to favorable changes in the jurisdictional mix of pre-tax income.Noncontrolling InterestsNoncontrolling interests in income of consolidated subsidiaries decreased $9 million primarily due to lower earnings as a result of the consolidation of NorthAmerican 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 impairmentand restructuring charges, in addition to lower research, development and engineering expenses, a lower effective tax rate, lower selling, general andadministrative expenses and favorable changes to corporate owned life insurance. Diluted earnings per share for 2017 benefited $0.26 per share from lowershares outstanding, primarily due to purchases under the stock repurchase program.39Table of ContentsComprehensive Income - Foreign Currency Translation AdjustmentThe foreign currency translation adjustment was a net gain (loss) of $335 million, $(448) million and $(305) million for the years ended December 31, 2017,2016 and 2015, respectively, and was driven by the following: Years ended December 31, 2017 2016 2015In millions Translationadjustment Primary currencydriver vs. U.S. dollar Translationadjustment Primary currencydriver vs. U.S. dollar Translationadjustment Primary currencydriver vs. U.S. dollarWholly-owned subsidiaries $255 British pound, Chineserenminbi, Indian rupee $(397) British pound, Chineserenminbi, offset byBrazilian real $(261) British pound,Brazilian real, ChineserenminbiEquity method investments 60 Chinese renminbi,Russian ruble, Indianrupee (34) Chinese renminbi,Indian rupee, offset byMexican peso (29) Chinese renminbi,Indian rupeeConsolidated subsidiaries with anoncontrolling interest 20 Indian rupee (17) Chinese renminbi,Indian rupee (15) Indian rupee, ChineserenminbiTotal $335 $(448) $(305) 40Table of ContentsOPERATING SEGMENT RESULTSOur reportable operating segments consist of the Engine, Distribution, Components and Power Systems segments. This reporting structure is organizedaccording to the products and markets each segment serves. We use segment EBIT as a primary basis for the Chief Operating Decision Maker to evaluate theperformance of each of our operating segments. Segment amounts exclude certain expenses not specifically identifiable to segments. See Note 21,"OPERATING SEGMENTS," to the Consolidated Financial Statements for additional information.Following is a discussion of results for each of our operating segments.Engine Segment ResultsFinancial data for the Engine segment was as follows: Favorable/(Unfavorable) Years ended December 31, 2017 vs. 2016 2016 vs. 2015In millions 2017 2016 2015 Amount Percent Amount PercentExternal sales (1) $6,661 $5,774 $6,733 $887 15 % $(959) (14)%Intersegment sales (1) 2,292 2,030 1,937 262 13 % 93 5 %Total sales 8,953 7,804 8,670 1,149 15 % (866) (10)%Depreciation and amortization 184 163 187 (21) (13)% 24 13 %Research, development and engineering expenses 279 226 263 (53) (23)% 37 14 %Equity, royalty and interest income from investees 219 148 146 71 48 % 2 1 %Interest income 6 10 11 (4) (40)% (1) (9)%Loss contingency charges (2) 5 138 60 133 96 % (78) NMImpairment of light-duty diesel assets (2) — — 202 — — % 202 100 %Restructuring actions and other charges (2) — — 17 — — % 17 100 %Segment EBIT 959 686 636 273 40 % 50 8 % Percentage Points Percentage PointsSegment EBIT as a percentage of total sales 10.7% 8.8% 7.3% 1.9 1.5____________________________________"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 Engine segment by market were as follows: Favorable/(Unfavorable) Years ended December 31, 2017 vs. 2016 2016 vs. 2015In millions 2017 2016 2015 Amount Percent Amount PercentHeavy-duty truck $2,840 $2,443 $3,116 $397 16% $(673) (22)%Medium-duty truck and bus 2,513 2,272 2,507 241 11% (235) (9)%Light-duty automotive 1,727 1,581 1,475 146 9% 106 7 %Total on-highway 7,080 6,296 7,098 784 12% (802) (11)%Off-highway 1,873 1,508 1,572 365 24% (64) (4)%Total sales $8,953$7,804 $8,670 $1,149 15% $(866) (10)%41Table of ContentsUnit 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, 2017 vs. 2016 2016 vs. 2015 2017 2016 2015 Amount Percent Amount PercentHeavy-duty 95,900 79,000 114,400 16,900 21% (35,400) (31)%Medium-duty 268,100 229,100 247,100 39,000 17% (18,000) (7)%Light-duty 257,500 228,600 209,300 28,900 13% 19,300 9 %Total unit shipments 621,500536,700570,800 84,800 16% (34,100) (6)%2017 vs. 2016SalesEngine segment sales increased $1.1 billion versus 2016. The following were the primary drivers by market:•Heavy-duty truck engine sales increased $397 million primarily due to higher demand in North American heavy-duty truck markets with increasedshipments of 20 percent.•Off-highway sales increased $365 million primarily due to improved demand in global industrial markets, especially in international constructionmarkets, with increased unit shipments of 54 percent primarily in China and Western Europe.•Medium-duty truck and bus sales increased $241 million primarily due to higher demand in North American medium-duty truck markets withincreased engine shipments of 20 percent.•Light-duty automotive sales increased $146 million primarily due to higher sales to Chrysler and higher sales of light commercial vehicles, partiallyoffset by lower sales to Nissan.Total on-highway-related sales for 2017 were 79 percent of total engine segment sales, compared to 81 percent in 2016.Segment EBITEngine segment EBIT increased $273 million versus 2016, primarily due to improved gross margin, lower loss contingency charges and increased equity,royalty and interest income from investees, partially offset by higher selling, general and administrative expenses and higher research, development andengineering expenses. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows: Year ended December 31, 2017 vs. 2016 Favorable/(Unfavorable) ChangeIn millions Amount Percent Percentage point changeas a percent of salesGross margin $195 13 % (0.2)Selling, general and administrative expenses (89) (16)% —Research, development and engineering expenses (53) (23)% (0.2)Equity, royalty and interest income from investees 71 48 % 0.5Loss contingency charge(1) 133 96 % 1.7__________________________________________________________________________ (1) See Note 12 , "COMMITMENTS AND CONTINGENCIES," to the Consolidated Financial Statements for additional information.42Table of ContentsThe increase in gross margin versus 2016 was primarily due to higher volumes, partially offset by increased warranty costs for campaigns, changes inestimates and higher variable compensation expense. Gross margin as a percentage of sales declined primarily due to the increased warranty costs andincreased variable compensation expense. The increase in selling, general and administrative expenses was primarily due to higher compensation expense,especially variable compensation expense, and higher consulting expenses. The increase in research, development and engineering expenses was primarilydue to higher compensation expense, especially higher variable compensation expense, and higher consulting expenses. The increase in equity, royalty andinterest income from investees was primarily due to higher earnings at Beijing Foton Cummins Engine Co. and Dongfeng Cummins Engine Company, Ltd.,despite unfavorable impacts from Tax Legislation related to withholding taxes on foreign earnings and remeasurement of deferred taxes of $23 million.2016 vs. 2015SalesEngine segment sales decreased $866 million versus 2015. The following were the primary drivers by market:•Heavy-duty truck sales decreased $673 million primarily due to lower demand in the North American heavy-duty truck market with decreasedengine 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 decreasedengine 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 offsetby 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 pickup truckplatform 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.Segment EBITIn 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 alsoincurred an impairment charge of $202 million for our light-duty diesel assets and incurred a restructuring charge of $17 million for actions primarily in theform 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 andadministrative expenses, lower research, development and engineering expenses and restructuring actions and other charges in 2015, partially offset by lowergross margin and higher loss contingency charges in 2016. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage ofsales were as follows: Year ended December 31, 2016 vs. 2015 Favorable/(Unfavorable) ChangeIn millions Amount Percent Percentage point changeas a percent of salesGross margin $(210) (13)% (0.6)Selling, general and administrative expenses 72 11 % 0.1Research, development and engineering expenses 37 14 % 0.1Equity, royalty and interest income from investees 2 1 % 0.2Impairment of light-duty diesel assets (1) 202 100 % 2.3Restructuring actions and other charges (1) 17 100 % 0.2Loss contingency charge (2) (78) NM 1.1__________________________________________________________________________ "NM" - not meaningful information(1) See respective sections of "Results of Operations" for additional information.(2) See Note 12 , "COMMITMENTS AND CONTINGENCIES," to the Consolidated Financial Statements for additional information.43Table of ContentsThe decrease in gross margin versus 2015 was primarily due to lower volumes and unfavorable mix, partially offset by lower material and commodity costsand favorable product coverage. The decrease in selling, general and administrative expenses was primarily due to lower compensation expenses as the resultof restructuring actions taken in the fourth quarter of 2015, and lower consulting expenses. The decrease in research, development and engineering expenseswas primarily due to lower compensation expenses as a result of restructuring actions taken in the fourth quarter of 2015 and higher expense recovery fromcustomers and external parties.Distribution Segment ResultsFinancial data for the Distribution segment was as follows: Favorable/(Unfavorable) Years ended December 31, 2017 vs. 2016 2016 vs. 2015In millions 2017 2016 2015 Amount Percent Amount PercentExternal sales $7,029 $6,157 $6,198 $872 14 % $(41) (1)%Intersegment sales 29 24 31 5 21 % (7) (23)%Total sales 7,0586,1816,229 877 14 % (48) (1)%Depreciation and amortization 116 116 105 — — % (11) (10)%Research, development and engineering expenses 19 13 10 (6) (46)% (3) (30)%Equity, royalty and interest income from investees 44 70 78 (26) (37)% (8) (10)%Interest income 6 4 4 2 50 % — — %Restructuring actions and other charges (1) — — 23 — — % 23 100 %Segment EBIT (2) 384 392 412 (8) (2)% (20) (5)% Percentage Points Percentage PointsSegment EBIT as a percentage of total sales (3) 5.4% 6.3% 6.6% (0.9) (0.3)____________________________________(1) See Restructuring Actions and Other Charges section of "Results of Operations" for additional information.(2) Segment EBIT for 2016 and 2015 included gains of $15 million and $18 million, respectively, resulting from acquisitions of controlling 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.In the first quarter of 2017, our Distribution segment reorganized its regions to align with how the segment is managed. All prior year amounts have beenreclassified to conform to our new regional structure. Sales for our Distribution segment by region were as follows: Favorable/(Unfavorable) Years ended December 31, 2017 vs. 2016 2016 vs. 2015In millions 2017 2016 2015 Amount Percent Amount PercentNorth America $4,733 $3,973 $3,957 $760 19 % $16 — %Asia Pacific 767 720 763 47 7 % (43) (6)%Europe 440 440 426 — — % 14 3 %Africa and Middle East 327 366 431 (39) (11)% (65) (15)%China 267 235 224 32 14 % 11 5 %India 190 175 165 15 9 % 10 6 %Russia 167 123 108 44 36 % 15 14 %Latin America 167 149 155 18 12 % (6) (4)%Total sales $7,058 $6,181 $6,229 $877 14 % $(48) (1)%44Table of ContentsSales for our Distribution segment by product line were as follows: Favorable/(Unfavorable) Years ended December 31, 2017 vs. 2016 2016 vs. 2015In millions 2017 2016 2015 Amount Percent Amount PercentParts $3,040 $2,627 $2,423 $413 16% $204 8 %Engines 1,369 1,100 1,294 269 24% (194) (15)%Power generation 1,337 1,239 1,290 98 8% (51) (4)%Service 1,312 1,215 1,222 97 8% (7) (1)%Total sales $7,058$6,181$6,229 $877 14% $(48) (1)%2017 vs. 2016SalesDistribution segment sales increased $877 million versus 2016, primarily due to an increase in organic sales of $684 million (primarily in North America) and$267 million of sales related to the acquisition of a North American distributor in the fourth quarter of 2016.Segment EBITDistribution segment EBIT decreased $8 million versus 2016, primarily due to higher selling, general and administrative expenses, higher researchdevelopment and engineering expenses, lower equity, royalty and interest income from investees and the absence of a gain from the acquisition ofcontrolling interests in a North American distributor in 2016, partially offset by higher gross margin. Major components of EBIT and related changes tosegment EBIT and EBIT as a percentage of sales were as follows: Year ended December 31, 2017 vs. 2016 Favorable/(Unfavorable) ChangeIn millions Amount Percent Percentage point change as a percent of salesGross margin $112 10 % (0.5)Selling, general and administrative expenses (111) (15)% —Research, development and engineering expenses (6) (46)% (0.1)Equity, royalty and interest income from investees (26) (37)% (0.5)Gain on sale of assets (15) (100)% NM__________________________________________________________________________ "NM" - not meaningful informationThe increase in gross margin versus 2016 was primarily due to higher organic volumes and the acquisition of a North American distributor in the fourthquarter of 2016, partially offset by increased variable compensation expense. Gross margin as a percentage of sales declined primarily due to the increase invariable compensation expense. The increase in selling, general and administrative expenses was primarily due to higher variable compensation expense,increased compensation expense related to the acquisition of a North American distributor and higher consulting expenses. The decrease in equity, royaltyand interest income from investees was the result of the acquisition of a North American distributor in 2016 and unfavorable impacts from Tax Legislationrelated to withholding taxes on foreign earnings of $4 million.2016 vs. 2015SalesDistribution segment sales decreased $48 million versus 2015, primarily due to a decline in organic sales of $295 million principally in North America, AsiaPacific and the Middle East and unfavorable foreign currency fluctuations (primarily in the South African rand, Canadian dollar, Chinese renminbi, Indianrupee, Australian dollar and British pound), partially offset by $344 million of segment sales related to the acquisition of North American distributors sinceDecember 31, 2014.Segment EBITIn 2015, we incurred a restructuring charge of $23 million for actions primarily in the form of professional voluntary and involuntary employee separationprograms in response to the continued deterioration in our global markets.45Table of ContentsDistribution segment EBIT decreased $20 million versus 2015, primarily due to higher selling, general and administrative expenses (mainly related to theacquisition of North American distributors since December 31, 2014), partially offset by higher gross margin and the absence of restructuring actions andother 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 and2015, respectively. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows: Year ended December 31, 2016 vs. 2015 Favorable/(Unfavorable) ChangeIn millions Amount Percent Percentage point change as a percent of salesGross margin $37 4 % 0.7Selling, general and administrative expenses (68) (10)% (1.2)Equity, royalty and interest income from investees (8) (10)% (0.2)Restructuring actions and other charges (1) 23 NM 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 improvedpricing, partially offset by unfavorable foreign currency fluctuations (primarily in the South African rand, Canadian dollar and Australian dollar) and lowervolumes. The increase in selling, general and administrative expenses was primarily due to higher compensation expenses related to the acquisitions of NorthAmerican distributors and higher consulting expenses. The decrease in equity, royalty and interest income from investees was the result of the acquisitions ofNorth American distributors.Components Segment ResultsFinancial data for the Components segment was as follows: Favorable/(Unfavorable) Years ended December 31, 2017 vs. 2016 2016 vs. 2015In millions 2017 2016 2015 Amount Percent Amount PercentExternal sales (1) $4,363 $3,514 $3,745 $849 24 % $(231) (6)%Intersegment sales (1) 1,526 1,322 1,427 204 15 % (105) (7)%Total sales 5,889 4,836 5,172 1,053 22 % (336) (6)%Depreciation and amortization 163 133 109 (30) (23)% (24) (22)%Research, development and engineering expenses 240 208 236 (32) (15)% 28 12 %Equity, royalty and interest income from investees 40 41 35 (1) (2)% 6 17 %Interest income 3 4 4 (1) (25)% — — %Impairment of light-duty diesel assets (2) — — 9 — — % 9 100 %Restructuring actions and other charges (2) — — 13 — — % 13 100 %Segment EBIT 754 641 727 113 18 % (86) (12)% Percentage Points Percentage PointsSegment EBIT as a percentage of total sales 12.8% 13.3% 14.1% (0.5) (0.8)____________________________________(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.In the first quarter of 2017, our Components segment reorganized its reporting structure to move the electronics business out of the emission solutionsbusiness and into the fuel systems business to enhance operational, administrative and product development efficiencies. Prior year sales were reclassified toconform with this change. We changed the name of our fuel systems business to electronics and fuel systems.46Table of ContentsIn the third quarter of 2017, we formed the Eaton Cummins Automated Transmission Technologies joint venture (ECJV), which was consolidated andincluded in our Components segment as the automated transmissions business. See Note 18, "ACQUISITIONS", in the Consolidated Financial Statements foradditional information.Sales for our Components segment by business were as follows: Favorable/(Unfavorable) Years ended December 31, 2017 vs. 2016 2016 vs. 2015In millions 2017 2016 2015 Amount Percent Amount PercentEmission solutions $2,675 $2,238 $2,449 $437 20% $(211) (9)%Turbo technologies 1,179 1,036 1,141 143 14% (105) (9)%Filtration 1,153 1,010 1,010 143 14% — — %Electronics and fuel systems 718 552 572 166 30% (20) (3)%Automated transmissions 164 — — 164 NM — — %Total sales $5,889$4,836$5,172 $1,053 22% $(336) (6)%____________________________________"NM" - not meaningful information2017 vs. 2016SalesComponents segment sales increased $1.1 billion across all lines of business versus 2016. The following were the primary drivers by business:•Emission solutions sales increased $437 million primarily due to increased sales of products to meet new emission standards in India and strongermarket demand for trucks in North America and China.•Electronics and fuel systems sales increased $166 million primarily due to higher demand in China, Mexico and India.•Automated transmissions contributed North American sales of $164 million following the consolidation of the ECJV during the third quarter of2017.•Turbo technologies sales increased $143 million primarily due to higher demand in China and North America.•Filtration sales increased $143 million primarily due to higher demand in North America, Australia and China.Segment EBITComponents segment EBIT increased $113 million versus 2016, primarily due to higher gross margin, partially offset by increased selling, general andadministrative expenses and research, development and engineering expenses. Major components of EBIT and related changes to segment EBIT and EBIT asa percentage of sales were as follows: Year ended December 31, 2017 vs. 2016 Favorable/(Unfavorable) ChangeIn millions Amount Percent Percentage point changeas a percent of salesGross margin $218 19 % (0.5)Selling, general and administrative expenses (99) (28)% (0.4)Research, development and engineering expenses (32) (15)% 0.2Equity, royalty and interest income from investees (1) (2)% (0.1)The increase in gross margin was primarily due to higher volumes, lower material costs and improved leverage, partially offset by higher warranty costsdriven by campaigns and changes in estimates, unfavorable pricing and increased variable compensation expense. The increase in selling, general andadministrative expenses was primarily due to higher compensation expense, especially variable compensation expense, and expenses related to the newECJV. The increase in research, development and engineering expenses was primarily due to higher compensation expense, especially variable compensationexpense, higher consulting expenses and expenses related to the new ECJV. The decrease in equity, royalty and interest income from investees was primarilydue to unfavorable impacts from Tax Legislation related to withholding taxes on foreign earnings47Table of Contentsof $12 million, partially offset by increased earnings at Dongfeng Cummins Emission Solutions Co., Ltd. and Shanghai Fleetguard Filter Co.2016 vs. 2015SalesComponents segment sales decreased $336 million across most lines of business versus 2015. The following were the primary drivers by business:•Emission solutions sales decreased $211 million primarily due to lower demand in North American on-highway markets, partially offset by higherdemand in China.•Turbo technologies sales decreased $105 million primarily due to lower demand in North American on-highway markets, partially offset by higherdemand in China.•Foreign currency fluctuations unfavorably impacted sales results primarily in the Chinese renminbi, British pound and Brazilian real.•Electronics and fuel systems sales decreased $20 million primarily due to lower demand in North American on-highway markets, partially offset byhigher demand in China.Segment EBITIn 2015, we incurred a restructuring charge of $13 million for actions primarily in the form of professional voluntary and involuntary employee separationprograms in response to the continued deterioration in our global markets. We also incurred an impairment charge of $9 million for our light-duty dieselassets.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 and the absence of restructuring actions and other charges and impairment chargesin 2016. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows: Year ended December 31, 2016 vs. 2015 Favorable/(Unfavorable) ChangeIn millions Amount Percent Percentage point changeas a percent of salesGross margin $(111) (9)% (0.6)Selling, general and administrative expenses (33) (10)% (1.1)Research, development and engineering expenses 28 12 % 0.3Equity, royalty and interest income from investees 6 17 % 0.1Impairment of light-duty diesel assets (1) 9 NM 0.2Restructuring actions and other charges (1) 13 NM 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 expenseswas primarily due to higher consulting and compensation expenses as a result of absorbing a greater share of corporate costs under the new allocationmethodology adopted during 2016, 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 fromrestructuring actions taken in the fourth quarter of 2015.48Table of ContentsPower Systems Segment ResultsFinancial data for the Power Systems segment was as follows: Favorable/(Unfavorable) Years ended December 31, 2017 vs. 2016 2016 vs. 2015In millions 2017 2016 2015 Amount Percent Amount PercentExternal sales (1) $2,375 $2,064 $2,434 $311 15 % $(370) (15)%Intersegment sales (1) 1,683 1,453 1,633 230 16 % (180) (11)%Total sales 4,0583,5174,067 541 15 % (550) (14)%Depreciation and amortization 117 115 110 (2) (2)% (5) (5)%Research, development and engineering expenses 214 189 226 (25) (13)% 37 16 %Equity, royalty and interest income from investees 54 42 56 12 29 % (14) (25)%Interest income 3 5 5 (2) (40)% — — %Restructuring actions and other charges (2) — — 26 — — % 26 100 %Segment EBIT 294 263 335 31 12 % (72) (21)% Percentage Points Percentage PointsSegment EBIT as a percentage of total sales 7.2% 7.5% 8.2% (0.3) (0.7)____________________________________(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.In the first quarter of 2017, our Power Systems segment reorganized its product lines to better reflect how the segment is managed. Prior year sales werereclassified to reflect these changes. Sales for our Power Systems segment by product line were as follows: Favorable/(Unfavorable) Years ended December 31, 2017 vs. 2016 2016 vs. 2015In millions 2017 2016 2015 Amount Percent Amount PercentPower generation $2,305 $2,256 $2,588 $49 2% $(332) (13)%Industrial 1,399 941 1,121 458 49% (180) (16)%Generator technologies 354 320 358 34 11% (38) (11)%Total sales $4,058 $3,517 $4,067 $541 15% $(550) (14)%High-horsepower unit shipments by engine classification were as follows: Favorable/(Unfavorable) Years ended December 31, 2017 vs. 2016 2016 vs. 2015 2017 2016 2015 Amount Percent Amount PercentPower generation 8,200 7,900 8,600 300 4% (700) (8)%Industrial 6,400 4,400 5,200 2,000 45% (800) (15)%Total units 14,600 12,300 13,800 2,300 19% (1,500) (11)%2017 vs. 2016SalesPower Systems segment sales increased $541 million across all product lines versus 2016. The following were the primary drivers:•Industrial sales increased $458 million primarily due to higher demand in global mining markets, especially in Europe, North America and China,and oil and gas markets in North America.49Table of Contents•Power generation sales increased $49 million primarily due to higher demand in Western Europe, North America and China, partially offset by lowerdemand in the Middle East, Africa and Eastern Europe.•Generator technologies sales increased $34 million primarily due to higher demand in Europe.Segment EBITPower Systems segment EBIT increased $31 million versus 2016, primarily due to higher gross margin, favorable foreign currency fluctuations and higherequity, royalty and interest income from investees, partially offset by increased selling, general and administrative expenses, higher research, developmentand engineering expenses and the absence of a $17 million gain on the sale of an equity investee recorded in 2016. Major components of EBIT and relatedchanges to segment EBIT and EBIT as a percentage of sales were as follows: Year ended December 31, 2017 vs. 2016 Favorable/(Unfavorable) ChangeIn millions Amount Percent Percentage point changeas a percent of salesGross margin $107 14 % (0.3)Selling, general and administrative expenses (45) (11)% 0.4Research, development and engineering expenses (25) (13)% 0.1Equity, royalty and interest income from investees 12 29 % 0.1Gain on sale of an equity investee (17) (100)% 0.5The increase in gross margin versus 2016 was primarily due to increased volumes, partially offset by higher warranty cost related to a campaign accrual andhigher variable compensation expense. The increase in selling, general and administrative expenses was primarily due to higher variable compensationexpense and higher consulting expenses. The increase in research, development and engineering expenses was primarily due to higher variable compensationexpense, increased project spending and higher consulting expenses. The increase in equity, royalty and interest income from investees was primarily due tothe absence of a joint venture asset impairment recorded in 2016. The decrease in the gain on sale of an equity investee was due to the absence of a $17million gain recorded in the fourth quarter of 2016 for Cummins Olayan Energy.2016 vs. 2015SalesPower Systems segment sales decreased $550 million across all product lines versus 2015. The following were the primary drivers:•Power generation sales decreased $332 million, in most regions, with the largest declines in demand primarily in Asia, the Middle East, NorthAmerica, Latin America, China, Western Europe, Africa and Mexico.•Industrial sales decreased $180 million primarily due to lower demand in North America (mainly oil and gas and mining markets, partially offset byrail 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 $38 million primarily due to lower demand in China and North America.Segment EBITIn 2015, we incurred a restructuring charge of $26 million for actions primarily in the form of professional voluntary and involuntary employee separationprograms 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 andadministrative expenses, favorable foreign currency fluctuations (primarily the British pound), lower research, development and engineering expenses, theabsence of restructuring actions and other charges and a gain from the divestiture of an equity investee. Major components of EBIT and related changes tosegment EBIT and EBIT as a percentage of sales were as follows:50Table of Contents Year ended December 31, 2016 vs. 2015 Favorable/(Unfavorable) ChangeIn millions Amount Percent Percentage point changeas a percent of salesGross margin $(215) (21)% (2.3)Selling, general and administrative expenses 75 16 % 0.3Research, development and engineering expenses 37 16 % 0.2Equity, royalty and interest income from investees (14) (25)% (0.2)Restructuring actions and other charges (1) 26 100 % 0.6Gain on sale of an equity investee 17 100 % 0.5__________________________________________________________________________ (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 administrativeexpenses was primarily due to lower compensation expenses as the result of restructuring actions taken in the fourth quarter of 2015 and lower consultingexpenses. The decrease in research, development and engineering expenses was primarily due to reduced project spending, lower consulting expenses andlower compensation expenses as the result of restructuring actions taken in the fourth quarter of 2015. The decrease in equity, royalty and interest incomefrom investees was primarily due to the impact of an $8 million asset impairment incurred by one of our joint ventures. In 2016, we sold our remaining 49percent interest in Cummins Olayan Energy for $61 million and recognized a gain of $17 million.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. Years ended December 31,In millions 2017 2016 2015TOTAL SEGMENT EBIT $2,391 $1,982 $2,110Non-segment EBIT (1) 55 17 (20)TOTAL EBIT 2,4461,9992,090Less: Interest expense 81 69 65INCOME BEFORE INCOME TAXES 2,365 1,930 2,025Less: Income tax expense 1,371 474 555CONSOLIDATED NET INCOME 994 1,456 1,470Less: Net (loss) income attributable to noncontrolling interest (5) 62 71NET INCOME ATTRIBUTABLE TO CUMMINS INC. $999 $1,394 $1,399_______________________________________________(1) Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. The year ended December 31, 2015, included an $11million corporate restructuring charge. There were no significant unallocated corporate expenses for the years ended December 31, 2017 and 2016.51Table of ContentsLIQUIDITY AND CAPITAL RESOURCESKey Working Capital and Balance Sheet DataWe fund our working capital with cash from operations and short-term borrowings, including commercial paper, when necessary. Various assets andliabilities, including short-term debt, can fluctuate significantly from month to month depending on short-term liquidity needs. As a result, working capital isa prime focus of management attention. Working capital and balance sheet measures are provided in the following table:Dollars in millions December 31, 2017 December 31, 2016Working capital (1) $3,251 $3,382Current ratio 1.57 1.78Accounts and notes receivable, net $3,618 $3,025Days’ sales in receivables 59 61Inventories $3,166 $2,675Inventory turnover 5.0 4.7Accounts payable (principally trade) $2,579 $1,854Days' payable outstanding 53 51Total debt $2,006 $1,856Total debt as a percent of total capital 19.7% 20.6%____________________________________(1) Working capital includes cash and cash equivalents.Cash FlowsCash and cash equivalents were impacted as follows: Years ended December 31, ChangeIn millions 2017 2016 2015 2017 vs. 2016 2016 vs. 2015Net cash provided by operating activities $2,277 $1,939 $2,065 $338 $(126)Net cash used in investing activities (1,052) (917) (918) (135) 1Net cash used in financing activities (1,074) (1,413) (1,650) 339 237Effect of exchange rate changes on cash and cash equivalents 98 (200) (87) 298 (113)Net increase (decrease) in cash and cash equivalents $249 $(591) $(590) $840 $(1)2017 vs. 2016Net cash provided by operating activities increased $338 million versus 2016, primarily due to improved earnings of $358 million, excluding the non-cashimpact of Tax Legislation of $820 million and lower working capital levels of $352 million, partially offset by higher pension contributions of $109 million,a decrease in deferred tax expense of $104 million, lower loss contingency charges of $117 million and higher equity earnings of $77 million. The lowerworking capital requirements in 2017 resulted in a cash inflow of $90 million compared to a cash outflow of $262 million in 2016.Net cash used in investing activities increased $135 million versus 2016, primarily due to higher acquisitions of businesses, net of cash acquired of $568million and the absence of $60 million in proceeds from the sale of of equity investees in 2016, partially offset by lower net investments in marketablesecurities of $244 million, higher cash flows from derivatives not designated as hedges of $178 million and higher proceeds from the disposal of property,plant and equipment of $96 million.Net cash used in financing activities decreased $339 million versus 2016, primarily due to lower repurchases of common stock of $327 million.The effect of exchange rate changes on cash and cash equivalents increased $298 million versus 2016, primarily due to the British pound, which increasedcash and cash equivalents $249 million.2016 vs. 2015Net cash provided by operating activities decreased $126 million versus 2015, primarily due to the absence of the 2015 impairment of light-duty dieselassets of $211 million and a $123 million year over year impact related to restructuring, partially offset by an increase in deferred income taxes of $158million and higher loss contingency charges of $62 million resulting in lower cash net income in 2016.52Table of ContentsNet cash used in investing activities decreased $1 million versus 2015, primarily due to lower capital expenditures of $213 million and proceeds from thesale of equity investees of $60 million, partially offset by higher net investments in marketable securities of $160 million and changes in cash flows fromderivatives not designated as hedges of $110 million.Net cash used in financing activities decreased $237 million versus 2015, primarily due to higher net borrowings of commercial paper of $212 million, lowercommon stock repurchases of $122 million and higher proceeds from borrowings of $67 million, partially offset by higher acquisitions of noncontrollinginterests 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 decreasedcash and cash equivalents $112 million.Sources of LiquidityWe generate significant ongoing cash flow. Cash provided by operations is our principal source of liquidity with $2.3 billion provided in 2017.At December 31, 2017, our sources of liquidity included: December 31, 2017In millions Total U.S. International Primary location of internationalbalancesCash and cash equivalents $1,369 $360 $1,009 U.K., Singapore, China,Belgium, Australia, CanadaMarketable securities (1) 198 49 149 IndiaTotal $1,567 $409 $1,158 Available credit capacity Revolving credit facility (2) $2,452 International and other uncommitteddomestic credit facilities $240 ____________________________________(1) The majority of marketable securities could be liquidated into cash within a few days.(2) The five-year credit facility for $1.75 billion and the 364-day credit facility for $1.0 billion, maturing November 2020 and September 2018, respectively, are maintained primarilyto provide backup liquidity for our commercial paper borrowings and general corporate purposes. At December 31, 2017, we had $298 million of commercial paper outstanding,which effectively reduced the $1.75 billion available capacity under our five-year revolving credit facility to $1.45 billion.Cash, Cash Equivalents and Marketable SecuritiesA significant portion of our cash flows is generated outside the U.S. We manage our worldwide cash requirements considering available funds among themany subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. As a result, we do not anticipateany local liquidity restrictions to preclude us from funding our operating needs with local resources.The Tax Legislation made significant changes to U.S. tax law, including a one-time transition tax on accumulated foreign earnings of $298 million with acash impact of $338 million. The payments associated with this deemed repatriation will be paid over eight years. The unrepatriated foreign earnings atDecember 31, 2017, will be repatriated as needed to fund cash needs. The estimated accrued withholding taxes of $331 million on foreign earnings that weplan to repatriate in the foreseeable future will be paid as cash is repatriated. See Note 2, "INCOME TAXES," to our Consolidated Financial Statements foradditional information.Debt Facilities and Other Sources of LiquidityOn November 13, 2015, we entered into an amended and restated five-year revolving credit agreement with a syndicate of lenders, which provides us with a$1.75 billion senior unsecured revolving credit facility and expires on November 13, 2020. On September 5, 2017, we entered into a 364-day credit facilitythat allows us to borrow up to $1 billion of additional unsecured funds at any time through September 2018. We have access to both credit facilities whichtotal $2.75 billion of borrowing capacity. We intend to maintain credit facilities of a similar aggregate amount by renewing or replacing these facilitiesbefore expiration. Revolving credit facilities are maintained primarily to provide backup liquidity for our commercial paper borrowings, letters of credit andgeneral corporate purposes.53Table of ContentsWe can issue up to $1.75 billion of unsecured short-term promissory notes ("commercial paper") pursuant to our board authorized commercial paperprograms. The programs facilitate the private placement of unsecured short-term debt through third party brokers. We intend to use the net proceeds from thecommercial paper borrowings for general corporate purposes.The total combined borrowing capacity under the revolving credit facility and commercial paper program should not exceed $2.75 billion. See Note 9,"DEBT," to our Consolidated Financial Statements for additional information.As a well-known seasoned issuer, we filed an automatic shelf registration for an undetermined amount of debt and equity securities with the Securities andExchange Commission (SEC) on February 16, 2016. Under this shelf registration we may offer, from time to time, debt securities, common stock, preferredand preference stock, depositary shares, warrants, stock purchase contracts and stock purchase units.Uses of CashStock RepurchasesIn December 2016, our Board of Directors authorized the acquisition of up to $1 billion of additional common stock upon completion of the 2015 repurchaseplan. In 2017, we made the following purchases under the 2015 repurchase program:In millions (except per share amounts)For each quarter ended SharesPurchased Average CostPer Share Total Cost ofRepurchases RemainingAuthorizedCapacity (1)April 2 0.3 $151.32 $51 $445July 2 0.5 153.95 69 376October 1 1.7 155.05 271 105December 31 0.4 166.00 60 46Total 2.9 $155.81 $451 ___________________________________________________________(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 authorizedplan. We intend to repurchase outstanding shares from time to time during 2018 to enhance shareholder value and to offset the dilutive impact of employee stockbased compensation plans.DividendsTotal dividends paid to common shareholders in 2017, 2016 and 2015 were $701 million, $676 million and $622 million, respectively. Declaration andpayment of dividends in the future depends upon our income and liquidity position, among other factors, and is subject to declaration by our Board ofDirectors, who meet quarterly to consider our dividend payment. We expect to fund dividend payments with cash from operations.In July 2017, our Board of Directors authorized an increase to our quarterly dividend of 5.4 percent from $1.025 per share to $1.08 per share. 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 ofDirectors authorized an increase to our quarterly dividend of 25 percent from $0.78 per share to $0.975 per share. Cash dividends per share paid to commonshareholders for the last three years were as follows: Quarterly Dividends 2017 2016 2015First quarter $1.025 $0.975 $0.78Second quarter 1.025 0.975 0.78Third quarter 1.08 1.025 0.975Fourth quarter 1.08 1.025 0.975Total $4.21 $4.00 $3.51AcquisitionsOn July 31, 2017, we formed a joint venture with Eaton Corporation PLC by purchasing a 50 percent interest in the new venture named Eaton CumminsAutomated Transmission Technologies (ECJV) for $600 million in cash. In addition, each partner contributed $20 million for working capital. See Note 18"ACQUISITIONS," to the Consolidated Financial Statements for additional information.54Table of ContentsOn November 1, 2017, we acquired Brammo Inc., an engineerer and manufacturer of lithium ion batteries primarily related to the utility vehicle markets, for$68 million. See Note 18 "ACQUISITIONS," to the Consolidated Financial Statements for additional information.Capital ExpendituresCapital expenditures, including spending on internal use software, were $587 million in 2017, compared to $594 million in 2016. We continue to invest innew product lines and targeted capacity expansions. We plan to spend between $730 million and $760 million in 2018 on capital expenditures as wecontinue with product launches and facility improvements. Approximately 50 percent of our capital expenditures are expected to be invested outside of theU.S. in 2018.PensionsThe funded status of our pension plans is dependent upon a variety of variables and assumptions including return on invested assets, market interest rates andlevels of voluntary contributions to the plans. In 2017, the investment return on our U.S. pension trust was 12.9 percent while our U.K. pension trust returnwas 4.4 percent. Approximately 77 percent of our pension plan assets are held in highly liquid investments such as fixed income and equity securities. Theremaining 23 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: Years ended December 31,In millions 2017 2016 2015Defined benefit pension plans Voluntary contribution $233 $133 $82Mandatory contribution 10 1 108Defined benefit pension contributions 243 134 190 Defined contribution pension plans $84 $68 $74We anticipate making total contributions of approximately $38 million to our defined benefit pension plans in 2018. Expected contributions to our definedbenefit pension plans in 2018 will meet or exceed the current funding requirements.Current Maturities of Short and Long-Term DebtWe had $298 million of commercial paper outstanding at December 31, 2017, that matures in less than one year. The maturity schedule of our existing long-term debt does not require significant cash outflows in the intermediate term. Required annual principal payments range from $6 million to $63 million overthe next five years. See Note 9 "DEBT"to the Consolidated Financial Statements for additional information.55Table of ContentsCredit RatingsOur ratings and outlook from each of the credit rating agencies as of the date of filing are shown in the table below. Long-Term Short-Term Credit Rating Agency (1)Senior DebtRating Debt Rating OutlookStandard & Poor’s Rating ServicesA+ A1 StableMoody’s Investors Service, Inc.A2 P1 Stable____________________________________(1) Credit ratings are not recommendations to buy, are subject to change and each rating should be evaluated independently of any other rating. In addition, weundertake no obligation to update disclosures concerning our credit ratings, whether as a result of new information, future events or otherwise.Management's Assessment of LiquidityOur financial condition and liquidity remain strong. Our solid balance sheet and credit ratings enable us to have ready access to credit and the capitalmarkets. We assess our liquidity in terms of our ability to generate adequate cash to fund our operating, investing and financing activities. We believe ouroperating cash flow and liquidity provides us with the financial flexibility needed to fund working capital, common stock repurchases, acquisitions, capitalexpenditures, dividend payments, projected pension obligations and debt service obligations. While we expect more efficient access to overseas earnings as aresult of Tax Legislation, we continue to generate cash from operations in the U.S. and maintain access to our revolving credit facility as noted above.56Table of ContentsCONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTSA summary of our contractual obligations and other commercial commitments, at December 31, 2017, are as follows:Contractual Cash Obligations Payments Due by Period In millions 2018 2019-2020 2021-2022 After 2022 TotalLoans payable $57 $— $— $— $57Long-term debt and capital lease obligations (1) 169 254 180 2,817 3,420Operating leases 140 188 104 70 502Capital expenditures 280 30 — — 310Purchase commitments for inventory 789 — — — 789Other purchase commitments 262 17 7 16 302Transitional tax liability 57 54 77 150 338Other postretirement benefits 29 55 51 108 243International and other domestic letters of credit 90 57 — 2 149Performance and excise bonds 26 14 61 1 102Guarantees, indemnifications and other commitments 31 3 7 10 51Total $1,930$672$487$3,174 $6,263___________________________________________________________ (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 $41 million as of December 31, 2017. We are not able to reasonablyestimate the period in which cash outflows relating to uncertain tax contingencies could occur. See Note 2, "INCOME TAXES," to the ConsolidatedFinancial Statements for additional information. APPLICATION OF CRITICAL ACCOUNTING ESTIMATESA summary of our significant accounting policies is included in Note 1, "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES," of our ConsolidatedFinancial 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 requiresmanagement to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts presented and disclosed in the financialstatements. Management reviews these estimates and assumptions based on historical experience, changes in business conditions and other relevant factorsthey believe to be reasonable under the circumstances. In any given reporting period, our actual results may differ from the estimates and assumptions used inpreparing 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 thetime the estimate was made; different estimates reasonably could have been used; or if changes in the estimate are reasonably likely to occur from period toperiod and the change would have a material impact on our financial condition or results of operations. Our senior management has discussed thedevelopment and selection of our accounting policies, related accounting estimates and the disclosures set forth below with the Audit Committee of ourBoard of Directors. We believe our critical accounting estimates include those addressing the estimation of liabilities for warranty programs, accounting forincome taxes and pension benefits.57Table of ContentsWarranty ProgramsWe estimate and record a liability for base warranty programs at the time our products are sold. Our estimates are based on historical experience and reflectmanagement's best estimates of expected costs at the time products are sold and subsequent adjustment to those expected costs when actual costs differ. As aresult of the uncertainty surrounding the nature and frequency of product recall programs, the liability for such programs is recorded when we commit to arecall action or when a recall becomes probable and estimable, which generally occurs when it is announced. Our warranty liability is generally affected bycomponent failure rates, repair costs and the point of failure within the product life cycle. Future events and circumstances related to these factors couldmaterially change our estimates and require adjustments to our liability. New product launches require a greater use of judgment in developing estimatesuntil historical experience becomes available. Product specific experience is typically available four or five quarters after product launch, with a clearexperience trend evident eight quarters after launch. We generally record warranty expense for new products upon shipment using a preceding product'swarranty history and a multiplicative factor based upon preceding similar product experience and new product assessment until sufficient new product data isavailable for warranty estimation. We then use a blend of actual new product experience and preceding product historical experience for several subsequentquarters, and new product specific experience thereafter. Note 8, "PRODUCT WARRANTY LIABILITY," to our Consolidated Financial Statements containsa summary of the activity in our warranty liability account for 2017, 2016 and 2015 including adjustments to pre-existing warranties.Accounting for Income TaxesWe determine our income tax expense using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the futuretax effects of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Futuretax benefits of net operating loss and credit carryforwards are also recognized as deferred tax assets. We evaluate the recoverability of our deferred tax assetseach quarter by assessing the likelihood of future profitability and available tax planning strategies that could be implemented to realize our net deferred taxassets. At December 31, 2017, we recorded net deferred tax liabilities of $85 million. The assets included $359 million for the value of net operating loss andcredit carryforwards. A valuation allowance of $347 million was recorded to reduce the tax assets to the net value management believed was more likely thannot to be realized. In the event our operating performance deteriorates, future assessments could conclude that a larger valuation allowance will be needed tofurther reduce the deferred tax assets.On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (Tax Legislation). We have not completed our accounting for the tax effects of enactmentof the Tax Legislation. We made provisional estimates of the effects on our existing deferred tax balances, the one-time transition tax, and the withholdingtax accrued on those earnings not permanently reinvested at December 31, 2017. The final transition impacts of the Tax Legislation may differ from ourestimates, possibly materially, due to, among other things, changes in interpretations for the Tax Legislation, any legislative action to address questions thatarise because of the Tax Legislation, any changes in accounting standards for income taxes or related interpretations in response to the Tax Legislation, orany updates or changes to estimates the company has utilized to calculate the transition impacts. Final calculations will be completed within the one yearmeasurement period ending December 22, 2018, as required under the rules issued by the SEC. Any change of provisional amounts will be reported inincome from continuing operations in the period in which the initial estimates are revised. In addition, we operate within multiple taxing jurisdictions andare subject to tax audits in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. We accruefor the estimated additional tax and interest that may result from tax authorities disputing uncertain tax positions. We have taken and we believe we havemade adequate provisions for income taxes for all years that are subject to audit based upon the latest information available. A more complete description ofour income taxes and the future benefits of our net operating loss and credit carryforwards is disclosed in Note 2, "INCOME TAXES," to our ConsolidatedFinancial Statements.Pension BenefitsWe 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 haveseveral major defined benefit plans that are separately funded. We account for our pension programs in accordance with employers' accounting for definedbenefit pension and other postretirement plans under GAAP. GAAP requires that amounts recognized in financial statements be determined using an actuarialbasis. As a result, our pension benefit programs are based on a number of statistical and judgmental assumptions that attempt to anticipate future events andare used in calculating the expense and liability related to our plans each year at December 31. These assumptions include discount rates used to valueliabilities, 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 economicconditions, participant life span and withdrawal rates. These differences may result in a material impact to the amount of net periodic pension cost to berecorded in our Consolidated Financial Statements in the future.58Table of ContentsThe expected long-term return on plan assets is used in calculating the net periodic pension cost. We considered several factors in developing our expectedrate of return on plan assets. The long-term rate of return considers historical returns and expected returns on current and projected asset allocations. Projectedreturns are based primarily on broad, publicly traded passive fixed income and equity indices and forward-looking estimates of the value added by activeinvestment management. At December 31, 2017, based upon our target asset allocations, it is anticipated that our U.S. investment policy will generate anaverage annual return over the 10-year projection period equal to or in excess of 6.5 percent approximately 32 percent of the time while returns of 7.0 percentor greater are anticipated 21 percent of the time, including the additional positive returns expected from active investment management.Our plan assets have averaged annualized returns of 10.5 percent over the prior eight years, and resulted in approximately $418 million of actuarial gains inaccumulated other comprehensive income in the same period. Based on the historical returns and forward-looking return expectations, we believe aninvestment return assumption of 6.5 percent per year in 2018 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, 2017, 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 4.1 percent approximately 50 percent ofthe time while returns of 4.8 percent or greater are anticipated 25 percent of the time. We expect modest additional positive returns from active investmentmanagement. The one-year return for our U.K. plans was 4.4 percent for 2017, and similar to our U.S. plans, the strong returns since 2010 have resulted inapproximately $383 million of actuarial gains in accumulated other comprehensive income. Our strategy with respect to our investments in pension planassets 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 thehistorical returns and forward-looking return expectations as the plan assets continue to be de-risked, we believe an investment return assumption of 4.0percent in 2018 for U.K. pension assets is reasonable. Our pension plan asset allocations at December 31, 2017 and 2016 and target allocation for 2018 are asfollows: U.S. Plans U.K. Plans Target Allocation Percentage of Plan Assets atDecember 31, Target Allocation Percentage of Plan Assets atDecember 31,Investment description 2018 2017 2016 20182017 2016Liability matching 68.0% 68.3% 57.8% 56.5% 56.1% 54.6%Risk seeking 32.0% 31.7% 42.2% 43.5% 43.9% 45.4%Total 100.0% 100.0% 100.0% 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 netperiodic cost over five years. The table below sets forth the expected return assumptions used to develop our pension cost for the period 2015-2017 and ourexpected rate of return for 2018. Long-term Expected Return Assumptions 2018 2017 2016 2015U.S. plans 6.50% 7.25% 7.50% 7.50%U.K. plans 4.00% 4.50% 4.70% 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 actuarialvaluations and the actual results. It is acceptable to delay or immediately recognize these differences. Under the delayed recognition alternative, changes inpension obligations (including those resulting from plan amendments) and changes in the value of assets set aside to meet those obligations are notrecognized in net periodic pension cost as they occur but are recognized initially in accumulated other comprehensive loss and subsequently amortized ascomponents of net periodic pension cost systematically and gradually over future periods. In addition to this approach, GAAP also allows immediaterecognition of actuarial gains or losses. Immediate recognition introduces volatility in financial results. We have chosen to delay recognition and amortizeactuarial differences over future periods. If we adopted the immediate recognition approach, we would record a loss of $864 million ($680 million after-tax)from cumulative actuarial net losses for our U.S. and U.K. pension plans.59Table of ContentsThe difference between the expected return and the actual return on plan assets is deferred from recognition in our results of operations and under certaincircumstances such as when the difference exceeds 10 percent of the market value of plan assets or the projected benefit obligation, amortized over futureyears of service. This is also true of changes to actuarial assumptions. Under GAAP, the actuarial gains and losses are recognized and recorded in accumulatedother comprehensive loss. At December 31, 2017, we had net pension actuarial losses of $649 million and $207 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 ofparticipating employees. Net actuarial losses decreased our shareholders' equity by $28 million after-tax in 2017. The loss is due to lower discount rates inthe U.S. and U.K. and unfavorable foreign currency, partially offset by strong asset performance in the U.S. and the U.K.The table below sets forth the net periodic pension cost for the years ended December 31 and our expected cost for 2018.In millions 2018 2017 2016 2015Net periodic pension cost $79 $82 $42 $63We expect 2018 net periodic pension cost to decrease compared to 2017, primarily due to reduced loss amortization in the U.S. and U.K., which resulted fromstrong asset performance, partially offset by lower expected asset returns in the U.S. and U.K. as we de-risk plan trust assets. The increase in net periodicpension cost in 2017 compared to 2016 was primarily due to onboarding North American distributors to Cummins pension benefits, a lower expected rate ofreturn 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 toreduced 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 wede-risked plan trust assets. Another key assumption used in the development of the net periodic pension cost is the discount rate. The weighted-averagediscount rates used to develop our net periodic pension cost are set forth in the table below. Discount Rates 2018 2017 2016 2015U.S. plans 3.66% 4.12% 4.47% 4.07%U.K. plans 2.55% 2.70% 3.95% 3.80%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 thisrate 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-callablebonds (Aa or better) at December 31, 2017, 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'sprojected benefit payments to the market value of the theoretical settlement bond portfolio. A single equivalent discount rate is determined to align thepresent value of the required cash flow with the value of the bond portfolio. The resulting discount rate is reflective of both the current interest rateenvironment and the plan's distinct liability characteristics.The table below sets forth the estimated impact on our 2018 net periodic pension cost relative to a change in the discount rate and a change in the expectedrate of return on plan assets.In millionsImpact on Pension CostIncrease/(Decrease)Discount rate used to value liabilities 0.25 percent increase$(16)0.25 percent decrease17Expected rate of return on assets 1 percent increase(48)1 percent decrease4860Table of ContentsThe above sensitivities reflect the impact of changing one assumption at a time. A higher discount rate decreases the plan obligations and decreases our netperiodic pension cost. A lower discount rate increases the plan obligations and increases our net periodic pension cost. It should be noted that economicfactors and conditions often affect multiple assumptions simultaneously and the effects of changes in key assumptions are not necessarily linear. Note 10,"PENSION AND OTHER POSTRETIREMENT BENEFITS," to our Consolidated Financial Statements provides a summary of our pension benefit planactivity, the funded status of our plans and the amounts recognized in our Consolidated Financial Statements.RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTSSee Note 1, "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES", to the Consolidated Financial Statements for additional information.ITEM 7A. Quantitative and Qualitative Disclosures About Market RiskWe are exposed to financial risk resulting from volatility in foreign exchange rates, interest rates and commodity prices. This risk is closely monitored andmanaged through the use of financial derivative instruments including foreign currency forward contracts, interest rate swaps, commodity zero-cost collarsand physical forward contracts. These instruments, as further described below, are accounted for as cash flow or fair value hedges or as economic hedges notdesignated as hedges for accounting purposes. Financial derivatives are used expressly for hedging purposes and under no circumstances are they used forspeculative purposes. When material, we adjust the estimated fair value of our derivative contracts for counterparty or our credit risk. None of our derivativeinstruments are subject to collateral requirements. Substantially all of our derivative contracts are subject to master netting arrangements which provide uswith 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 fora 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 terminationevent.We also enter into physical forward contracts with certain suppliers to purchase minimum volumes of commodities at contractually stated prices for variousperiods. These arrangements, as further described below, enable us to fix the prices of portions of our normal purchases of these commodities, which otherwiseare subject to market volatility.The following describes our risk exposures and provides the results of a sensitivity analysis performed at December 31, 2017. The sensitivity analysisassumes instantaneous, parallel shifts in foreign currency exchange rates and commodity prices.Foreign Exchange Rate RiskAs a result of our international business presence, we are exposed to foreign currency exchange rate risks. We transact business in foreign currencies and, as aresult, our income experiences some volatility related to movements in foreign currency exchange rates. To help manage our exposure to exchange ratevolatility, we use foreign currency forward contracts on a regular basis to hedge forecasted intercompany and third-party sales and purchases denominated innon-functional currencies. Our internal policy allows for managing anticipated foreign currency cash flows for up to 18 months. These foreign currencyforward contracts are designated and qualify as foreign currency cash flow hedges under GAAP. For the years ended December 31, 2017 and 2016, there wereno 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 functionalcurrency, we enter into foreign currency forward contracts, which are considered economic hedges. The objective is to offset the gain or loss fromremeasurement with the gain or loss from the fair market valuation of the forward contract. These derivative instruments are not designated as hedges underGAAP.At December 31, 2017, the potential gain or loss in the fair value of our outstanding foreign currency contracts, assuming a hypothetical 10 percentfluctuation in the currencies of such contracts, would be approximately $101 million. The sensitivity analysis of the effects of changes in foreign currencyexchange rates assumes the notional value to remain constant for the next 12 months. The analysis ignores the impact of foreign exchange movements on ourcompetitive position and potential changes in sales levels. Any change in the value of the contracts, real or hypothetical, would be significantly offset by aninverse change in the value of the underlying hedged items.61Table of ContentsInterest Rate RiskWe are exposed to market risk from fluctuations in interest rates. We manage our exposure to interest rate fluctuations through the use of interest rateswaps. The objective of the swaps is to more effectively balance our borrowing costs and interest rate risk.We have 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 afloating 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 weredesignated, 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 losson the hedged item attributable to the hedged risk, are recognized in current income as “Interest expense.” The net swap settlements that accrue each periodare also reported in interest expense.The following table summarizes these gains and losses for the years presented below: Years ended December 31,In millions 2017 2016 2015Income StatementClassification Gain/(Loss) on Swaps Gain/(Loss) onBorrowings Gain/(Loss) on Swaps Gain/(Loss) onBorrowings Gain/(Loss) onSwaps Gain/(Loss) onBorrowingsInterest expense (1) $(7) $8 $(8) $12 $6 $(2)___________________________________________________________(1) The difference between the gain/(loss) on swaps and borrowings represents hedge ineffectiveness.Commodity Price RiskWe are exposed to fluctuations in commodity prices due to contractual agreements with component suppliers. In order to protect ourselves against futureprice volatility and, consequently, fluctuations in gross margins, we periodically enter into commodity zero-cost collar contracts with designated banks to fixthe cost of certain raw material purchases with the objective of minimizing changes in inventory cost due to market price fluctuations. These commodityzero-cost collar contracts that represent an economic hedge, but are not designated for hedge accounting and are marked to market through earnings. Ourinternal policy allows for managing our cash flow hedges for up to three years.At December 31, 2017, the potential gain or loss related to the outstanding commodity zero-cost collar contracts, assuming a hypothetical 10 percentfluctuation in the price of such commodities, would be approximately $3 million. The sensitivity analysis of the effects of changes in commodity pricesassumes the notional value to remain constant for the next 12 months. The analysis ignores the impact of commodity price movements on our competitiveposition and potential changes in sales levels. Any change in the value of the zero-cost collar contracts, real or hypothetical, would be significantly offset byan 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 palladiumexpected to be used in our products. We enter into physical forward contracts with suppliers of platinum and palladium to purchase some volumes of thecommodities at contractually stated prices for various periods, generally not exceeding one year. These arrangements enable us to fix the prices of a portionof our purchases of these commodities, which otherwise are subject to market volatility.62Table of ContentsITEM 8. Financial Statements and Supplementary DataIndex 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, 2017, 2016 and 2015•Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015•Consolidated Balance Sheets at December 31, 2017 and 2016•Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015•Consolidated Statements of Changes in Equity for the years ended December 31, 2017, 2016 and 2015•Notes to Consolidated Financial StatementsNOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESNOTE 2 INCOME TAXESNOTE 3 INVESTMENTS IN EQUITY INVESTEESNOTE 4 MARKETABLE SECURITIESNOTE 5 INVENTORIESNOTE 6 PROPERTY, PLANT AND EQUIPMENTNOTE 7 GOODWILL AND OTHER INTANGIBLE ASSETSNOTE 8 PRODUCT WARRANTY LIABILITYNOTE 9 DEBTNOTE 10 PENSION AND OTHER POSTRETIREMENT BENEFITSNOTE 11 OTHER LIABILITIES AND DEFERRED REVENUENOTE 12 COMMITMENTS AND CONTINGENCIESNOTE 13 SHAREHOLDERS' EQUITYNOTE 14 ACCUMULATED OTHER COMPREHENSIVE LOSSNOTE 15 STOCK INCENTIVE AND STOCK OPTION PLANSNOTE 16 NONCONTROLLING INTERESTSNOTE 17 EARNINGS PER SHARENOTE 18 ACQUISITIONSNOTE 19 IMPAIRMENT OF LIGHT-DUTY DIESEL ASSETSNOTE 20 RESTRUCTURING ACTIONS AND OTHER CHARGESNOTE 21 OPERATING SEGMENTS•Selected Quarterly Financial Data (Unaudited)63Table of ContentsMANAGEMENT'S REPORT TO SHAREHOLDERSManagement's Report on Financial Statements and PracticesThe accompanying Consolidated Financial Statements of Cummins Inc. were prepared by management, which is responsible for their integrity andobjectivity. The statements were prepared in accordance with generally accepted accounting principles and include amounts that are based on management'sbest 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. Thisresponsibility is characterized and reflected in key policy statements issued from time to time regarding, among other things, conduct of its businessactivities within the laws of the host countries in which we operate, within The Foreign Corrupt Practices Act and potentially conflicting interests of itsemployees. 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 comprehensivecompliance process to evaluate our internal control over financial reporting across the enterprise.Management's Report on Internal Control Over Financial ReportingThe management of Cummins Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control overfinancial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of our ConsolidatedFinancial 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, 2017. In making itsassessment, 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, 2017, has been audited by PricewaterhouseCoopers LLP, an independentregistered public accounting firm, as stated in their report which appears herein.Officer CertificationsPlease 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 /s/ PATRICK J. WARDChairman and Chief Executive Officer Vice President and Chief Financial Officer64Table of ContentsReport of Independent Registered Public Accounting FirmTo the Board of Directors and Shareholders of Cummins Inc.:Opinions on the Financial Statements and Internal Control over Financial ReportingWe have audited the accompanying consolidated balance sheets of Cummins Inc. and its subsidiaries as of December 31, 2017 and 2016, and the relatedconsolidated statements of income, comprehensive income, cash flows, and changes in equity for each of the three years in the period ended December 31,2017, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal controlover financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committeeof Sponsoring Organizations of the Treadway Commission (“COSO”).In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as ofDecember 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 inconformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all materialrespects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework(2013) issued by the COSO.Basis for OpinionsThe Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, andfor its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Controlover Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internalcontrol over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board(United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and theapplicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonableassurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internalcontrol over financial reporting was maintained in all material respects.Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financialstatements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles usedand significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internalcontrol over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performingsuch other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.Definition and Limitations of Internal Control over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.65Table of ContentsBecause of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate./s/ PricewaterhouseCoopers LLPIndianapolis, INFebruary 14, 2018We have served as the Company’s auditor since 2002.66Table of ContentsCUMMINS INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME Years ended December 31,In millions, except per share amounts 2017 2016 2015NET SALES (a) $20,428 $17,509 $19,110Cost of sales 15,338 13,057 14,163GROSS MARGIN 5,090 4,452 4,947OPERATING EXPENSES AND INCOME Selling, general and administrative expenses 2,390 2,046 2,092Research, development and engineering expenses 752 636 735Equity, royalty and interest income from investees (Note 3) 357 301 315Loss contingency (Note 12) 5 138 60Impairment of light-duty diesel assets (Note 19) — — 211Restructuring actions and other charges (Note 20) — — 90Other operating income (expense), net 65 (5) (17)OPERATING INCOME 2,365 1,928 2,057Interest income 18 23 24Interest expense (Note 9) 81 69 65Other income, net 63 48 9INCOME BEFORE INCOME TAXES 2,365 1,930 2,025Income tax expense (Note 2) 1,371 474 555CONSOLIDATED NET INCOME 994 1,456 1,470Less: Net (loss) income attributable to noncontrolling interests (Note 16) (5) 62 71NET INCOME ATTRIBUTABLE TO CUMMINS INC. $999 $1,394 $1,399 EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC. (Note 17) Basic $5.99 $8.25 $7.86Diluted $5.97 $8.23 $7.84____________________________________(a) Includes sales to nonconsolidated equity investees of $1,174 million, $1,028 million and $1,209 million for the years ended December 31, 2017, 2016 and 2015, respectively.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years ended December 31,In millions 2017 2016 2015CONSOLIDATED NET INCOME $994 $1,456 $1,470Other comprehensive income (loss), net of tax (Note 14) Change in pension and other postretirement defined benefit plans (4) (31) 15Foreign currency translation adjustments 335 (448) (305)Unrealized gain (loss) on marketable securities 2 1 (1)Unrealized gain (loss) on derivatives 5 (12) 6Total other comprehensive income (loss), net of tax 338 (490) (285)COMPREHENSIVE INCOME 1,332 966 1,185Less: Comprehensive income attributable to noncontrolling interests 15 45 56COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC. $1,317 $921 $1,129The accompanying notes are an integral part of our Consolidated Financial Statements.67Table of ContentsCUMMINS INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS December 31,In millions, except par value 2017 2016ASSETS Current assets Cash and cash equivalents $1,369 $1,120Marketable securities (Note 4) 198 260Total cash, cash equivalents and marketable securities 1,567 1,380Accounts and notes receivable, net Trade and other 3,311 2,803Nonconsolidated equity investees 307 222Inventories (Note 5) 3,166 2,675Prepaid expenses and other current assets 577 627Total current assets 8,928 7,707Long-term assets Property, plant and equipment, net (Note 6) 3,927 3,800Investments and advances related to equity method investees (Note 3) 1,156 946Goodwill (Note 7) 1,082 480Other intangible assets, net (Note 7) 973 332Pension assets (Note 10) 1,043 731Other assets 966 1,015Total assets $18,075$15,011 LIABILITIES Current liabilities Accounts payable (principally trade) $2,579 $1,854Loans payable (Note 9) 57 41Commercial paper (Note 9) 298 212Accrued compensation, benefits and retirement costs 811 412Current portion of accrued product warranty (Note 8) 454 333Current portion of deferred revenue 500 468Other accrued expenses 915 970Current maturities of long-term debt (Note 9) 63 35Total current liabilities 5,677 4,325Long-term liabilities Long-term debt (Note 9) 1,588 1,568Postretirement benefits other than pensions (Note 10) 289 329Pensions (Note 10) 330 326Other liabilities and deferred revenue (Note 11) 2,027 1,289Total liabilities $9,911 $7,837 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 $2,210 $2,153Retained earnings 11,464 11,040Treasury stock, at cost, 56.7 and 54.2 shares (4,905) (4,489)Common stock held by employee benefits trust, at cost, 0.5 and 0.7 shares (7) (8)Accumulated other comprehensive loss (Note 14) (1,503) (1,821)Total Cummins Inc. shareholders’ equity 7,259 6,875Noncontrolling interests (Note 16) 905 299Total equity $8,164 $7,174Total liabilities and equity $18,075 $15,011The accompanying notes are an integral part of our Consolidated Financial Statements.68Table of ContentsCUMMINS INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31,In millions 2017 2016 2015CASH FLOWS FROM OPERATING ACTIVITIES Consolidated net income $994 $1,456 $1,470Adjustments to reconcile consolidated net income to net cash provided by operating activities Impact of tax legislation, net (Note 2) 820 — —Depreciation and amortization 583 530 514Gains on fair value adjustment for consolidated investees (Note 18) — (15) (18)Deferred income taxes (Note 2) (54) 50 (108)Equity in income of investees, net of dividends (Note 3) (123) (46) (36)Pension contributions in excess of expense (Note 10) (161) (92) (127)Other post retirement benefits payments in excess of expense (Note 10) (5) (25) (23)Stock-based compensation expense (Note 15) 41 32 24Loss contingency charges, net of payments (Note 12) 5 122 60Impairment of light-duty diesel assets (Note 19) — — 211Restructuring charges and other actions, net of cash payments (Note 20) — (59) 64Proceeds from corporate owned life insurance (52) (22) 6Translation and hedging activities 71 (55) 26Changes in current assets and liabilities, net of acquisitions Accounts and notes receivable (508) (265) 103Inventories (407) (4) 150Other current assets (12) 14 (151)Accounts payable 639 188 (130)Accrued expenses 378 (195) (226)Changes in other liabilities and deferred revenue 241 200 292Other, net (173) 125 (36)Net cash provided by operating activities 2,277 1,939 2,065CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (506) (531) (744)Investments in internal use software (81) (63) (55)Proceeds from disposals of property, plant and equipment 110 14 25Investments in and advances to equity investees (66) (41) (7)Acquisitions of businesses, net of cash acquired (Note 18) (662) (94) (117)Investments in marketable securities—acquisitions (Note 4) (194) (478) (282)Investments in marketable securities—liquidations (Note 4) 266 306 270Proceeds from sale of equity investees (Note 3) — 60 —Cash flows from derivatives not designated as hedges 76 (102) 8Other, net 5 12 (16)Net cash used in investing activities (1,052) (917) (918)CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings 6 111 44Net borrowings of commercial paper 86 212 —Payments on borrowings and capital lease obligations (60) (163) (76)Net borrowings (payments) under short-term credit agreements 12 19 (41)Distributions to noncontrolling interests (29) (65) (49)Dividend payments on common stock (Note 13) (701) (676) (622)Repurchases of common stock (Note 13) (451) (778) (900)Acquisitions of noncontrolling interests (Note 18) — (98) (10)Other, net 63 25 4Net cash used in financing activities (1,074) (1,413) (1,650)EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 98 (200) (87)Net increase (decrease) in cash and cash equivalents 249 (591)(590)Cash and cash equivalents at beginning of year 1,120 1,711 2,301CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,369 $1,120 $1,711The accompanying notes are an integral part of our Consolidated Financial Statements.69Table of ContentsCUMMINS INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN EQUITYIn millionsCommonStock Additional Paid-inCapital RetainedEarnings TreasuryStock CommonStockHeld inTrust AccumulatedOtherComprehensiveLoss TotalCummins Inc.Shareholders’Equity NoncontrollingInterests TotalEquityBALANCE AT DECEMBER 31, 2014$556 $1,583 $9,545 $(2,844) $(13) $(1,078) $7,749 $344 $8,093Net income 1,399 1,399 71 1,470Other comprehensive income (loss), netof tax (Note 14) (270) (270) (15) (285)Issuance of common stock 9 9 — 9Employee benefits trust activity (Note 13) 25 2 27 — 27Repurchases of common stock (Note 13) (900) (900) — (900)Cash dividends on common stock (Note13) (622) (622) — (622)Distributions to noncontrolling interests — (49) (49)Stock based awards (4) 9 5 — 5Acquisition of noncontrollinginterests (Note 18) (3) (3) (7) (10)Other shareholder transactions 12 12 — 12BALANCE AT DECEMBER 31, 2015$556 $1,622 $10,322 $(3,735) $(11) $(1,348) $7,406 $344 $7,750Net income 1,394 1,394 62 1,456Other comprehensive income (loss), netof tax (Note 14) (473) (473) (17) (490)Issuance of common stock 6 6 — 6Employee benefits trust activity (Note 13) 23 3 26 — 26Repurchases of common stock (Note 13) (778) (778) — (778)Cash dividends on common stock (Note13) (676) (676) — (676)Distributions to noncontrolling interests — (65) (65)Stock based awards (5) 24 19 — 19Acquisition of noncontrollinginterests (Note 18) (73) (73) (25) (98)Other shareholder transactions 24 24 — 24BALANCE AT DECEMBER 31, 2016$556 $1,597 $11,040 $(4,489) $(8) $(1,821) $6,875 $299 $7,174Impact of tax legislation (Note 2) 126 126 — 126Net income 999 999 (5) 994Other comprehensive income (loss), netof tax (Note 14) 318 318 20 338Issuance of common stock 6 6 — 6Employee benefits trust activity (Note 13) 17 1 18 — 18Repurchases of common stock (Note 13) (451) (451) — (451)Cash dividends on common stock (Note13) (701) (701) — (701)Distributions to noncontrolling interests — (29) (29)Stock based awards 3 35 38 — 38Acquisition of business (Note 18) — 600 600Other shareholder transactions 31 31 20 51BALANCE AT DECEMBER 31, 2017$556 $1,654 $11,464 $(4,905) $(7) $(1,503) $7,259 $905 $8,164The accompanying notes are an integral part of our Consolidated Financial Statements.70CUMMINS INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESNature of OperationsWe were founded in 1919 as Cummins Engine Company, a corporation in Columbus, Indiana and one of the first diesel engine manufacturers. In 2001, wechanged our name to Cummins Inc. We are a global power leader that designs, manufactures, distributes and services diesel and natural gas engines andengine-related component products, including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems, transmissions andelectric power generation systems. We sell our products to original equipment manufacturers (OEMs), distributors and other customers worldwide. We serveour customers through a network of approximately 500 wholly-owned and independent distributor locations and over 7,500 dealer locations in more than190 countries and territories.Principles of ConsolidationOur Consolidated Financial Statements include the accounts of all wholly-owned and majority-owned domestic and foreign subsidiaries where ourownership 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 weare deemed to have a controlling financial interest. Intercompany balances and transactions are eliminated in consolidation. Where our ownership interest isless than 100 percent, the noncontrolling ownership interests are reported in our Consolidated Balance Sheets. The noncontrolling ownership interest in ourincome, net of tax, is classified as "Net (loss) 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 generallyaccepted accounting principles in the United States of America (GAAP) for variable interest entities. Most of these VIEs are unconsolidated.ReclassificationsCertain amounts for 2016 and 2015 have been reclassified to conform to the current year presentation.Investments in Equity InvesteesWe use the equity method to account for our investments in joint ventures, affiliated companies and alliances in which we have the ability to exercisesignificant influence, generally represented by equity ownership or partnership equity of at least 20 percent but not more than 50 percent. Generally, underthe equity method, original investments in these entities are recorded at cost and subsequently adjusted by our share of equity in income or losses after thedate 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. Ifthe 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 lossesaccumulate, we record our share of losses until our investment has been fully depleted. If our investment has been fully depleted, we recognize additionallosses only when we are the primary funding source. We eliminate (to the extent of our ownership percentage) in our Consolidated Financial Statements theprofit in inventory held by our equity method investees that has not yet been sold to a third-party. Our investments are classified as "Investments andadvances related to equity method investees" in our Consolidated Balance Sheets. Our share of the results from joint ventures, affiliated companies andalliances is reported in our Consolidated Statements of Income as "Equity, royalty and interest income from investees," and is reported net of all applicableincome 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. SeeNOTE 3, "INVESTMENTS IN EQUITY INVESTEES," for additional information.Use of Estimates in the Preparation of the Financial StatementsPreparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts presentedand disclosed in our Consolidated Financial Statements. Significant estimates and assumptions in these Consolidated Financial Statements require theexercise of judgment and are used for, but not limited to, allowance for doubtful accounts, estimates of future cash flows and other assumptions associatedwith goodwill and long-lived asset impairment tests, useful lives for depreciation and amortization, warranty programs, determination of discount rate and71Table of Contentsother assumptions for pension and other postretirement benefit costs, income taxes and deferred tax valuation allowances, lease classification andcontingencies. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be different from these estimates.Revenue RecognitionWe 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 ofour customers and generally do not require collateral to secure our accounts receivable. For engines, service parts, service tools and other items sold toindependent distributors and to partially-owned distributors accounted for under the equity method, revenues are recorded when title and risk of ownershiptransfers. This transfer is based on the agreement in effect with the respective distributor, which generally occurs when the products are shipped. To the extentof our ownership percentage, margins on sales to distributors accounted for under the equity method are deferred until the distributor sells the product tounrelated parties.We provide various sales incentives to both our distribution network and our OEM customers. These programs are designed to promote the sale of ourproduct 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 forthe 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 thecustomer will reach during the measurement period. For market share rebates, we provide certain customers with rebate opportunities based on the percentageof their production that utilizes our product. These rebates are typically measured either quarterly or annually and are accrued at the time of the original salebased on the current market shares, with adjustments made as the level changes. For aftermarket rebates, we provide incentives to promote sales to certaindealers 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 theamount yet to be paid. These estimates are based on historical experience with the particular program. The incentives are classified as a reduction in sales inour 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 areincluded 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, wheresome aftermarket customers are permitted to return small amounts of parts and filters each year and in our power systems business, which sells portablegenerators to retail customers. An estimate of future returns is accrued at the time of sale based on historical return rates.Foreign Currency Transactions and TranslationWe translate assets and liabilities of foreign entities to U.S. dollars, where the local currency is the functional currency, at year-end exchange rates. Wetranslate income and expenses to U.S. dollars using weighted-average exchange rates for the year. We record adjustments resulting from translation in aseparate component of accumulated other comprehensive loss (AOCL) and include the adjustments in net income only upon sale, loss of controllingfinancial interest or liquidation of the underlying foreign investment.72Table of ContentsForeign 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 usinghistorical 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 $6 million, $12 million and $18 million for the years ended December 31, 2017,2016 and 2015, respectively.Fair Value MeasurementsA three-level valuation hierarchy, based upon the observable and unobservable inputs, is used for fair value measurements. Observable inputs reflect marketdata obtained from independent sources, while unobservable inputs reflect market assumptions based on the best evidence available. These two types ofinputs 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 andmodel-derived valuations whose significant inputs are observable; and•Level 3 - Instruments whose significant inputs are unobservable.Derivative InstrumentsWe make use of derivative instruments in foreign exchange, commodity price and interest rate hedging programs. Derivatives currently in use are foreigncurrency forward contracts, commodity physical forward contracts, options and interest rate swaps. These contracts are used strictly for hedging and not forspeculative 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 rateswaps. 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 aswell 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, seeNOTE 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 liabilitiesdenominated in foreign currencies. Consequently, our income experiences some volatility related to movements in foreign currency exchange rates. In orderto benefit from global diversification and after considering naturally offsetting currency positions, we enter into foreign currency forward contracts tominimize our existing exposures (recognized assets and liabilities) and hedge forecasted transactions. Foreign currency forward contracts are designated andqualify as foreign currency cash flow hedges under GAAP. The effective portion of the unrealized gain or loss on the forward contract is deferred and reportedas a component of AOCL. When the hedged forecasted transaction (sale or purchase) occurs, the unrealized gain or loss is reclassified into income in the sameline 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 functionalcurrency, we enter into foreign currency forward contracts, which are considered economic hedges. The objective is to offset the gain or loss fromremeasurement with the gain or loss from the fair market valuation of the forward contract. These derivative instruments are not designated as hedges underGAAP.We are exposed to fluctuations in commodity prices due to contractual agreements with component suppliers. In order to protect ourselves against futureprice volatility and, consequently, fluctuations in gross margins, we periodically enter into commodity physical forward contracts and zero-cost collarcontracts with designated banks and other counterparties to fix the cost of certain raw material purchases with the objective of minimizing changes ininventory cost due to market price fluctuations. The physical forward contracts qualify for the normal purchases scope exceptions and are treated as purchasecommitments. The commodity zero-cost collar contracts that represent an economic hedge, but are not designated for hedge accounting, are marked to marketthrough earnings.Income Tax AccountingWe determine our income tax expense using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the futuretax effects of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Futuretax benefits of net operating loss and credit carryforwards are also recognized as deferred tax assets. We evaluate the recoverability of our deferred tax assetseach quarter by assessing the likelihood of future profitability and available tax planning strategies that could be implemented to realize our net deferred taxassets. 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 ouroperating performance deteriorates, future assessments could conclude that a larger valuation73Table of Contentsallowance will be needed to further reduce the deferred tax assets. In addition, we operate within multiple taxing jurisdictions and are subject to tax audits inthese jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. We accrue for the estimated additionaltax and interest that may result from tax authorities disputing uncertain tax positions. We have taken and we believe we have made adequate provisions forincome taxes for all years that are subject to audit based upon the latest information available. A more complete description of our income taxes and thefuture benefits of our net operating loss and credit carryforwards is disclosed in NOTE 2, "INCOME TAXES."Cash and Cash EquivalentsCash equivalents are defined as short-term, highly liquid investments with an original maturity of 90 days or less at the time of purchase. The carryingamounts reflected in our Consolidated Balance Sheets for cash and cash equivalents approximate fair value due to the short-term maturity of theseinvestments. Years ended December 31,In millions 2017 2016 2015Cash payments for income taxes, net of refunds $622 $430 $732Cash payments for interest, net of capitalized interest 82 68 65Marketable SecuritiesWe account for marketable securities in accordance with GAAP for investments in debt and equity securities. We determine the appropriate classification ofall marketable securities as "held-to-maturity," "available-for-sale" or "trading" at the time of purchase, and re-evaluate such classifications at each balancesheet date. At December 31, 2017 and 2016, 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. Unrealizedlosses 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 themarket price of similar types of securities that are traded in the market to estimate fair value. See NOTE 4, "MARKETABLE SECURITIES," for a detaileddescription of our investments in marketable securities.Accounts Receivable and Allowance for Doubtful AccountsTrade accounts receivable are recorded at the invoiced amount, which approximates net realizable value, and generally do not bear interest. The allowancefor doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. We determine the allowance based onour historical collection experience and by performing an analysis of our accounts receivable in light of the current economic environment. We review ourallowance for doubtful accounts on a regular basis. In addition, when necessary, we provide an allowance for the full amount of specific accounts deemed tobe uncollectible. Account balances are charged off against the allowance in the period in which we determine that it is probable the receivable will not berecovered. The allowance for doubtful accounts balances for the years ended December 31, 2017 and 2016 were $16 million and $16 million, respectively.InventoriesOur inventories are stated at the lower of cost or market. For the years ended December 31, 2017 and 2016, approximately 12 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-endreporting 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 ouraccounting systems provide, a meaningful segregation between raw materials and work-in-process. See NOTE 5, "INVENTORIES," for additional information.Property, Plant and EquipmentWe record property, plant and equipment, inclusive of assets under capital leases, at cost. We depreciate the cost of the majority of our property, plant andequipment using the straight-line method with depreciable lives ranging from 20 to 40 years for buildings and 3 to 15 years for machinery, equipment andfixtures. Capital lease amortization is recorded in depreciation expense. We expense normal maintenance and repair costs as incurred. Depreciation expensetotaled $467 million, $434 million and $419 million for the years ended December 31, 2017, 2016 and 2015, respectively. See NOTE 6, "PROPERTY,PLANT AND EQUIPMENT," for additional information.74Table of ContentsImpairment of Long-Lived AssetsWe review our long-lived assets for possible impairment whenever events or circumstances indicate that the carrying value of an asset or asset group may notbe recoverable. We assess the recoverability of the carrying value of the long-lived assets at the lowest level for which identifiable cash flows are largelyindependent 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 cashflows (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 areless 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 carryingvalue 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 determinethe impairment are subject to a degree of judgment and complexity. Any changes to the assumptions and estimates resulting from changes in actual results ormarket 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.GoodwillUnder 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 reportingunit 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 electedthis option on certain reporting units. The two-step impairment test is now only required if an entity determines through this qualitative analysis that it ismore 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 forimpairment on an interim basis in certain circumstances where impairment may be indicated. When we are required or opt to perform the two-step impairmenttest, the fair value of each reporting unit is estimated by discounting the after tax future cash flows less requirements for working capital and fixed assetadditions. Our reporting units are generally defined as one level below an operating segment. However, there are two situations where we have aggregatedtwo or more reporting units which share similar economic characteristics and thus are aggregated into a single reporting unit for testing purposes. These twosituations 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 characteristicsand provide similar products and services.Our valuation method requires us to make projections of revenue, operating expenses, working capital investment and fixed asset additions for the reportingunits over a multi-year period. Additionally, management must estimate a weighted-average cost of capital, which reflects a market rate, for each reportingunit 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, aseparate valuation of the goodwill is required to determine if an impairment loss has occurred. In addition, we also perform a sensitivity analysis to determinehow much our forecasts can fluctuate before the fair value of a reporting unit would be lower than its carrying amount. We performed the required proceduresas of the end of our fiscal third quarter and determined that our goodwill was not impaired. At December 31, 2017, our recorded goodwill was $1,082 million,approximately 36 percent of which resided in the aggregated emission solutions and filtration reporting unit. For this reporting unit, the fair value exceededits carrying value by a substantial margin. Approximately 50 percent and 4 percent of goodwill resides in our new automated transmissions reporting unit andour Brammo Inc. acquisition (not yet allocated to a segment), respectively. Since these businesses were just acquired in the second half of 2017, we did notperform an additional quantitative test as of the end of our third fiscal quarter. See NOTE 18, "ACQUISITIONS," for additional information on the acquisitionrelated goodwill recorded at the respective acquisition dates. Changes in our projections or estimates, a deterioration of our operating results and the relatedcash 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 ofgoodwill. See NOTE 7, "GOODWILL AND OTHER INTANGIBLE ASSETS," for additional information.Other Intangible AssetsWe capitalize other intangible assets, such as trademarks, patents, and customer relationships, that have been acquired either individually or with a group ofother assets. These intangible assets are amortized on a straight-line basis over their estimated useful lives generally ranging from 3 to 25 years. Intangibleassets are reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable over the remaining lives of theassets. See NOTE 7, "GOODWILL AND OTHER INTANGIBLE ASSETS," for additional information.75Table of ContentsSoftwareWe capitalize software that is developed or obtained for internal use. Software costs are amortized on a straight-line basis over their estimated useful livesgenerally ranging from 3 to 12 years. Software assets are reviewed for impairment when events or circumstances indicate that the carrying value may not berecoverable over the remaining lives of the assets. Upgrades and enhancements are capitalized if they result in significant modifications that enable thesoftware to perform tasks it was previously incapable of performing. Software maintenance, training, data conversion and business process reengineeringcosts are expensed in the period in which they are incurred. See NOTE 7, "GOODWILL AND OTHER INTANGIBLE ASSETS," for additional information.WarrantyWe 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. Weuse historical experience to develop the estimated liability for our various warranty programs. As a result of the uncertainty surrounding the nature andfrequency of product recall programs, the liability for such programs is recorded when we commit to a recall action or when a recall becomes probable andestimable, which generally occurs when it is announced. The liability for these programs is reflected in the provision for warranties issued. We review andassess 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 whenwe 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 customersatisfaction programs for items not covered by warranty. We accrue for these costs when agreement is reached with a specific customer. These costs are notincluded 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 proportionto the costs expected to be incurred in performing services over the contract period. We compare the remaining deferred revenue balance quarterly to theestimated amount of future claims under extended warranty programs and provide an additional accrual when the deferred revenue balance is less thanexpected future costs. See NOTE 8, "PRODUCT WARRANTY LIABILITY," for additional information.Research and DevelopmentOur research and development program is focused on product improvements, product extensions, innovations and cost reductions for our customers. Researchand development expenditures include salaries, contractor fees, building costs, utilities, testing, technical IT, administrative expenses and allocation ofcorporate costs and are expensed, net of contract reimbursements, when incurred. From time to time, we enter into agreements with customers and governmentagencies to fund a portion of the research and development costs of a particular project. We generally account for these reimbursements as an offset to therelated research and development expenditure. Research and development expenses, net of contract reimbursements, were $734 million in 2017, $616million in 2016 and $718 million in 2015. Contract reimbursements were $137 million in 2017, $131 million in 2016 and $98 million in 2015.Related Party TransactionsIn accordance with the provisions of various joint venture agreements, we may purchase products and components from our joint ventures, sell products andcomponents to our joint ventures and our joint ventures may sell products and components to unrelated parties. Joint venture transfer prices may differ fromnormal selling prices. Certain joint venture agreements transfer product at cost, some transfer product on a cost-plus basis, and others transfer product atmarket value. Our related party sales are presented on the face of our Consolidated Statements of Income. Our related party purchases were not material to ourfinancial position or results of operations.RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTSAccounting Pronouncements Recently AdoptedIn February 2018, the Financial Accounting Standards Board (FASB) amended its standard on comprehensive income to provide an option for an entity toreclassify the stranded tax effects of the Tax Cuts and Jobs Act (Tax Legislation) that was passed in December of 2017 from accumulated othercomprehensive income (AOCI) directly to retained earnings. The stranded tax effects result from the remeasurement of deferred tax assets and liabilitieswhich were originally recorded in comprehensive income but whose remeasurement is reflected in the income statement. This is a one-time amendmentapplicable only to the changes resulting from the Tax Legislation. The standard is effective for us on January 1, 2019, and may be reflected retroactively toany period in which the impacts of the Tax Legislation are recognized. The standard permits early adoption for any financial statements that have not beenreleased as of the date of the revised standard. We elected to early adopt this standard in our 2017 financial statements using specific identification and as aresult reclassified $126 million from76Table of ContentsAOCI to retained earnings which is reflected in the rollforward of AOCI. This reclassification relates only to the change in the statutory tax rate. See NOTE14, "ACCUMULATED OTHER COMPREHENSIVE LOSS," for additional information.In March 2016, the FASB amended its standards related to accounting for stock compensation, which became effective for us beginning January 1, 2017. Theamendment replaced the requirement to record excess tax benefits and certain tax deficiencies in additional paid-in capital by recording all excess taxbenefits and tax deficiencies as income tax expense / benefit in the Consolidated Statements of Income and was adopted prospectively. In addition, thestandard impacted our Consolidated Statements of Cash Flow retrospectively, as excess tax benefits are now required to be presented as an operating activityand the cash paid to tax authorities is required to be presented as a financing activity. This resulted in a net reclassification of $4 million and $6 million fromoperating to financing activities for the year ended December 31, 2016 and 2015, respectively. Finally, in accordance with the standard, we elected tocontinue our historical approach of estimating forfeitures during the award's vesting period and adjusting our estimate when it is no longer probable that theemployee will fulfill the service condition. The adoption of the standard was not material to our Consolidated Financial Statements.Accounting Pronouncements Issued But Not Yet EffectiveIn August 2017, the FASB amended its standards related to accounting for derivatives and hedging. These amendments allow the initial hedge effectivenessassessment to be performed by the end of the first quarter in which the hedge is designated rather than concurrently with entering into the hedge transaction.The changes also expand the use of a periodic qualitative hedge effectiveness assessment in lieu of an ongoing quantitative assessment performedthroughout the life of the hedge. The revision removes the requirement to record ineffectiveness on cash flow hedges through the income statement when ahedge is considered highly effective, instead deferring all related hedge gains and losses in "Other comprehensive income" until the hedged item impactsearnings. The modifications permit hedging the contractually-specified price of a component of a commodity purchase and revises certain disclosurerequirements. The amendments are effective January 1, 2019 and early adoption is permitted in any interim period or fiscal year prior to the effective date.The revised standard is required to be adopted on a modified retrospective basis for any cash flow or net investment hedge relationships that exist on the dateof adoption and prospectively for disclosures. We do not expect the amendments to have a material effect on our Consolidated Financial Statements and arestill evaluating early adoption.In March 2017, the FASB amended its standards related to the presentation of pension and other postretirement benefit costs in the financial statementsbeginning January 1, 2018. Under the new standard, we will be required to separate service costs from all other elements of pension costs and reflect the otherelements of pension costs outside of operating income in our Consolidated Statements of Income. In addition, the standard will limit the amount eligible forcapitalization (into inventory or self-constructed assets) to the amount of service cost. This portion of the standard will be applied on a prospective basis. Theremainder of the new standard is effective for us on a retrospective basis. The retroactive adoption of this standard will result in a reduction in operatingincome and a corresponding increase in other income (primarily related to the return on pension assets) of $31 million and $48 million for the years endedDecember 31, 2017 and 2016, respectively.In August 2016, the FASB amended its standards related to the classification of certain cash receipts and cash payments. The new standard will make eighttargeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The standard is effective for fiscal yearsbeginning after December 15, 2017 and interim periods within those fiscal years. The new standard will require adoption on a retrospective basis unless it isimpracticable to apply, in which case it would be required to apply the amendments prospectively as of the earliest date practicable. We do not expectadoption of this standard to have a material impact on our Consolidated Statements of Cash Flows.In June 2016, the FASB amended its standards related to accounting for credit losses on financial instruments. This amendment introduces new guidance foraccounting for credit losses on instruments including trade receivables and held-to-maturity debt securities. The new rules are effective for annual and interimperiods beginning after December 15, 2019. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods withinthose fiscal years. We do not expect adoption of this standard to have a material impact on our Consolidated Financial Statements.In February 2016, the FASB amended its standards related to the accounting for leases. Under the new standard, lessees will now be required to recognizesubstantially 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 incomestatement recognition purposes: operating leases and finance leases. Operating leases will result in the recognition of a single lease expense on a straight-linebasis over the lease term similar to the treatment for operating leases under today's standards. Finance leases will result in an accelerated expense similar tothe accounting for capital leases under today's standards. The determination of a lease classification as operating or finance will occur in a manner similar totoday's standard. The new standard also contains amended guidance regarding the identification of embedded leases in service contracts and theidentification of lease and non-lease components of an arrangement. The new standard is effective on January 1, 2019, with early adoption permitted. We arestill evaluating the impact the standard could have on our Consolidated Financial Statements, including our internal controls over financial77Table of Contentsreporting. While we have not yet quantified the amount, we do expect the standard will have a material impact on our Consolidated Balance Sheets due tothe 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 ofrecognition, 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 do not expect the standard to have a material impact on our Consolidated Financial Statements.In May 2014, the FASB amended its standards related to revenue recognition which replaces all existing revenue recognition guidance and provides a single,comprehensive model for all contracts with customers. The revised standard contains principles to determine the measurement of revenue and timing of whenit is recognized. The underlying principle is that we will recognize revenue to depict the transfer of goods or services to customers at an amount that weexpect to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and howrevenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of the time value of money in the transactionprice and allowing estimation of variable consideration to be recognized before contingencies are resolved in certain circumstances. The amendment alsorequires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, includingsignificant judgments and changes in those judgments as well as assets recognized from costs incurred to fulfill these contracts. The standard allows either full or modified retrospective adoption effective for annual and interim periods beginning January 1, 2018. We will adopt thestandard using the modified retrospective approach.We identified a change in the manner in which we will account for certain license income. We license certain technology to our unconsolidated jointventures that meet the definition of functional under the standard, which requires that revenue be recognized at a point in time rather than the currentrequirement of recognizing it over the license term. Using the modified retrospective adoption method, we will record an adjustment to our opening equitybalance at January 1, 2018, to account for the differences between existing revenue recorded and what would have been recorded under the new standard forcontracts for which we started recognizing revenue prior to the adoption date. We expect to record a credit to equity of approximately $30 million beforetaxes. We do not expect a material impact on any individual year from this change. We also identified transactions where revenue recognition is currently limited to the amount of billings not contingent on our future performance. With theallocation provisions of the new model, we expect to accelerate the timing of revenue recognition for amounts related to satisfied performance obligationsthat would be delayed under the current guidance. We do not expect the impact of this change to be material. On an ongoing basis, we do not expect this amendment to have a material impact on our Consolidated Financial Statements, including our internal controlsover financial reporting. The revenue recognition disclosures will significantly expand under the new standard, specifically around the quantitative andqualitative information about performance obligations, changes in contract assets and liabilities and disaggregation of revenue.NOTE 2. INCOME TAXESThe following table summarizes income before income taxes: Years ended December 31,In millions201720162015U.S. income$1,237$995$1,275Foreign income1,128935750Income before income taxes$2,365$1,930$2,02578Table of ContentsIncome tax expense (benefit) consists of the following: Years ended December 31,In millions 2017 2016 2015Current U.S. federal and state $355 $211 $516Foreign 289 213 147Impact of tax legislation 349 — —Total current 993 424 663Deferred U.S. federal and state (42) 57 (151)Foreign (12) (7) 43Impact of tax legislation 432 — —Total deferred 378 50 (108)Income tax expense $1,371 $474 $555A reconciliation of the statutory U.S. federal income tax rate to the effective tax rate was as follows: Years ended December 31, 2017 2016 2015Statutory U.S. federal income tax rate 35.0 % 35.0 % 35.0 %State income tax, net of federal effect 0.6 0.8 1.2Differences in rates and taxability of foreign subsidiaries and joint ventures (6.4) (7.2) (6.6)Research tax credits (1.4) (1.7) (1.4)Impact of tax legislation 33.1 — —Other, net (2.9) (2.3) (0.8)Effective tax rate 58.0 % 24.6 % 27.4 %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 researchtax credits. On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (Tax Legislation), which changed the U.S. statutory rate to 21 percenteffective January 1, 2018 and requires companies to pay a one-time transition tax on certain previously undistributed earnings of certain foreign subsidiariesand foreign joint ventures that were tax deferred. Our effective tax rate for 2017 was 58.0 percent compared to 24.6 percent for 2016. The impacts of the TaxLegislation resulted in additional tax expense of $781 million.The Securities and Exchange Commission (SEC) issued guidance which addressed the uncertainty in the application of GAAP to the Tax Legislation wherecertain income tax effects cannot be finalized at December 31, 2017. This guidance allows entities to record provisional amounts based on current estimatesthat are updated on a quarterly basis. As a result, our accounting for the effects of the Tax Legislation are not considered complete at this time. The finaltransition impacts of the Tax Legislation may differ from our estimates, possibly materially, due to, among other things, changes in interpretations of the TaxLegislation, any legislative action to address questions that arise because of the Tax Legislation, any changes in accounting standards for income taxes orrelated interpretations in response to the Tax Legislation, or any updates or changes to estimates the company has utilized to calculate the transition impacts.The SEC requires final calculations to be completed within the one year measurement period ending December 22, 2018, and reflect any additional guidanceissued throughout the year. Any adjustments of provisional amounts will be reported in continuing operations in the period in which the estimates change.We have made provisional estimates of the effects of the Tax Legislation in three primary areas: (1) our existing deferred tax balances; (2) the one-timetransition tax and (3) the withholding tax accrued on those earnings no longer considered permanently reinvested at December 31, 2017. Each of these itemsis described in more detail below.Deferred tax assets and liabilitiesWe remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21 percent.We are still analyzing certain aspects of the Tax Legislation and refining our calculations, which could potentially affect the measurement of these balances.The provisional amount related to the remeasurement of our deferred tax balance is an incremental tax expense of $152 million. See NOTE 3,"INVESTMENTS IN EQUITY INVESTEES," for the impact to our equity investees.79Table of ContentsOne-time transition taxThe one-time transition tax is based on our total post-1986 unrepatriated earnings and profits not previously subject to U.S. income tax. The recordedprovisional amount for our one-time transition tax is a tax expense of $298 million with a cash impact of $338 million .Withholding taxWithholding tax is an additional cost associated with the distribution of earnings from some jurisdictions. As a result of the Tax Legislation, we reconsideredprevious assertions regarding earnings that were considered permanently reinvested, which requires us to record withholding taxes on earnings likely to bedistributed in the foreseeable future. The assertion as to which earnings are permanently reinvested for purposes of calculating withholding tax is provisionalas we refine the underlying calculations of the amount of earnings subject to the tax and the rate at which it will be taxed. The recorded provisional amountfor the withholding tax resulted in an incremental tax expense of $331 million. See NOTE 3, "INVESTMENTS IN EQUITY INVESTEES," and NOTE 16,"NONCONTROLLING INTERESTS," for the impact of withholding taxes to our equity investees and noncontrolling interests.Carryforward tax benefits and the tax effect of temporary differences between financial and tax reporting that give rise to net deferred tax (liabilities) assetswere as follows: December 31,In millions 2017 2016Deferred tax assets U.S. state carryforward benefits $200 $159Foreign carryforward benefits 159 154Employee benefit plans 274 401Warranty expenses 300 405Accrued expenses 95 107Other 70 64Gross deferred tax assets 1,098 1,290Valuation allowance (347) (307)Total deferred tax assets 751 983Deferred tax liabilities Property, plant and equipment (250) (319)Unremitted income of foreign subsidiaries and joint ventures (331) (59)Employee benefit plans (224) (213)Other (31) (48)Total deferred tax liabilities (836) (639)Net deferred tax (liabilities) assets $(85) $344Our 2017 U.S. carryforward benefits include $200 million of state credit and net operating loss carryforward benefits that begin to expire in 2018. Our foreigncarryforward benefits include $159 million of net operating loss carryforwards that begin to expire in 2018. A valuation allowance is recorded to reduce thegross deferred tax assets to an amount we believe is more likely than not to be realized. The valuation allowance was $347 million and increased in 2017 by anet $40 million. The valuation allowance is primarily attributable to the uncertainty regarding the realization of a portion of the U.S. state and foreign netoperating loss and tax credit carryforward benefits.80Table of ContentsOur Consolidated Balance Sheets contain the following tax related items: December 31,In millions 2017 2016Prepaid and other current assets Refundable income taxes $152 $192Other assets Deferred income tax assets 306 420Long-term refundable income taxes 6 22Accrued expenses Income tax payable 77 48Other liabilities and deferred revenue Income tax payable 281 —Deferred income tax liabilities 391 76A reconciliation of unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015 was as follows: December 31,In millions 2017 2016 2015Balance at beginning of year $59 $135 $174Additions to current year tax positions 11 10 8Additions to prior years' tax positions 9 18 24Reductions to prior years' tax positions (3) — —Reductions for tax positions due to settlements with taxing authorities (35) (104) (71)Balance at end of year $41 $59 $135Included in the December 31, 2017, 2016 and 2015, balances are $32 million, $31 million and $78 million, respectively, related to tax positions that, ifrecognized, would favorably impact the effective tax rate in future periods. Also, we had accrued interest expense related to the unrecognized tax benefits of$4 million, $3 million and $8 million as of December 31, 2017, 2016 and 2015, respectively. We recognize potential accrued interest and penalties related tounrecognized tax benefits in income tax expense. For the years ended December 31, 2017, 2016 and 2015, we recognized $3 million, $2 million and $5million 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 forsuch issues, there is the possibility that the ultimate resolution of such issues could have an adverse effect on our earnings. Conversely, if these issues areresolved 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 routinelysubject to examination by taxing authorities throughout the world, including Australia, Belgium, Brazil, Canada, China, France, India, Mexico, the U.K. andthe 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 2013. TheU.S. examinations related to tax years 2013-2015 concluded during 2017.81Table of ContentsNOTE 3. INVESTMENTS IN EQUITY INVESTEESInvestments and advances related to equity method investees and our ownership percentage was as follows: December 31,In millions Ownership % 2017 2016Beijing Foton Cummins Engine Co., Ltd. 50% $223 $163Komatsu alliances 20-50% 219 197Dongfeng Cummins Engine Company, Ltd. 50% 146 111Cummins-Scania XPI Manufacturing, LLC 50% 87 82Chongqing Cummins Engine Company, Ltd. 50% 84 73Tata Cummins, Ltd. 50% 59 63Other Various 338 257Investments and advances related to equity method investees $1,156 $946We have approximately $614 million in our investment account at December 31, 2017, that represents cumulative undistributed income in our equityinvestees. Dividends received from our unconsolidated equity investees were $219 million, $212 million and $248 million in 2017, 2016 and 2015,respectively.Equity, royalty and interest income from investees, net of applicable taxes, was as follows: Years ended December 31,In millions 2017 2016 2015Distribution entities Komatsu Cummins Chile, Ltda. $30 $34 $31North American distributors — 21 33All other distributors (1) — 3Manufacturing entities Beijing Foton Cummins Engine Co., Ltd. 94 52 62Dongfeng Cummins Engine Company, Ltd. 73 46 51Chongqing Cummins Engine Company, Ltd. 41 38 41Dongfeng Cummins Emission Solutions Co., Ltd. 13 9 6Shanghai Fleetguard Filter Co., Ltd. 12 10 10Cummins Westport, Inc. 9(1) 11 18All other manufacturers 37(1) 39 18Cummins share of net income 308 260 273Royalty and interest income 49 41 42Equity, royalty and interest income from investees $357 $301 $315___________________________________________________________(1) U.S. tax legislation passed in December 2017 decreased our equity earnings at certain equity investees, including a $7 million unfavorable impact to Cummins Westport,Inc. due to the remeasurement of deferred taxes and a $32 million unfavorable impact to "All other manufacturers" due to withholding tax adjustments on foreignearnings. See Note 2, "INCOME TAXES," to our Consolidated Financial Statements for additional information.Distribution EntitiesWe have an extensive worldwide distributor and dealer network through which we sell and distribute our products and services. Generally, our distributorsare divided by geographic region with some of our distributors being wholly-owned by Cummins, some partially-owned and some independently owned. Weconsolidate all wholly-owned distributors and partially-owned distributors where we are the primary beneficiary and account for other partially-owneddistributors 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 adistributor that offers the full range of our products and services to customers and end-users in Chile and Peru.•North American Distributors - During 2016, we acquired the remaining interest in the final unconsolidated North American distributor jointventure.82Table of ContentsIn 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 maybe 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 EntitiesOur manufacturing joint ventures have generally been formed with customers and generally are intended to allow us to increase our market penetration ingeographic regions, reduce capital spending, streamline our supply chain management and develop technologies. Our largest manufacturing joint venturesare based in China and are included in the list below. Our engine manufacturing joint ventures are supplied by our Components segment in the same manneras it supplies our wholly-owned Engine segment and Power Systems segment manufacturing facilities. Our Components segment joint ventures and whollyowned entities provide fuel systems, filtration, aftertreatment systems, turbocharger products and transmissions that are used with our engines as well as somecompetitors' 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 Incomeand 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., acommercial vehicle manufacturer, which consists of two distinct lines of business, a light-duty business and a heavy-duty business. The light-dutybusiness produces our families of ISF 2.8 liter to 4.5 liter high performance light-duty diesel engines in Beijing. These engines are used in light-dutycommercial trucks, pickup trucks, buses, multipurpose and sport utility vehicles with main markets in China, Brazil and Russia. Certain types ofmarine, small construction equipment and industrial applications are also served by these engine families. The heavy-duty business produces ISG10.5 liter and ISG 11.8 liter families of our high performance heavy-duty diesel engines in Beijing. These engines are used in heavy-dutycommercial trucks in China and will be used by Cummins either directly sourced from China and/or locally assembled in other markets. Certaintypes 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 DongfengAutomotive Co. Ltd., a subsidiary of Dongfeng Motor Corporation, one of the largest medium-duty and heavy-duty truck manufacturers in China.DCEC produces Cummins 3.9 to 13-liter mechanical engines, full-electric diesel engines, with a power range from 80 to 680 horsepower, and naturalgas engines.•Chongqing Cummins Engine Company, Ltd. - Chongqing Cummins Engine Company, Ltd. is a joint venture in China with Chongqing Machineryand Electric Co. Ltd. This joint venture manufactures several models of our heavy-duty and high-horsepower diesel engines, primarily serving theindustrial and stationary power markets in China.•Dongfeng Cummins Emission Solutions Co., Ltd. - Dongfeng Cummins Emission Solutions Co. Ltd. is a joint venture in China with DongfengIndustrial Company, a subsidiary of Dongfeng Motor Group Company Limited, a manufacturer of numerous on-highway vehicles. This joint ventureproduces, purchases and sells advanced diesel engine aftertreatment solutions to support the full line of Dongfeng's commercial vehicles.•Shanghai Fleetguard Filter Co., Ltd. - Shanghai Fleetguard Filter Co. Ltd. is a joint venture in China with Dongfeng Motor Co., Ltd., amanufacturer of numerous on-highway vehicles. This joint venture produces and sells filters and filter parts to support the full line of Dongfeng'scommercial vehicles.•Cummins Westport, Inc. - Cummins Westport Inc. is a joint venture in Canada with Westport Innovations Inc. to market and sell automotive spark-ignited natural gas engines worldwide and to participate in joint technology projects on low-emission technologies.83Table of ContentsEquity Investee Financial SummarySummary financial information for our equity investees was as follows: For the years ended and at December 31,In millions 2017 2016 2015Net sales $7,050 $5,654 $5,946Gross margin 1,422 1,182 1,265Net income 680 499 521 Cummins share of net income $308 $260 $273Royalty and interest income 49 41 42Total equity, royalty and interest from investees $357 $301 $315 Current assets $3,416 $2,602 Non-current assets 1,379 1,377 Current liabilities (2,567) (1,938) Non-current liabilities (237) (232) Net assets $1,991 $1,809 Cummins share of net assets $1,116 $927 Sale of Equity InvesteeIn 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. Wereceived cash of $58 million with the remaining balance receivable in future periods.NOTE 4. MARKETABLE SECURITIESA summary of marketable securities, all of which are classified as current, was as follows: December 31, 2017 2016In millions Cost Gross unrealizedgains/(losses) Estimatedfair value Cost Gross unrealizedgains/(losses) Estimatedfair valueAvailable-for-sale (1) Debt mutual funds $170 $— $170 $132 $— $132Bank debentures — — — 114 — 114Equity mutual funds 12 3 15 12 — 12Certificates of deposit 12 — 12 — — —Government debt securities 1 — 1 2 — 2Total marketable securities $195 $3 $198 $260 $— $260______________________________________________________(1) All marketable securities are classified as Level 2 securities. The fair value of Level 2 securities is estimated using actively quoted prices for similar instruments from brokers andobservable 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 3securities and there were no transfers between Level 2 or 3 during 2017 or 2016. A description of the valuation techniques and inputs used for our Level 2 fair value measures was as follows:•Debt mutual funds— The fair value measure for the vast majority of these investments is the daily net asset value published on a regulatedgovernmental website. Daily quoted prices are available from the issuing brokerage and are used on a test basis to corroborate this Level 2 input.•Bank debentures and Certificates of deposit— These investments provide us with a contractual rate of return and generally range in maturity fromthree months to five years. The counterparties to these investments are reputable financial institutions with investment grade credit ratings. Sincethese instruments are not tradable and must be settled directly by us with the respective financial institution, our fair value measure is the financialinstitutions’ month-end statement.84Table of Contents•Equity mutual funds— The fair value measure for these investments is the net asset value published by the issuing brokerage. Daily quoted pricesare 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 areinfrequently 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 available-for-sale (AFS) securities were as follows: Years ended December 31,In millions 2017 2016 2015Proceeds from sales and maturities of marketable securities $266 $306 $270Gross realized gains from the sale of available-for-sale securities(1) — — 1____________________________________________________(1) Gross realized losses from the sale of available-for-sale securities were immaterial.At December 31, 2017, 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 (in millions)1 year or less $1821 - 5 years 1Total $183NOTE 5. INVENTORIESInventories are stated at the lower of cost or market. Inventories included the following: December 31,In millions2017 2016Finished products$2,078 $1,779Work-in-process and raw materials1,216 1,005Inventories at FIFO cost3,294 2,784Excess of FIFO over LIFO(128) (109)Total inventories$3,166 $2,675NOTE 6. PROPERTY, PLANT AND EQUIPMENTDetails of our property, plant and equipment balance were as follows: December 31,In millions2017 2016Land and buildings$2,332 $2,075Machinery, equipment and fixtures5,285 4,898Construction in process441 662Property, plant and equipment, gross8,058 7,635Less: Accumulated depreciation(4,131) (3,835)Property, plant and equipment, net$3,927 $3,80085Table of ContentsNOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETSThe following table summarizes the changes in the carrying amount of goodwill for the years ended December 31, 2017 and 2016:In millionsComponents Distribution Power Systems Engine Total Balance at December 31, 2015$391 $75 $10 $6 $482 Acquisitions— 4 — — 4 Translation and other(5) — (1) — (6) Balance at December 31, 2016386 79 9 6 480 Acquisitions544(1) — — — 544 Translation and other10 — 1 — 11 Balance at December 31, 2017$940 $79 $10 $6 $1,035 Goodwill not yet allocated to segments 47(2) $1,082 ____________________________________________________(1) Acquisition goodwill relates to Eaton Cummins Automated Transmission Technologies. See Note 18, "ACQUISITIONS," for additional information.(2) Goodwill associated with the Brammo Inc. acquisition was presented as a reconciling item as it had not yet been assigned to a reportable segment at December 31, 2017. EffectiveJanuary 1, 2018, Brammo Inc. will be assigned to a new reportable segment called Electrified Power. See Note 18, "ACQUISITIONS," for additional information.Intangible assets that have finite useful lives are amortized over their estimated useful lives. The following table summarizes our other intangible assets withfinite useful lives that are subject to amortization: December 31,In millions2017 2016Software$718 $617Less: Accumulated amortization(386) (330)Software, net332 287Trademarks, patents, customer relationships and other786 164Less: Accumulated amortization(145) (119)Trademarks, patents, customer relationships and other, net641 45Total other intangible assets, net$973 $332Amortization expense for software and other intangibles totaled $112 million, $92 million and $90 million for the years ended December 31, 2017, 2016 and2015, respectively. The projected amortization expense of our intangible assets, assuming no further acquisitions or dispositions, is as follows:In millions2018 2019 2020 2021 2022Projected amortization expense$130 $116 $101 $76 $5586Table of ContentsNOTE 8. PRODUCT WARRANTY LIABILITYA tabular reconciliation of the product warranty liability, including the deferred revenue related to our extended warranty coverage and accrued recallprograms was as follows: December 31,In millions 2017 2016 2015Balance, beginning of year $1,414 $1,404 $1,283Provision for warranties issued 557 334 391Deferred revenue on extended warranty contracts sold 240 231 290Payments (398) (385) (389)Amortization of deferred revenue on extended warranty contracts (219) (201) (179)Changes in estimates for pre-existing warranties 85 44 20Foreign currency translation 8 (13) (12)Balance, end of year $1,687 $1,414 $1,404Warranty related deferred revenues and the long-term portion of the warranty liabilities on our Consolidated Balance Sheets were as follows: December 31, In millions 2017 2016 Balance Sheet LocationDeferred revenue related to extended coverage programs Current portion $231 $218 Current portion of deferred revenueLong-term portion 536 527 Other liabilities and deferred revenueTotal $767 $745 Long-term portion of warranty liability $466 $336 Other liabilities and deferred revenueNOTE 9. DEBTLoans Payable and Commercial PaperLoans payable at December 31, 2017 and 2016 were $57 million and $41 million, respectively, and consisted primarily of notes payable to financialinstitutions. The weighted-average interest rate for notes payable, bank overdrafts and current maturities of long-term debt at December 31 was as follows: 2017 2016 2015Weighted-average interest rate 3.01% 4.20% 3.65%87Table of ContentsWe can issue up to $1.75 billion of unsecured short-term promissory notes ("commercial paper") pursuant to our board authorized commercial paperprograms. The programs facilitate the private placement of unsecured short-term debt through third party brokers. We intend to use the net proceeds from thecommercial paper borrowings for general corporate purposes. We had $298 million in outstanding borrowings under our commercial paper programs atDecember 31, 2017, with a weighted-average interest rate of 1.56 percent.Revolving Credit FacilitiesOn November 13, 2015, we entered into an amended and restated five-year revolving credit agreement with a syndicate of lenders, which provides us with a$1.75 billion senior unsecured revolving credit facility and expires on November 13, 2020. Amounts payable under our revolving credit facility will rank prorata with all of our unsecured, unsubordinated indebtedness. Up to $300 million under our credit facility is available for swingline loans. Advances under thefacility 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 seniorunsecured long-term debt. Based on our current long-term debt ratings, the applicable margin on LIBOR rate loans was 0.75 percent per annum atDecember 31, 2017. Advances under the facility may be prepaid without premium or penalty, subject to customary breakage costs.On September 5, 2017, we entered into a 364-day credit facility that allows us to borrow up to $1 billion of additional unsecured funds at any time throughSeptember 2018.These credit agreements include various covenants, including, among others, maintaining a leverage ratio of no more than 3.5 to 1.0. At December 31, 2017,we were in compliance with the covenants.There were no outstanding borrowings under these facilities at December 31, 2017. We intend to maintain credit facilities of a similar aggregate amount byrenewing or replacing these facilities before expiration. Revolving credit facilities are maintained primarily to provide backup liquidity for our commercialpaper borrowings, letters of credit and general corporate purposes. At December 31, 2017, we had $298 million of commercial paper outstanding, whicheffectively reduced the $1.75 billion available capacity under our five-year revolving credit facility to $1.45 billion. At December 31, 2017, we also had $1billion available under our 364-day facility.At December 31, 2017, we also had $240 million available for borrowings under our international and other domestic credit facilities. Long-term Debt December 31,In millions2017 2016Long-term debt Senior notes, 3.65%, due 2023$500 $500Debentures, 6.75%, due 202758 58Debentures, 7.125%, due 2028250 250Senior notes, 4.875%, due 2043500 500Debentures, 5.65%, due 2098 (effective interest rate 7.48%)165 165Other debt76 51Unamortized discount(54) (56)Fair value adjustments due to hedge on indebtedness35 47Capital leases121 88Total long-term debt1,651 1,603Less: Current maturities of long-term debt63 35Long-term debt$1,588 $1,568Principal payments required on long-term debt during the next five years are as follows:In millions2018 2019 2020 2021 2022Principal payments$63 $50 $12 $6 $688Table of ContentsInterest on the $500 million aggregate principal amount of 3.65% senior unsecured notes due in 2023 and the $500 million aggregate principal amount of4.875% senior unsecured notes due in 2043 pay interest semi-annually on April 1 and October 1 of each year.Interest on the 6.75% debentures is payable on February 15 and August 15 of each year.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 areunsecured 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 tomaturity 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 upondefault, among other things, limit our ability to incur additional debt or issue preferred stock, enter into sale-leaseback transactions, sell or create liens on ourassets, 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, 2017, we were in compliance with all of the covenants under our borrowing agreements.Shelf RegistrationAs a well-known seasoned issuer, we filed an automatic shelf registration for an undetermined amount of debt and equity securities with the SEC on February16, 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.InterestFor the years ended December 31, 2017, 2016 and 2015, total interest incurred was $85 million, $75 million and $68 million, respectively, and interestcapitalized was $4 million, $6 million and $3 million, respectively.Interest Rate RiskWe are exposed to market risk from fluctuations in interest rates. We manage our exposure to interest rate fluctuations through the use of interest rateswaps. The objective of the swaps is to more effectively balance our borrowing costs and interest rate risk.We have 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 afloating 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 weredesignated, 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 losson the hedged item attributable to the hedged risk, are recognized in current income as “Interest expense.” The net swap settlements that accrue each periodare also reported in interest expense.The following table summarizes these gains and losses for the years presented below: Years ended December 31,In millions 2017 2016 2015Income StatementClassification Gain/(Loss) onSwaps Gain/(Loss) onBorrowings Gain/(Loss) onSwaps Gain/(Loss) onBorrowings Gain/(Loss) onSwaps Gain/(Loss) onBorrowingsInterest expense (1) $(7) $8 $(8) $12 $6 $(2)___________________________________________(1) The difference between the gain/(loss) on swaps and borrowings represents hedge ineffectiveness.Fair Value of DebtBased on borrowing rates currently available to us for bank loans with similar terms and average maturities, considering our risk premium, the fair values andcarrying values of total debt, including current maturities, were as follows: December 31,In millions 2017 2016Fair values of total debt (1) $2,301 $2,077Carrying values of total debt 2,006 1,856___________________________________________(1) The fair value of debt is derived from Level 2 inputs.89Table of ContentsNOTE 10. PENSION AND OTHER POSTRETIREMENT BENEFITSPension PlansWe sponsor several contributory and noncontributory pension plans covering substantially all employees. Generally, hourly employee pension benefits areearned based on years of service and compensation during active employment while future benefits for salaried employees are determined using a cashbalance formula. However, the level of benefits and terms of vesting may vary among plans. Pension plan assets are administered by trustees and areprincipally invested in fixed income securities and equity securities. It is our policy to make contributions to our various qualified plans in accordance withstatutory and contractual funding requirements and any additional contributions we determine are appropriate.Obligations, Assets and Funded StatusBenefit obligation balances presented below reflect the projected benefit obligation (PBO) for our pension plans. The changes in the benefit obligations, thevarious plan assets, the funded status of the plans and the amounts recognized in our Consolidated Balance Sheets for our significant pension plans atDecember 31 were as follows: Qualified and Non-Qualified Pension Plans U.S. Plans U.K. PlansIn millions 2017 2016 2017 2016Change in benefit obligation Benefit obligation at the beginning of the year $2,661 $2,533 $1,451 $1,390Service cost 107 90 26 21Interest cost 106 109 40 50Actuarial loss 61 111 53 316Benefits paid from fund (155) (175) (54) (55)Benefits paid directly by employer (15) (16) — —Plan amendments — 9 — —Exchange rate changes — — 146 (271)Benefit obligation at end of year $2,765 $2,661 $1,662 $1,451Change in plan assets Fair value of plan assets at beginning of year $2,751 $2,636 $1,753 $1,712Actual return on plan assets 351 200 78 402Employer contributions 219 90 9 28Benefits paid (155) (175) (54) (55)Exchange rate changes — — 174 (334)Fair value of plan assets at end of year $3,166 $2,751 $1,960 $1,753Funded status (including underfunded and nonfunded plans) at end of year $401 $90 $298 $302Amounts recognized in consolidated balance sheets Pension assets - long-term $745 $429 $298 $302Accrued compensation, benefits and retirement costs - current liabilities (14) (13) — —Pensions - long-term liabilities (330) (326) — —Net amount recognized $401 $90 $298 $302Amounts recognized in accumulated other comprehensive loss Net actuarial loss $649 $770 $207 $172Prior service cost 8 9 — —Net amount recognized $657 $779 $207 $172In addition to the pension plans in the above table, we also maintain less significant defined benefit pension plans primarily in 14 other countries outside ofthe U.S. and the U.K. that comprise approximately 3 percent and 4 percent of our pension plan assets and obligations, respectively at December 31, 2017.These plans are reflected in "Other liabilities and deferred revenue" on our Consolidated Balance Sheets. In 2017, we made $11 million of contributions tothese plans.90Table of ContentsThe following table presents information regarding total accumulated benefit obligation, PBO's and underfunded pension plans that are included in thepreceding table: Qualified and Non-Qualified Pension Plans U.S. Plans U.K. PlansIn millions 2017 2016 2017 2016Total accumulated benefit obligation $2,745 $2,625 $1,569 $1,366Plans with accumulated benefit obligation in excess of plan assets Accumulated benefit obligation 323 304 — —Plans with projected benefit obligation in excess of plan assets Projected benefit obligation 344 339 — —Components of Net Periodic Pension CostThe following table presents the net periodic pension cost under our plans for the years ended December 31: Qualified and Non-Qualified Pension Plans U.S. Plans U.K. PlansIn millions 2017 2016 2015 2017 2016 2015Service cost $107 $90 $80 $26 $21 $27Interest cost 106 109 102 40 50 56Expected return on plan assets (204) (201) (189) (70) (71) (91)Amortization of prior service cost — — (1) — — —Recognized net actuarial loss 37 29 45 40 15 34Net periodic pension cost $46 $27 $37 $36 $15 $26Other changes in benefit obligations and plan assets recognized in other comprehensive income for the years ended December 31 were as follows:In millions 2017 2016 2015Amortization of prior service credit $— $— $1Recognized net actuarial loss (77) (44) (79)Incurred actuarial (gain) loss (40) 107 105Foreign exchange translation adjustments 30 (28) (7)Total recognized in other comprehensive income $(87) $35 $20 Total recognized in net periodic pension cost and other comprehensive income $(5) $77 $83The amount in accumulated other comprehensive loss expected to be recognized as a component of net periodic pension cost during the next fiscal year is anet actuarial loss of $62 million.AssumptionsThe table below presents various assumptions used in determining the PBO for each year and reflects weighted-average percentages for the various plans asfollows: Qualified and Non-Qualified Pension Plans U.S. Plans U.K. Plans 2017 2016 2017 2016Discount rate 3.66% 4.12% 2.55% 2.70%Compensation increase rate 2.99% 4.87% 3.75% 3.75%91Table of ContentsThe table below presents various assumptions used in determining the net periodic pension cost and reflects weighted-average percentages for the variousplans as follows: Qualified and Non-Qualified Pension Plans U.S. Plans U.K. Plans 2017 2016 2015 2017 2016 2015Discount rate 4.12% 4.47% 4.07% 2.70% 3.95% 3.80%Expected return on plan assets 7.25% 7.50% 7.50% 4.50% 4.70% 5.80%Compensation increase rate 4.87% 4.87% 4.88% 3.75% 3.75% 4.25%Plan AssetsOur 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 tothis long-term strategy and do not attempt to time the market given empirical evidence that asset allocation is more critical than individual asset orinvestment manager selection. Rebalancing of the assets has and continues to occur. The rebalancing is critical to having the proper weighting of assets toachieve the expected total portfolio returns. We believe that our portfolio is highly diversified and does not have any significant exposure to concentrationrisk. The plan assets for our defined benefit pension plans do not include any of our common stock.U.S. Plan AssetsFor the U.S. qualified pension plans, our assumption for the expected return on assets was 7.25 percent in 2017. Projected returns are based primarily onbroad, publicly traded equity and fixed income indices and forward-looking estimates of active portfolio and investment management. We expect additionalpositive returns from this active investment management. Based on the historical returns and forward-looking return expectations in a rising interest rateenvironment, we have elected to reduce our assumption to 6.50 percent in 2018.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 Target RangeU.S. equities 10.0% +2.0/-8.0%Non-U.S. equities 2.0% +3.0/-2.0%Global equities 8.0% +1.0/-5.0%Total equities 20.0% Real estate 6.0% +4.0/-6.0%Private equity/venture capital 4.0% +6.0/-4.0%Opportunistic credit 2.0% +8.0/-2.0%Fixed income 68.0% +/-5.0%Total 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. Thiscomponent 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 68 percent of plan assets invested in fixed income securities, our BenefitsPolicy Committee (BPC) permits the fixed income managers, other managers or the custodian/trustee to utilize derivative securities, as part of a liabilitydriven investment strategy to further reduce the plan's risk of declining interest rates. However, all managers hired to manage assets for the trust are prohibitedfrom using leverage unless specifically discussed with the BPC and approved in their guidelines.U.K. Plan AssetsFor the U.K. qualified pension plans, our assumption for the expected return on assets was 4.5 percent in 2017. The methodology used to determine the rate ofreturn 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 assetallocations. 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, realestate and liability matching assets such as group annuity insurance contracts and duration matched bonds. 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:92Table of ContentsAsset Class TargetGlobal equities 23.0%Real estate/private markets 5.0%Re-insurance 8.0%Corporate credit instruments 7.5%Fixed income 56.5%Total 100.0%As part of our strategy in the U.K. we have not prohibited the use of any financial instrument, including derivatives. As in the U.S. plan, derivatives may beused to better match liability duration and are not used in a speculative way. The 56.5 percent fixed income component is structured in a way that coversapproximately 79 percent of the plan's exposure to changes in its discount rate. Based on the above discussion, we have elected an assumption of 4.00percent in 2018.Fair Value of U.S. Plan AssetsThe fair values of U.S. pension plan assets by asset category were as follows: Fair Value Measurements at December 31, 2017In millions Quoted prices in active markets for identical assets(Level 1) Significant other observable inputs(Level 2) Significant unobservable inputs(Level 3) TotalEquities U.S. $102 $— $— $102Non-U.S. 56 — — 56Fixed income Government debt — 691 — 691Corporate debt U.S. — 590 — 590Non-U.S. — 73 — 73Asset/mortgaged backed securities — 78 — 78Net cash equivalents(1) 50 25 — 75Derivative instruments(2) — 3 — 3Private equity and real estate(3) — — 246 246Net plan assets subject to leveling $208 $1,460 $246 $1,914Pending trade/purchases/sales (96)Accruals(4) 12Investments measured at net asset value 1,336Net plan assets $3,16693Table of Contents Fair Value Measurements at December 31, 2016In millions Quoted prices in active markets for identical assets(Level 1) Significant other observable inputs(Level 2) Significant unobservable inputs(Level 3) TotalEquities U.S. $145 $— $— $145Non-U.S. 125 — — 125Fixed income Government debt — 570 — 570Corporate debt U.S. — 497 — 497Non-U.S. — 84 — 84Asset/mortgaged backed securities — 58 — 58Net cash equivalents (1) 18 20 — 38Derivative instruments (2) — 9 — 9Private equity and real estate (3) — — 212 212Net plan assets subject to leveling $288 $1,238 $212 $1,738Pending trade/purchases/sales (83)Accruals (4) 12Investments measured at net asset value 1,084Net plan assets $2,751____________________________________________________(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 as determined byapplicable investment managers or by audited financial statements of the funds.(4)Accruals include interest or dividends that were not settled at December 31.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 absenceof readily available market prices. The fair value of each such investment category was as follows:•U.S. and Non-U.S. Equities ($428 million and $511 million at December 31, 2017 and 2016, respectively) - These commingled funds haveobservable NAVs provided to investors and provide for liquidity either immediately or within a couple of days.•Government Debt ($347 million and $178 million at December 31, 2017 and 2016, respectively) - These commingled funds have observable NAVsprovided to investors and provide for liquidity either immediately or within a couple of days.•U.S. and Non-U.S. Corporate Debt ($321 million and $265 million at December 31, 2017 and 2016, respectively) - These commingled funds haveobservable NAVs provided to investors and provide for liquidity either immediately or within a couple of days.•Real Estate ($137 million and $129 million at December 31, 2017 and 2016, respectively) - This asset type represents different types of real estateincluding 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 ($103 million and $1 million at December 31, 2017 and 2016, respectively) - This asset type representsinvestments in fixed- and floating-rate loans. These funds are valued using NAVs and allow quarterly or more frequent redemptions.94Table of ContentsThe reconciliation of Level 3 assets was as follows: Fair Value Measurements Using Significant Unobservable Inputs (Level 3)In millions Private Equity Real Estate TotalBalance at December 31, 2015 $143 $60 $203Actual return on plan assets Unrealized gains on assets still held at the reporting date 6 6 12Purchases, sales and settlements, net (1) (2) (3)Balance at December 31, 2016 148 64 212Actual return on plan assets Unrealized gains on assets still held at the reporting date 24 5 29Purchases, sales and settlements, net 8 (3) 5Balance at December 31, 2017 $180 $66 $246Fair Value of U.K. Plan AssetsIn July 2012, the U.K. pension plan purchased an insurance contract that will guarantee payment of specified pension liabilities. The contract defers paymentfor 10 years and is included in the table below in Level 3 for years ended December 31, 2017 and 2016 at a value of $477 million and $439 million,respectively.The fair values of U.K. pension plan assets by asset category were as follows: Fair Value Measurements at December 31, 2017In millions Quoted prices in active markets for identical assets(Level 1) Significant other observable inputs(Level 2) Significant unobservable inputs(Level 3) TotalEquities U.S. $— $63 $— $63Non-U.S. — 91 — 91Fixed income Net cash equivalents (1) 29 — — 29Private equity, real estate and insurance (2) — — 671 671Net plan assets subject to leveling $29 $154 $671 $854Investments measured at net asset value 1,106Net plan assets $1,960 Fair Value Measurements at December 31, 2016In millions Quoted prices in active markets for identical assets(Level 1) Significant other observable inputs(Level 2) Significant unobservable inputs(Level 3) TotalEquities U.S. $— $174 $— $174Non-U.S. — 193 — 193Fixed income Net cash equivalents (1) 24 — — 24Private equity, real estate and insurance (2) — — 613 613Net plan assets subject to leveling $24 $367 $613 $1,004Investments measured at net asset value 749Net plan assets $1,753_____________________________________________________(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 byapplicable investment managers or by audited financial statement of the funds.95Table of ContentsCertain 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 readilyavailable market prices. The fair value of each such investment category was as follows:•U.S. and Non-U.S. Corporate Debt ($822 million and $655 million at December 31, 2017 and 2016, respectively) - These commingled funds haveobservable NAVs provided to investors and provide for liquidity either immediately or within a couple of days.•U.S. and Non-U.S. Equities ($144 million and zero dollars at December 31, 2017 and 2016, respectively) - These commingled funds have observableNAVs provided to investors and provide for liquidity either immediately or within a couple of days.•Re-insurance ($86 million and $56 million at December 31, 2017 and 2016, respectively) - This commingled fund has a NAV that is determined ona monthly basis and the investment may be sold at that value.•Managed Futures Funds ($54 million and $38 million at December 31, 2017 and 2016, respectively) - These commingled funds invest incommodities, fixed income and equity securities. They have observable NAVs provided to investors and provide for liquidity either immediately orwithin a couple of days.The reconciliation of Level 3 assets was as follows: Fair Value MeasurementsUsing Significant Unobservable Inputs (Level 3)In millions Insurance Real Estate Private Equity TotalBalance at December 31, 2015 $445 $57 $99 $601Actual return on plan assets Unrealized (losses) gains on assets still held at the reporting date (6) (7) 15 2Purchases, sales and settlements, net — 7 3 10Balance at December 31, 2016 439 57 117 613Actual return on plan assets Unrealized gains on assets still held at the reporting date 38 10 28 76Purchases, sales and settlements, net — (8) (10) (18)Balance at December 31, 2017 $477 $59 $135 $671Level 3 AssetsThe investments in an insurance contract, venture capital, private equity, opportunistic credit and real estate funds, for which quoted market prices are notavailable, are valued at their estimated fair value as determined by applicable investment managers or by quarterly financial statements of the funds. Thesefinancial statements are audited at least annually. In conjunction with our investment consultant, we monitor the fair value of the insurance contract asperiodically 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 peryear by an independent professional real estate valuation firm. Fair value generally represents the fund's proportionate share of the net assets of theinvestment partnerships as reported by the general partners of the underlying partnerships. Some securities with no readily available market are initiallyvalued at cost, utilizing independent professional valuation firms as well as market comparisons with subsequent adjustments to values which reflect eitherthe basis of meaningful third-party transactions in the private market or the fair value deemed appropriate by the general partners of the underlyinginvestment partnerships. In such instances, consideration is also given to the financial condition and operating results of the issuer, the amount that theinvestment partnerships can reasonably expect to realize upon the sale of the securities and any other factors deemed relevant. The estimated fair values aresubject to uncertainty and therefore may differ from the values that would have been used had a ready market for such investments existed and suchdifferences could be material.96Table of ContentsEstimated Future Contributions and Benefit PaymentsWe plan to contribute approximately $38 million to our defined benefit pension plans in 2018. The table below presents expected future benefit paymentsunder our pension plans: Qualified and Non-Qualified Pension PlansIn millions 2018 2019 2020 2021 2022 2023 - 2027Expected benefit payments $239 $237 $242 $248 $253 $1,320Other Pension PlansWe also sponsor defined contribution plans for certain hourly and salaried employees. Our contributions to these plans were $84 million, $68 million and$74 million for the years ended December 31, 2017, 2016 and 2015.Other Postretirement BenefitsOur other postretirement benefit plans provide various health care and life insurance benefits to eligible employees, who retire and satisfy certain age andservice requirements, and their dependents. The plans are contributory and contain cost-sharing features such as caps, deductibles, coinsurance and spousalcontributions. Employer contributions are limited by formulas in each plan. Retiree contributions for health care benefits are adjusted annually, and wereserve 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 benefitsand expenses for these plans as claims and premiums are incurred.Obligations and Funded StatusBenefit 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 significantother postretirement benefit plans were as follows:In millions 2017 2016Change in benefit obligation Benefit obligation at the beginning of the year $364 $385Interest cost 14 16Plan participants' contributions 24 14Actuarial (gain) loss (35) 9Benefits paid directly by employer (49) (60)Benefit obligation at end of year $318 $364 Funded status at end of year $(318) $(364) Amounts recognized in consolidated balance sheets Accrued compensation, benefits and retirement costs - current liabilities $(29) $(35)Postretirement benefits other than pensions-long-term liabilities (289) (329)Net amount recognized $(318) $(364) Amounts recognized in accumulated other comprehensive loss: Net actuarial loss $27 $69Prior service credit (4) (5)Net amount recognized $23 $64In 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 6 percent and 5 percent of our postretirement obligations at December 31, 2017 and 2016, respectively. These plans arereflected in "Other liabilities and deferred revenue" in our Consolidated Balance Sheets.97Table of ContentsComponents of Net Periodic Other Postretirement Benefits CostThe following table presents the net periodic other postretirement benefits cost under our plans: Years ended December 31,In millions 2017 2016 2015Interest cost $14 $16 $15Recognized net actuarial loss 6 5 5Net periodic other postretirement benefit cost $20 $21 $20Other changes in benefit obligations recognized in other comprehensive income for the years ended December 31 were as follows: Years ended December 31,In millions 2017 2016 2015Recognized net actuarial loss $(6) $(6) $(5)Incurred actuarial (gain) loss (35) 9 6Total recognized in other comprehensive income $(41) $3 $1 Total recognized in net periodic other postretirement benefit cost and other comprehensive income $(21) $24 $21The amount in accumulated other comprehensive loss expected to be recognized as a component of net periodic other postretirement benefit cost during thenext fiscal year is approximately zero.AssumptionsThe table below presents assumptions used in determining the other postretirement benefit obligation for each year and reflects weighted-averagepercentages for our other postretirement plans as follows: 2017 2016Discount rate 3.55% 4.00%The table below presents assumptions used in determining the net periodic other postretirement benefits cost and reflects weighted-average percentages forthe various plans as follows: 2017 2016 2015Discount rate 4.00% 4.35% 3.90%Our consolidated other postretirement benefit obligation is determined by application of the terms of health care and life insurance plans, together withrelevant actuarial assumptions and health care cost trend rates. For measurement purposes, an 8.00 percent annual rate of increase in the per capita cost ofcovered health care benefits was assumed in 2017. The rate is assumed to decrease on a linear basis to 5.00 percent through 2026 and remain at that levelthereafter. An increase in the health care cost trends of 1 percent would increase our APBO by $16 million at December 31, 2017 and the net periodic otherpostretirement benefit cost for 2018 by $1 million. A decrease in the health care cost trends of 1 percent would decrease our APBO by $14 million atDecember 31, 2017 and the net periodic other postretirement benefit cost for 2018 by $1 million.Estimated Benefit PaymentsThe table below presents expected benefit payments under our other postretirement benefit plans:In millions 2018 2019 2020 2021 2022 2023 - 2027Expected benefit payments $29 $28 $27 $26 $25 $10898Table of ContentsNOTE 11. OTHER LIABILITIES AND DEFERRED REVENUEOther liabilities and deferred revenue included the following: December 31,In millions2017 2016Deferred revenue$604 $589Accrued warranty466 336Deferred income taxes391 76Income tax payable(1)281 —Accrued compensation151 151Other long-term liabilities134 137Other liabilities and deferred revenue$2,027 $1,289____________________________________________________(1) Long-term income taxes payable are the result of Tax Legislation and relate to the non-current portion ofthe one-time transition tax on accumulated foreign earnings. See Note 2, "INCOME TAXES," to ourConsolidated Financial Statements for additional information.NOTE 12. COMMITMENTS AND CONTINGENCIESWe are subject to numerous lawsuits and claims arising out of the ordinary course of our business, including actions related to product liability; personalinjury; the use and performance of our products; warranty matters; product recalls; patent, trademark or other intellectual property infringement; contractualliability; the conduct of our business; tax reporting in foreign jurisdictions; distributor termination; workplace safety; and environmental matters. We alsohave been identified as a potentially responsible party at multiple waste disposal sites under U.S. federal and related state environmental statutes andregulations and may have joint and several liability for any investigation and remediation costs incurred with respect to such sites. We have denied liabilitywith respect to many of these lawsuits, claims and proceedings and are vigorously defending such lawsuits, claims and proceedings. We carry various formsof commercial, property and casualty, product liability and other forms of insurance; however, such insurance may not be applicable or adequate to cover thecosts associated with a judgment against us with respect to these lawsuits, claims and proceedings. We do not believe that these lawsuits are materialindividually or in the aggregate. While we believe we have also established adequate accruals pursuant to GAAP for our expected future liability with respectto pending lawsuits, claims and proceedings, where the nature and extent of any such liability can be reasonably estimated based upon then presentlyavailable information, there can be no assurance that the final resolution of any existing or future lawsuits, claims or proceedings will not have a materialadverse 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 customslaws. While we believe we comply with such laws, they are complex, subject to varying interpretations and we are often engaged in litigation regarding theapplication of these laws to particular circumstances.Loss ContingenciesThird Party AftertreatmentEngine 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 theEPA and CARB in order to ensure ongoing compliance with these emission standards. We are the holder of this emission certificate for our engines, includingengines installed in certain vehicles with one customer for which we did not also manufacture or sell the emission aftertreatment system. During 2015, aquality 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 quarterof 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 thetechnical issue purportedly causing some vehicles to fail the in-use testing.As the certificate holder, we recorded a charge of $60 million in 2015 for the expected cost of the proposed voluntary Campaign. The Campaign design wasfinalized with our original equipment manufacturer (OEM) customer, reviewed with the EPA and submitted for final approval in 2016. We concluded basedupon additional in-use emission testing performed in 2016 that the Campaign should be expanded to include a larger population of vehicles manufacturedby this one OEM. We recorded additional charges of $138 million in 2016 to reflect the estimated cost of our overall participation in the Campaign.99Table of ContentsIn late 2016, litigation arose with our OEM customer regarding cost allocation for this Campaign. In January 2018, a settlement was reached with ourcustomer to fully resolve this matter, which resulted in an incremental charge of $5 million recorded in the fourth quarter of 2017.These charges are reflected in a separate line item on our Consolidated Statements of Income.Engine SystemDuring 2017, the CARB and U.S. EPA selected certain of our pre-2013 model year engine systems for additional emissions testing. Some of these enginesystems failed CARB and EPA's tests as a result of degradation of an aftertreatment component. We have not been issued an official notice from the CARB orEPA regarding these particular engine systems. We are working with the agencies and will meet with them beginning in the first quarter of 2018, to develop aresolution of these matters. We are developing and testing a variety of solutions to address the technical issues, which could include a combination ofcalibration changes, service practices and hardware changes. We recorded a charge of $29 million to "cost of sales" in our Consolidated Statements of Incomein the third quarter of 2017 for the expected cost of field campaigns to repair some of these engine systems.In addition, we continue to evaluate other engine systems for model years 2010 through 2015 that could potentially be subject to similar aftertreatmentcomponent degradation issues. At the close of 2017, we had not yet determined the impact to other model years or engine systems or the percentage of theengine system populations that could be affected.Since there are many unresolved variables with respect to these degradation issues, we are not yet able to estimate the financial impact of these matters. It ispossible that they could have a material impact on our results of operations in the periods in which these degradation issues are resolved and a solution isdetermined.We do not currently expect any fines or penalties from the EPA or CARB related to this matter.Guarantees and CommitmentsPeriodically, we enter into guarantee arrangements, including guarantees of non-U.S. distributor financings, residual value guarantees on equipment underoperating leases and other miscellaneous guarantees of joint ventures or third-party obligations. At December 31, 2017, the maximum potential loss relatedto these guarantees was $51 million.We have arrangements with certain suppliers that require us to purchase minimum volumes or be subject to monetary penalties. At December 31, 2017, if wewere to stop purchasing from each of these suppliers, the aggregate amount of the penalty would be approximately $84 million, of which $23 million relatesto a contract with a components supplier that extends to 2018 and $19 million relates to a contract with a power systems supplier that extends to 2019. Mostof 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 atcontractually stated prices for various periods, not to exceed two years. At December 31, 2017, the total commitments under these contracts were $17 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 lossesrelated to nonperformance. These performance bonds and other performance-related guarantees were $102 million at December 31, 2017.Periodically, we enter into various contractual arrangements where we agree to indemnify a third-party against certain types of losses. Common types ofindemnities include:•product liability and license, patent or trademark indemnifications;•asset sale agreements where we agree to indemnify the purchaser against future environmental exposures related to the asset sold; and•any contractual agreement where we agree to indemnify the 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 theindemnifications are not related to specified known liabilities and due to their uncertain nature, we are unable to estimate the maximum amount of thepotential loss associated with these indemnifications.100Table of ContentsLeasesWe lease certain manufacturing equipment, facilities, warehouses, office space and equipment, aircraft and automobiles for varying periods under leaseagreements. 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: Years ended December 31,In millions 2017 2016 2015Rent expense $215 $210 $205The following is a summary of the leased property under capital leases by major classes: December 31,In millions 2017 2016Building $158 $113Equipment 94 109Land 16 15Less: Accumulated depreciation (137) (133)Total $131 $104Following is a summary of the future minimum lease payments due under capital and operating leases with terms of more than one year at December 31,2017, together with the net present value of the minimum payments due under capital leases:In millions Capital Leases Operating Leases2018 $30 $1402019 26 1082020 14 802021 9 602022 9 44After 2022 75 70Total minimum lease payments $163 $502Interest (42) Present value of net minimum lease payments $121 NOTE 13. SHAREHOLDERS' EQUITYPreferred and Preference StockWe are authorized to issue one million shares each of zero par value preferred and preference stock with preferred shares being senior to preference shares. Wecan determine the number of shares of each series, and the rights, preferences and limitations of each series. At December 31, 2017, there was no preferred orpreference stock outstanding.101Table of ContentsCommon StockChanges in shares of common stock, treasury stock and common stock held in trust for employee benefit plans were as follows:In millions CommonStock TreasuryStock Common StockHeld in TrustBalance at December 31, 2014 222.3 40.1 1.1Shares acquired — 7.2 —Shares issued 0.1 (0.1) (0.2)Balance at December 31, 2015 222.4 47.2 0.9Shares acquired — 7.3 —Shares issued — (0.3) (0.2)Balance at December 31, 2016 222.4 54.2 0.7Shares acquired — 2.9 —Shares issued — (0.4) (0.2)Balance at December 31, 2017 222.4 56.7 0.5Treasury StockShares of common stock repurchased by us are recorded at cost as treasury stock and result in a reduction of shareholders' equity in our Consolidated BalanceSheets. Treasury shares may be reissued as part of our stock-based compensation programs. When shares are reissued, we use the weighted-average costmethod 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 deductedfrom additional paid-in capital to the extent of the gains. Thereafter, the losses are deducted from retained earnings. Treasury stock activity for the three-yearperiod ended December 31, 2017, 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 repurchaseplan. In 2017, we made the following purchases under the 2015 purchase programs:In millions (except per share amounts)For each quarter ended 2017 SharesPurchased Average CostPer Share Total Cost ofRepurchases RemainingAuthorizedCapacity (1)April 2 0.3 $151.32 $51 $445July 2 0.5 153.95 69 376October 1 1.7 155.05 271 105December 31 0.4 166.00 60 46Total 2.9 $155.81 $451 ___________________________________________(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 authorizedplan. In 2016, we entered into an accelerated share repurchase agreement with a third party financial institution to repurchase $500 million of our common stockunder our previously announced share repurchase plans and received 4.7 million shares at an average purchase price of $105.50 per share.We repurchased $451 million, $778 million and $900 million of our common stock in the years ended December 31, 2017, 2016 and 2015 respectively.Quarterly DividendsTotal dividends paid to common shareholders in 2017, 2016 and 2015 were $701 million, $676 million and $622 million, respectively. Declaration andpayment of dividends in the future depends upon our income and liquidity position, among other factors, and is subject to declaration by our Board ofDirectors, who meet quarterly to consider our dividend payment. We expect to fund dividend payments with cash from operations.102Table of ContentsIn July 2017, the Board of Directors authorized an increase to our quarterly dividend of 5.4 percent from $1.025 per share to $1.08. In July 2016, the Board ofDirectors authorized a 5.1 percent increase to our quarterly cash dividend on our common stock from $0.975 per share to $1.025 per share. In July 2015, theBoard of Directors approved a 25 percent increase to our quarterly dividend on our common stock from $0.780 per share to $0.975 per share. Cash dividendsper share paid to common shareholders for the last three years were as follows: Quarterly Dividends 2017 2016 2015First quarter $1.025 $0.975 $0.78Second quarter 1.025 0.975 0.78Third quarter 1.08 1.025 0.975Fourth quarter 1.08 1.025 0.975Total $4.21 $4.00 $3.51Employee Benefits TrustIn 1997, we established the Employee Benefits Trust (EBT) funded with common stock for use in meeting our future obligations under employee benefit andcompensation plans. The primary sources of cash for the EBT are dividends received on unallocated shares of our common stock held by the EBT. The EBTmay be used to fund matching contributions to employee accounts in the 401(k) Retirement Savings Plan (RSP) made in proportion to employeecontributions 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-qualifiedemployee benefit plans. Matching contributions charged to income for the years ended December 31, 2017, 2016 and 2015 were $17 million, $23 millionand $25 million, respectively.103Table of ContentsNOTE 14. ACCUMULATED OTHER COMPREHENSIVE LOSSFollowing are the changes in accumulated other comprehensive income (loss) by component:In millions Change inpensions andotherpostretirementdefined benefitplans Foreigncurrencytranslationadjustment Unrealized gain(loss) onmarketablesecurities Unrealized gain(loss) onderivatives Totalattributable toCummins Inc. Noncontrollinginterests TotalBalance at December 31, 2014 $(669) $(406) $(1) $(2) $(1,078) Other comprehensive income beforereclassifications Before tax amount (81) (366) — 17 (430) $(15) $(445)Tax (expense) benefit 35 76 — (1) 110 — 110After tax amount (46) (290) — 16 (320) (15) (335)Amounts reclassified from accumulated othercomprehensive income(1)(2) 61 — (1) (10) 50 — 50Net current period other comprehensive income(loss) 15 (290) (1) 6 (270) $(15) $(285)Balance at December 31, 2015 $(654) $(696) $(2) $4 $(1,348) Other comprehensive income beforereclassifications Before tax amount (111) (469) 1 (38) (617) $(17) $(634)Tax benefit (expense) 44 38 — 6 88 — 88After tax amount (67) (431) 1 (32) (529) (17) (546)Amounts reclassified from accumulated othercomprehensive income(1)(2) 36 — — 20 56 — 56Net current period other comprehensive income(loss) (31) (431) 1 (12) (473) $(17) $(490)Balance at December 31, 2016 $(685) $(1,127) $(1) $(8) $(1,821) Other comprehensive income beforereclassifications Before tax amount 73 335 2 (12) 398 $20 $418Tax benefit (expense) (36) (20) — 5 (51) — (51)After tax amount 37 315 2 (7) 347 20 367Amounts reclassified from accumulated othercomprehensive income(1)(2) 62 — — 12 74 — 74Impact of tax legislation (Note 2) (103)(3) — — — (103) — (103)Net current period other comprehensive income(loss) (4) 315 2 5 318 $20 $338Balance at December 31, 2017 $(689) $(812) $1 $(3) $(1,503) _______________________________________________________________________(1) Amounts are net of tax. (2) Reclassifications out of accumulated other comprehensive income (loss) and the related tax effects are immaterial for separate disclosure. (3) Impact of tax legislation includes $(126) million related to one-time cumulative adjustments and $23 million related to 2017. See Note 2, "INCOME TAXES," to our ConsolidatedFinancial Statements for additional information.104Table of ContentsNOTE 15. STOCK INCENTIVE AND STOCK OPTION PLANSIn May of 2017 the Board of Directors approved an amendment to the shareholder approved stock incentive plan (the Plan) to increase the number ofavailable shares. The revised Plan allows for the granting of up to 8.5 million total shares of equity awards to executives, employees and non-employeedirectors. Awards available for grant under the Plan include, but are not limited to, stock options, stock appreciation rights, performance shares and otherstock 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 optionsgranted 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 thefair value of each option grant using the Black-Scholes option pricing model. Options granted to employees eligible for retirement under our retirement planare 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 purchaseshares 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 50stock options are granted. The options granted through the KESIP program are considered awards under the Plan and are vested immediately. Compensationexpense for stock options granted through the KESIP program is recorded based on the fair value of each option grant using the Black-Scholes option pricingmodel.Performance shares are granted as target awards and are earned based on our return on equity (ROE) performance. A payout factor has been establishedranging 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 theaward 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. Compensationexpense 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 isexpected to be earned under the plan formula, adjusted each reporting period based on current information.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 twoyears and one-third of the shares issued become vested and free from restrictions each year thereafter on the anniversary of the grant date, provided theparticipant 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 isdetermined 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, 2017, 2016 and 2015, wasapproximately $39 million, $31 million and $22 million, respectively. In addition, non-employee director share-based compensation expense for the yearsended December 31, 2017, 2016 and 2015, was approximately $2 million, $1 million and $2 million, respectively. Shares granted to non-employee directorsvest immediately and have no restrictions or performance conditions. The excess tax benefit associated with our employee share-based plans for the yearsended December 31, 2017, 2016 and 2015, was $2 million, $1 million and $1 million, respectively. The total unrecognized compensation expense (net ofestimated forfeitures) related to nonvested awards for our employee share-based plans was approximately $41 million at December 31, 2017, and is expectedto be recognized over a weighted-average period of less than two years.105Table of ContentsThe tables below summarize the employee share-based activity in the Plan: Options Weighted-averageExercise Price Weighted-averageRemainingContractual Life(in years) AggregateIntrinsic Value(in millions)Balance at December 31, 2014 1,626,724 $108.30 Granted 476,205 135.21 Exercised (53,545) 82.89 Forfeited (19,698) 135.89 Balance at December 31, 2015 2,029,686 115.02 Granted 984,430 109.24 Exercised (215,890) 87.27 Forfeited (63,462) 119.56 Balance at December 31, 2016 2,734,764 115.02 Granted 648,900 149.98 Exercised (355,479) 105.91 Forfeited (126,816) 125.65 Balance at December 31, 2017 2,901,369 $123.49 7.1 $156 Exercisable, December 31, 2015 1,318,101 $100.55 5.7 $13Exercisable, December 31, 2016 1,149,549 $104.19 4.8 $38Exercisable, December 31, 2017 1,063,889 $115.26 4.7 $66The weighted-average grant date fair value of options granted during the years ended December 31, 2017, 2016 and 2015, was $36.86, $25.28 and $35.25,respectively. The total intrinsic value of options exercised during the years ended December 31, 2017, 2016 and 2015, was approximately $19 million, $9million and $3 million, respectively.The weighted-average grant date fair value of performance and restricted shares was as follows: Performance Shares Restricted SharesNonvested Shares Weighted-averageFair Value Shares Weighted-averageFair ValueBalance at December 31, 2014 466,693 $119.78 11,275 $110.94Granted 133,975 128.48 — —Vested (112,901) 115.48 (7,021) 110.66Forfeited (67,398) 118.71 — —Balance at December 31, 2015 420,369 123.88 4,254 111.40Granted 169,150 98.26 8,089 117.69Vested (115,680) 106.55 (2,502) 114.57Forfeited (69,345) 110.52 — —Balance at December 31, 2016 404,494 120.41 9,841 115.76Granted 150,225 138.23 — —Vested (85,020) 141.50 (1,752) 106.89Forfeited (58,460) 132.52 — —Balance at December 31, 2017 411,239 $120.84 8,089 $117.68The total vesting date fair value of performance shares vested during the years ended December 31, 2017, 2016 and 2015 was $13 million, $12 million and$11 million, respectively. The total fair value of restricted shares vested was less than $1 million, $1 million and $1 million for the years ended December 31,2017, 2016 and 2015, respectively.106Table of ContentsThe fair value of each option grant was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions: 2017 2016 2015Expected life (years) 6 5 5Risk-free interest rate 2.08% 1.34% 1.41%Expected volatility 29.97% 30.96% 33.06%Dividend yield 2.28% 2.10% 1.69%Expected life—The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstandingbased 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 ouremployee stock options.Expected volatility—The expected volatility assumption is based upon the weighted-average historical daily price changes of our common stock over themost 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 INTERESTSNet (loss) income attributable to noncontrolling interests included a $43 million increase to income related to withholding taxes on foreign earnings as aresult of tax legislation.Noncontrolling interests in the equity of consolidated subsidiaries were as follows: December 31,In millions 2017 2016Eaton Cummins Automated Transmission Technologies(1) $609 $—Cummins India Ltd. 280(2) 285Other 16 14Total $905 $299____________________________________________________(1) See Note 18, "ACQUISITIONS," for additional information.(2) Noncontrolling interest for Cummins India Ltd. was reduced by $43 million related to withholding taxes on foreign earnings as a result of tax legislation.See Note 2, "INCOME TAXES," to our Consolidated Financial Statements for additional information.107Table of ContentsNOTE 17. EARNINGS PER SHAREWe calculate basic earnings per share (EPS) of common stock by dividing net income attributable to Cummins Inc. by the weighted-average number ofcommon shares outstanding for the period. The calculation of diluted EPS assumes the issuance of common stock for all potentially dilutive shareequivalents outstanding. We exclude shares of common stock held in the Employee Benefits Trust (EBT) (see Note 13, "SHAREHOLDERS' EQUITY") fromthe calculation of the weighted-average common shares outstanding until those shares are distributed from the EBT to the Retirement Savings Plan.Following are the computations for basic and diluted earnings per share: Years ended December 31,Dollars in millions, except per share amounts 2017 2016 2015Net income attributable to Cummins Inc. $999 $1,394 $1,399 Weighted-average common shares outstanding Basic 166,625,320 169,038,410 178,037,581Dilutive effect of stock compensation awards 645,545 298,206 369,247Diluted 167,270,865 169,336,616 178,406,828Earnings per common share attributable to Cummins Inc. Basic $5.99 $8.25 $7.86Diluted 5.97 8.23 7.84The weighted-average diluted common shares outstanding excludes the anti-dilutive effect of certain stock options since such options had an exercise pricein excess of the monthly average market value of our common stock. The options excluded from diluted earnings per share were as follows: Years ended December 31, 2017 2016 2015Options excluded 31,991 1,091,799 866,262108Table of ContentsNOTE 18. ACQUISITIONSAcquisitions for the years ended December 31, 2017, 2016 and 2015 were as follows:Entity Acquired (Dollars inmillions) Date ofAcquisition Additional PercentInterest Acquired Paymentsto FormerOwners AcquisitionRelated DebtRetirements Total PurchaseConsideration Type ofAcquisition(1) GainRecognized(1) GoodwillAcquired IntangiblesRecognized(2) Net SalesPreviousFiscal YearEnded 2017 Brammo Inc. 11/01/17 100% $62 $— $68(3) COMB $— $47$23 $4 Eaton Cummins AutomatedTransmission Technologies 07/31/17 50% 600(4) — 600 COMB — 544 596 —(4) 2016 Wuxi Cummins TurboTechnologies Co. Ltd 12/05/16 45% $86 $— $86 EQUITY $— $— $— $— Cummins Pacific LLC 10/04/16 50% 32 67 99 COMB 15 4 8 391(5 ) Cummins Northeast LLC 01/01/16 35% 12 — 12 EQUITY — — — — 2015 Cummins Crosspoint LLC 08/03/15 50% $29 $36 $65 COMB $10 $7 $2 $258(5 ) Cummins Atlantic LLC 08/03/15 51% 21 28 49 COMB 8 5 6 245(5 ) Cummins Central Power LLC 06/29/15 20.01% 8 — 8 EQUITY — — — — ____________________________________________________(1) All results from acquired entities (excluding Brammo Inc.) were included in segment results subsequent to the acquisition date. Previously consolidated entities were accounted foras equity transactions (EQUITY). Newly consolidated entities were accounted for as business combinations (COMB) with gains recognized based on the requirement to remeasureour pre-existing ownership to fair value in accordance with GAAP and are included in the Consolidated Statements of Income as "Other income, net. The Brammo Inc. acquisitionhad not yet been assigned to a reportable segment at December 31, 2017.(2) Intangible assets acquired in business combinations were mostly customer and technology related, the majority of which will be amortized over a period of`up to 25 years from thedate of the acquisition.(3) The "Total Purchase Consideration" represents the total amount that will or is estimated to be paid to complete the acquisition. A portion of the Brammo Inc. acquisition paymenthas not yet been made and will be paid in future periods in accordance with the purchase contract. The Brammo Inc. acquisition contains an earnout based on future results of theacquired business and could result in a maximum contingent consideration payment of $100 million (fair value of $5 million) to the former owners.(4) This transaction created a newly formed joint venture that we consolidated. See additional information below.(5)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.109Table of ContentsEaton Cummins Automated Transmission Technologies In April 2017, we entered into an agreement to form a joint venture with Eaton Corporation PLC (Eaton), which closed on July 31, 2017 (the acquisitiondate). We purchased a 50 percent interest in the new venture named Eaton Cummins Automated Transmission Technologies (ECJV) for $600 million incash. In addition, each partner contributed $20 million for working capital. The joint venture will design, assemble, sell and support medium-duty and heavy-duty automated transmissions for the commercial vehicle market, including new product launches. The new generation products (Procision and Endurant)were launched in 2016 and 2017, respectively, and are owned by the joint venture. Eaton will continue to manufacture and sell the old generation productsto the joint venture which will be marked up and sold to end customers. Eaton will also sell certain transmission components to the joint venture at pricesapproximating market rates. In addition, Eaton will provide certain manufacturing and administrative services to the joint venture, including but not limitedto manufacturing labor in Mexico, information technology services, accounting services and purchasing services, at prices approximating market rates. Proforma financial information was not provided as historical activity related to the products contributed to the joint venture was not material.We consolidated the results of the joint venture in our Components segment as we have a majority voting interest in the venture by virtue of a tie-breakingvote on the joint venture's board of directors. The joint venture had an enterprise value at inception of $1.2 billion. Due to the structure of the joint ventureand equal sharing of economic benefits, we did not apply a discount for lack of control to the noncontrolling interests. The final purchase price allocationwas as follows:In millions Inventory$3Fixed assets58Intangible assets Customer relationships424 Technology172Goodwill544Liabilities(1) Total business valuation1,200Less: Noncontrolling interest600Total purchase consideration$600Customer relationship assets represent the value of the long-term strategic relationship the business has with its significant customers, which we areamortizing over 25 years. The assets were valued using an income approach, specifically the "multi-period excess earnings" method, which identifies anestimated stream of revenues and expenses for a particular group of assets from which deductions of portions of the projected economic benefits, attributableto assets other than the subject asset (contributory assets), are deducted in order to isolate the prospective earnings of the subject asset. This value isconsidered a level 3 measurement under the GAAP fair value hierarchy. Key assumptions used in the valuation of customer relationships include: (1) a rate ofreturn of 10 percent and (2) an attrition rate of 3 percent. Technology assets primarily represent the associated patents and know how related to the Endurantand Procision next generation automated transmissions, which we are amortizing over 15 years. These assets were valued using the "relief-from-royalty"method, which is a combination of both the income approach and market approach that values a subject asset based on an estimate of the "relief" from theroyalty expense that would be incurred if the subject asset were licensed from a third party. Key assumptions impacting this value include: (1) a marketroyalty rate of 5 percent, (2) a rate of return of 10 percent and (3) an economic depreciation rate of 7.5 percent. This value is considered a level 3 measurementunder the GAAP fair value hierarchy. Annual amortization of the intangible assets for the next 5 years is expected to approximate $28 million.Goodwill was determined based on the residual difference between the fair value of consideration transferred and the value assigned to tangible andintangible assets and liabilities. Approximately $31 million of the goodwill is deductible for tax purposes. Among the factors contributing to a purchaseprice resulting in the recognition of goodwill is the ability to integrate and optimize the engine and transmission development to deliver the world’s bestpower train, to realize synergies in service and aftermarket growth and to utilize our strength in international markets where automated transmission adoptionrates are very low.Included in our 2017 results were revenues of $164 million and a net loss of $11 million related to this joint venture.110Table of ContentsNOTE 19. IMPAIRMENT OF LIGHT-DUTY DIESEL ASSETSWe 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-highwayapplications. At December 31, 2015, we had capitalized investments of approximately $279 million, with a net book value prior to the impairment of $246million ($235 million of which was in our Engine segment and $11 million of which was in our Components segment). Market uncertainty due to the globalrecession in 2008/2009 resulted in some customers delaying or canceling their vehicle programs, while others remained active. We announced an agreementwith 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 learnedthat we were not successful in our bid to supply this product for an additional customer. In addition, the deterioration in global economic conditions andexcess manufacturing capacity in other markets made it unlikely that we would manufacture additional products on the LDD line to utilize its excesscapacity during the asset recovery period. As a result, we concluded that the combination of these events presented a triggering event requiring an assessmentof the recoverability of these assets in the fourth quarter of 2015. The assessment indicated that the projected undiscounted cash flows related to this assetgroup were not sufficient to recover its carrying value. Consequently, we were required to write down the LDD asset group to fair value. Our 2015 fourthquarter results included an impairment charge of $211 million ($133 million after-tax), of which $202 million was in the Engine segment and $9 million wasin 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) atDecember 31, 2015 and was calculated primarily using a cost approach with consideration of a market approach where secondary market information wasavailable 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 bestestimate of fair value. In the application of the cost approach we considered the current cost of replacing the assets with a reduction for physical deteriorationgiven 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 unobservableinputs or have significant adjustments to the observable inputs.NOTE 20. RESTRUCTURING ACTIONS AND OTHER CHARGESWe executed restructuring actions primarily in the form of professional voluntary and involuntary employee separation programs in the fourth quarter of2015. 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 ordersin most U.S. and global markets in 2016. We reduced our worldwide workforce by approximately 1,900 employees, including approximately 370 employeesaccepting 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 assetimpairments and other charges.At December 31, 2017, all terminations were completed. 111Table of ContentsNOTE 21. OPERATING SEGMENTSOperating segments under GAAP are defined as components of an enterprise about which separate financial information is available that is evaluatedregularly by the Chief Operating Decision Maker (CODM), or decision-making group, in deciding how to allocate resources and in assessing performance.Our CODM is the President and Chief Operating Officer.Our reportable operating segments consist of Engine, Distribution, Components and Power Systems. This reporting structure is organized according to theproducts 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 industrialapplications, 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 repairactivities on our products and maintaining relationships with various OEMs throughout the world. The Components segment sells filtration products,aftertreatment systems, turbochargers, fuel systems and transmissions. The Power Systems segment is an integrated power provider, which designs,manufactures and sells engines (16 liters and larger) for industrial applications (including mining, oil and gas, marine and rail), standby and prime powergenerator sets, alternators and other power components.We use EBIT (defined as earnings before interest expense, income taxes and noncontrolling interests) as a primary basis for the CODM to evaluate theperformance of each of our operating segments. Segment amounts exclude certain expenses not specifically identifiable to segments.The accounting policies of our operating segments are the same as those applied in our Consolidated Financial Statements. We prepared the financial resultsof our operating segments on a basis that is consistent with the manner in which we internally disaggregate financial information to assist in making internaloperating decisions. We allocate certain common costs and expenses, primarily corporate functions, among segments differently than we would for stand-alone financial information prepared in accordance with GAAP. These include certain costs and expenses of shared services, such as information technology,human resources, legal, finance and supply chain management. We do not allocate debt-related items, actuarial gains or losses, prior service costs or credits,changes in cash surrender value of corporate owned life insurance or income taxes to individual segments. EBIT may not be consistent with measures used byother companies.112Table of ContentsSummarized financial information regarding our reportable operating segments at December 31, is shown in the table below:In millions Engine Distribution Components (1) PowerSystems TotalSegment IntersegmentEliminations (2) Total2017 External sales $6,661 $7,029 $4,363 $2,375 $20,428 $— $20,428Intersegment sales 2,292 29 1,526 1,683 5,530 (5,530) —Total sales 8,953 7,058 5,889 4,058 25,958 (5,530) 20,428Depreciation and amortization (3) 184 116 163 117 580 — 580Research, development and engineering expenses 279 19 240 214 752 — 752Equity, royalty and interest income from investees (4) 219 44 40 54 357 — 357Interest income 6 6 3 3 18 — 18Loss contingency charge (5) 5 — — — 5 — 5Segment EBIT 959 384 754 294 2,391 55 2,446Net assets 1,290 2,700 3,028 3,124 10,142 — 10,142Investments and advances to equity investees 531 267 194 164 1,156 — 1,156Capital expenditures 188 101 127 90 506 — 5062016 External sales $5,774 $6,157 $3,514 $2,064 $17,509 $— $17,509Intersegment sales 2,030 24 1,322 1,453 4,829 (4,829) —Total sales 7,804 6,181 4,836 3,517 22,338 (4,829) 17,509Depreciation and amortization (3) 163 116 133 115 527 — 527Research, development and engineering expenses 226 13 208 189 636 — 636Equity, royalty and interest income from investees 148 70 41 42 301 — 301Interest income 10 4 4 5 23 — 23Loss contingency charge (5) 138 — — — 138 — 138Segment EBIT 686 392(6) 641 263(7) 1,982 17 1,999Net assets 1,620 2,604 1,868 2,629 8,721 — 8,721Investments and advances to equity investees 427 204 176 139 946 — 946Capital expenditures 200 96 143 92 531 — 5312015 External sales $6,733 $6,198 $3,745 $2,434 $19,110 $— $19,110Intersegment sales 1,937 31 1,427 1,633 5,028 (5,028) —Total sales 8,670 6,229 5,172 4,067 24,138 (5,028) 19,110Depreciation and amortization (3) 187 105 109 110 511 — 511Research, development and engineering expenses 263 10 236 226 735 — 735Equity, royalty and interest income from investees 146 78 35 56 315 — 315Interest income 11 4 4 5 24 — 24Loss contingency charge (5) 60 — — — 60 — 60Impairment of light-duty diesel assets (8) 202 — 9 — 211 — 211Restructuring actions and other charges (9) 17 23 13 26 79 11 90Segment EBIT 636 412(6) 727 335 2,110 (20) 2,090Net assets 2,107 2,330 1,891 2,736 9,064 — 9,064Investments and advances to equity investees 445 192 150 188 975 — 975Capital expenditures 345 125 137 137 744 — 744____________________________________________________(1) Includes Eaton Cummins Automated Transmission Technologies joint venture results consolidated during the third quarter of 2017. See Note18 , "ACQUISITIONS," for additional information.(2) Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for theyears ended December 31, 2017, 2016 and 2015, respectively.(3) 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 ofIncome 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, 2017, 2016 and2015, respectively.(4) U.S. tax legislation passed in December 2017 decreased our equity earnings at certain equity investees, negatively impacting our equity, royalty and interest income frominvestees by $23 million, $4 million and $12 million for the Engine, Distribution and Components segments, respectively. See Note 2, "INCOME TAXES," for additionalinformation.(5) See Note 12, "COMMITMENTS AND CONTINGENCIES," for additional information.(6) Distribution segment EBIT included gains on the fair value adjustment resulting from the acquisition of controlling interests in North American distributors of $15 million and$18 million for the years ended December 31, 2016 and 2015, respectively. See Note 18, "ACQUISITIONS," for additional information.(7) Power Systems segment EBIT included a $17 million gain on the sale of an equity investee for the year ended December 31, 2016. See Note 3, "INVESTMENTS IN EQUITYINVESTEES," for additional information.(8) See Note 19, "IMPAIRMENT OF LIGHT-DUTY DIESEL ASSETS," for additional information.(9) See Note 20, "RESTRUCTURING ACTIONS AND OTHER CHARGES," for additional information.113Table of ContentsA reconciliation of our segment information to the corresponding amounts in the Consolidated Statements of Income is shown in the table below: Years ended December 31,In millions 2017 2016 2015Total EBIT $2,446 $1,999 $2,090Less: Interest expense 81 69 65Income before income taxes $2,365 $1,930 $2,025 December 31,In millions 2017 2016 2015Net assets for operating segments $10,142 $8,721 $9,064Brammo Inc. assets 72(1) — —Liabilities deducted in arriving at net assets 7,397 6,152 5,920Pension and other postretirement benefit adjustments excluded from net assets 156 (284) (242)Deferred tax assets not allocated to segments 306 420 390Deferred debt costs not allocated to segments 2 2 2Total assets $18,075 $15,011 $15,134____________________________________________________(1) Assets associated with the Brammo Inc. acquisition were presented as a reconciling item as Brammo Inc. had not yet been assigned to a reportable segment at December 31, 2017.See Note 18, "ACQUISITIONS," for additional information.The tables below present certain segment information by geographic area. Net sales attributed to geographic areas were based on the location of thecustomer.In millions Years ended December 31,Net Sales 2017 2016 2015United States $11,010 $9,476 $10,757China 2,137 1,544 1,451Other International 7,281 6,489 6,902Total net sales $20,428 $17,509 $19,110Long-lived assets include property, plant and equipment, net of depreciation, investments and advances to equity investees and other assets, excludingdeferred tax assets, refundable taxes and deferred debt expenses.In millions December 31,Long-lived assets 2017 2016 2015United States $3,157 $3,092 $2,968China 795 652 668India 563 475 450United Kingdom 339 254 349Netherlands 221 197 172Brazil 149 149 124Mexico 136 131 108Canada 116 132 133Other international countries 293 236 261Total long-lived assets $5,769 $5,318 $5,233Our largest customer is PACCAR Inc. Worldwide sales to this customer were $2,893 million in 2017, $2,359 million in 2016 and $2,949 million in 2015,representing 14 percent, 13 percent and 15 percent, respectively, of our consolidated net sales. No other customer accounted for more than 10 percent ofconsolidated net sales.114Table of ContentsSELECTED QUARTERLY FINANCIAL DATAUNAUDITED FirstQuarter SecondQuarter ThirdQuarter FourthQuarter In millions, except per share amounts 2017 Net sales $4,589 $5,078 $5,285 $5,476 Gross margin 1,128 1,249 1,339 1,374 Net income attributable to Cummins Inc. 396 424 453 (274)(1) Earnings per common share attributable to Cummins Inc.—basic (2) $2.36 $2.53 $2.72 $(1.66)(1) Earnings per common share attributable to Cummins Inc.—diluted (2) 2.36 2.53 2.71 (1.65)(1) Cash dividends per share 1.025 1.025 1.08 1.08 Stock price per share High $155.51 $164.23 $170.68 $181.79 Low 134.06 143.83 150.25 158.75 2016 Net sales $4,291 $4,528 $4,187 $4,503 Gross margin 1,056 1,197 1,079 1,120 Net income attributable to Cummins Inc. 321 406(3) 289(3) 378 Earnings per common share attributable to Cummins Inc.—basic (2) $1.87 $2.41(3) $1.72(3) $2.26 Earnings per common share attributable to Cummins Inc.—diluted (2) 1.87 2.40(3) 1.72(3) 2.25 Cash dividends per share 0.975 0.975 1.025 1.025 Stock price per share High $111.29 $120.00 $128.60 $147.10 Low 79.88 104.30 107.51 121.22 ___________________________________________________(1) Net income attributable to Cummins Inc. and earnings per share were negatively impacted by a $777 million tax adjustment related to The Tax Cuts and Jobs Act passed inDecember of 2017. For the fourth quarter of 2017, results for basic and diluted earnings per share were reduced by $4.70 per share and $4.68 per share, respectively, due to taxreform.(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 computedusing 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 second quarter of 2016 included a $39 million loss contingency charge ($24 million after-tax). The third quarter of 2016 included an additional $99 million loss contingencycharge ($50 million net of favorable compensation impact and after-tax).At December 31, 2017, there were approximately 3,362 holders of record of Cummins Inc.'s $2.50 par value common stock.115Table of ContentsITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.ITEM 9A. Controls and ProceduresEvaluation of Disclosure Controls and ProceduresAs 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 Officerand 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 andprocedures were effective as of the end of the period covered by this Annual Report on Form 10-K.Changes in Internal Control over Financial ReportingThere has been no change in our internal control over financial reporting during the quarter ended December 31, 2017, that has materially affected, or isreasonably likely to materially affect, our internal control over financial reporting.Management's Report on Internal Control Over Financial ReportingThe information required by Item 9A relating to Management's Annual Report on Internal Control Over Financial Reporting and Attestation Report of theRegistered Public Accounting Firm is incorporated herein by reference to the information set forth under the captions "Management's Report on InternalControl Over Financial Reporting" and "Report of Independent Registered Public Accounting Firm," respectively, under Item 8.ITEM 9B. Other InformationNone.PART IIIITEM 10. Directors, Executive Officers and Corporate GovernanceThe information required by Item 10 is incorporated by reference to the relevant information under the captions "Corporate Governance," "Election ofDirectors" and "Other Information—Section 16(a) Beneficial Ownership Reporting Compliance" in our 2018 Proxy Statement, which will be filed within120 days after the end of 2017. Information regarding our executive officers may be found in Part 1 of this annual report under the caption "ExecutiveOfficers of the Registrant." Except as otherwise specifically incorporated by reference, our Proxy Statement is not deemed to be filed as part of this annualreport.ITEM 11. Executive CompensationThe information required by Item 11 is incorporated by reference to the relevant information under the caption "Executive Compensation" in our 2018 ProxyStatement, which will be filed within 120 days after the end of 2017.116Table of ContentsITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersInformation concerning our equity compensation plans at December 31, 2017, was as follows:Plan Category Number of securities to beissued upon exercise ofoutstanding options,warrants and rights(1) Weighted-averageexercise price ofoutstanding options,warrants and rights(2) Number of securities remainingavailable for future issuanceunder equity compensationplans (excluding securitiesreflected in the first column)Equity compensation plans approved by securityholders 3,320,697 $123.49 8,510,444Equity compensation plans not approved by securityholders — — —Total 3,320,697 $123.49 8,510,444________________________________________________(1) The number is comprised of 2,901,369 stock options, 411,239 performance shares and 8,089 restricted shares. See NOTE 15, "STOCK INCENTIVE AND STOCK OPTIONPLANS," 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 2,901,369 stock options. Performance and restricted shares do not have an exercise price and, therefore, are not included inthis 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 2018 Proxy Statement, which will be filed within 120 days after the end of 2017.ITEM 13. Certain Relationships, Related Transactions and Director IndependenceThe information required by Item 13 is incorporated by reference to the relevant information under the captions "Corporate Governance" and "OtherInformation-Related Party Transactions" in our 2018 Proxy Statement, which will be filed within 120 days after the end of 2017.ITEM 14. Principal Accounting Fees and ServicesThe information required by Item 14 is incorporated by reference to the relevant information under the caption "Selection of Independent PublicAccountants" in our 2018 Proxy Statement, which will be filed within 120 days after the end of 2017.PART IVITEM 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 andSupplementary Data":•Management's Report to Shareholders •Report of Independent Registered Public Accounting Firm •Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015 •Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015 •Consolidated Balance Sheets at December 31, 2017 and 2016 •Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015 •Consolidated Statements of Changes in Equity for the years ended December 31, 2017, 2016 and 2015 •Notes to Consolidated Financial Statements•Selected Quarterly Financial Data (Unaudited)117Table of Contents(b)The exhibits listed in the following Exhibit Index are filed as part of this Annual Report on Form 10-K.CUMMINS INC.EXHIBIT INDEXExhibit No. Description of Exhibit3(a) Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 3(a) to Cummins Inc.'s Quarterly Report onForm 10-Q for the quarter ended June 28, 2009).3(b) By-laws, as amended and restated effective as of May 9, 2017 (incorporated by reference to Exhibit 3.1 to Cummins Inc.'sQuarterly Report on Form 10-Q for the quarter ended October 1, 2017).4(a) Indenture, dated as of September 16, 2013, by and between Cummins Inc. and U.S. Bank National Association (incorporated byreference to Exhibit 4.3 to the Registration Statement on Form S-3 filed with the Securities and Exchange Commission onSeptember 16, 2013 (Registration Statement No. 333-191189)).4(b) 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 ExchangeCommission on September 24, 2013 (File No. 001-04949)).4(c) 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 ExchangeCommission on September 24, 2013 (File No. 001-04949)).10(a)# 2003 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10(a) to Cummins Inc.'s Annual Report onForm 10-K for the year ended December 31, 2009).10(b)# Target Bonus Plan (incorporated by reference to Exhibit 10(b) to Cummins Inc.'s Annual Report on Form 10-K for the yearended December 31, 2009).10(c)# Deferred Compensation Plan, as amended (incorporated by reference to Exhibit 10(c) to Cummins Inc.’s Quarterly Report onForm 10-Q for the quarter ended September 27, 2015).10(d)# Supplemental Life Insurance and Deferred Income Plan, as amended (incorporated by reference to Exhibit 10(d) toCummins Inc.'s Annual Report on Form 10-K for the year ended December 31, 2011).10(e) Amended and Restated Credit Agreement, dated as of November 13, 2015, by and among Cummins Inc., the subsidiaryborrowers referred to therein and the Lenders party thereto (incorporated by reference to Exhibit 10 to Cummins Inc.'s CurrentReport on Form 8-K dated November 13, 2015).10(f)# Deferred Compensation Plan for Non-Employee Directors, as amended (incorporated by reference to Exhibit 10(f) to CumminsInc.'s Annual Report on Form 10-K for the year ended December 31, 2013).10(g)# Excess Benefit Retirement Plan, as amended (incorporated by reference to Exhibit 10(g) to Cummins Inc.'s Quarterly Report onForm 10-Q for the quarter ended September 28, 2014).10(h)# Employee Stock Purchase Plan, as amended (incorporated by reference to Annex B to Cummins Inc.'s definitive proxy statementfiled with the Securities and Exchange Commission on Schedule 14A on March 27, 2012 (File No. 001-04949)).10(i)# Longer Term Performance Plan (incorporated by reference to Exhibit 10(i) to Cummins Inc.'s Annual Report on Form 10-K forthe year ended December 31, 2009).10(j)# 2006 Executive Retention Plan, as amended (incorporated by reference to Exhibit 10(j) to Cummins Inc.'s Annual Report onForm 10-K for the year ended December 31, 2011).10(k)# 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).10(l)# Senior Executive Longer Term Performance Plan (incorporated by reference to Exhibit 10(l) to Cummins Inc.'s Annual Reporton 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) toCummins Inc.'s Annual Report on Form 10-K for the year ended December 31, 2009).10(n)# Form of Long-Term Grant Notice under the 2012 Omnibus Incentive Plan (incorporated by reference to Exhibit 10(n) toCummins Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 29, 2015).10(o)# 2012 Omnibus Incentive Plan, as amended and restated (incorporated by reference to Annex A to Cummins Inc.'s definitiveproxy statement filed with the Securities and Exchange Commission on Schedule 14A on March 27, 2017 (File No. 001-04949)).10(p)# Form of Stock Option Agreement under the 2012 Omnibus Incentive Plan (incorporated by reference to Exhibit 10(p) toCummins Inc.'s Annual Report on Form 10-K for the year ended December 31, 2013).10(q)# Key Employee Stock Investment Plan (incorporated by reference to Exhibit 10(q) to Cummins Inc.’s Quarterly Report on Form10-Q for the quarter ended September 28, 2014).10(r)# 364-Day Credit Agreement, dated as of September 5, 2017, by and among Cummins Inc., the subsidiary borrowers referred totherein, the Lenders and Agents party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated byreference to Exhibit 10.1 to Cummins Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commissionon September 6, 2017)(File No.001-04949)).12 Calculation of Ratio of Earnings to Fixed Charges (filed herewith).21 Subsidiaries of the Registrant (filed herewith).23 Consent of PricewaterhouseCoopers LLP (filed herewith).118Table of Contents24 Powers of Attorney (filed herewith).31(a) Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).31(b) Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).32 Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags areembedded within the Inline XBRL document. 101.SCH XBRL Taxonomy Extension Schema Document.101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.101.DEF XBRL Taxonomy Extension Definition Linkbase Document.101.LAB XBRL Taxonomy Extension Label Linkbase Document.101.PRE XBRL Taxonomy Extension Presentation Linkbase Document._______________________________________________# A management contract or compensatory plan or arrangement.119Table of ContentsITEM 16. Form 10-K Summary (optional)Not Applicable.120Table of ContentsSIGNATURESPursuant 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 itsbehalf by the undersigned, thereunto duly authorized.CUMMINS INC.By: /s/ PATRICK J. WARD By: /s/ CHRISTOPHER C. CLULOW Patrick J. Ward Vice President and Chief Financial Officer(Principal Financial Officer) Christopher C. Clulow Vice President—Corporate Controller(Principal Accounting Officer) Date: February 12, 2018 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 registrantand in the capacities and on the dates indicated.Signatures Title Date/s/ N. THOMAS LINEBARGER Chairman of the Board of Directors and Chief Executive Officer(Principal Executive Officer) February 12, 2018N. Thomas Linebarger /s/ PATRICK J. WARD Vice President and Chief Financial Officer(Principal Financial Officer) February 12, 2018Patrick J. Ward /s/ CHRISTOPHER C. CLULOW Vice President—Corporate Controller(Principal Accounting Officer) February 12, 2018Christopher C. Clulow * February 12, 2018Robert J. Bernhard Director * February 12, 2018Franklin R. ChangDiaz Director * February 12, 2018Bruno V. Di Leo Allen Director * February 12, 2018Stephen B. Dobbs Director * February 12, 2018Richard J. Freeland Director * February 12, 2018Robert K. Herdman Director * February 12, 2018Alexis M. Herman Director * February 12, 2018Thomas J. Lynch Director * February 12, 2018William I. Miller Director * February 12, 2018Georgia R. Nelson Director * February 12, 2018Karen H. Quintos Director *By:/s/ PATRICK J. WARD Patrick J. Ward Attorney-in-fact121EXHIBIT 12 CUMMINS INC. AND SUBSIDIARIESCOMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Years ended December 31,In millions 2017 2016 2015 2014 2013Earnings Income before income taxes (1) $2,365 $1,930 $2,025 $2,434 $2,119Add Fixed charges 160 148 140 138 112Amortization of capitalized interest 1 2 2 1 1Distributed income of equity investees 219 212 248 228 271Less Equity in earnings of investees 308 260 273 330 325Capitalized interest 4 6 3 7 7Noncontrolling interest in pre-tax income of subsidiaries that havenot incurred fixed charges (3) — — — —Earnings before fixed charges $2,436 $2,026 $2,139 $2,464 $2,171 Fixed charges Interest expense (2) $81 $69 $65 $64 $41Capitalized interest 4 6 3 7 7Amortization of debt discount and deferred costs 3 3 3 3 2Interest portion of rental expense (3) 72 70 69 64 62Total fixed charges $160 $148 $140 $138 $112 Ratio of earnings to fixed charges (4) 15.2 13.7 15.3 17.9 19.4___________________________________________________ (1) For the year ended December 31, 2016, income before income taxes included a $138 million charge related to a loss contingency. For the year ended December 31, 2015,income before income taxes included a $211 million charge related to impairment of light-duty diesel assets, $90 million of restructuring actions and other charges and a $60million charge related to a loss contingency.(2) The interest amount in the table above does not include interest expense associated with uncertain tax positions. In 2015, we adopted new rules related to balance sheet debtissuance 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 $1billion of senior unsecured debt.(3) Amounts represent those portions of rent expense that are reasonable approximations of interest costs.(4) We have not issued preferred stock. Therefore, the ratios of earnings to combined fixed charges and preferred stock dividends are the same as the ratios presented above.CUMMINS INC.SUBSIDIARIES OF THE REGISTRANTEXHIBIT 21Entity Name Country or State of Organization35601 Cummins Canada ULC Canada4077652 Canada Inc. Canada4249739 Canada Inc. Canada665217 B.C. Ltd. Canada968392 Alberta Ltd. CanadaAngus Werks Ltd. CanadaCEB Holdco LLC IndianaCEB MergerCo. Inc. DelawareCenter of Excellence Singapore Pte. Ltd. SingaporeCherry Island Renewable Energy, LLC DelawareCIFC Worldwide Partner C.V. The NetherlandsCMI Africa Holdings BV The NetherlandsCMI Canada Financing Ltd. United KingdomCMI Canada LP CanadaCMI CGT Holdings LLC IndianaCMI Foreign Holdings B.V. The NetherlandsCMI Global Equity Holdings B.V. The NetherlandsCMI Global Equity Holdings C.V. The NetherlandsCMI Global Holdings B.V. The NetherlandsCMI Global Partner 2 C.V. The NetherlandsCMI Global Partners B.V. The NetherlandsCMI Group Holdings Cooperatief U.A. The NetherlandsCMI International Finance Partner 1 LLC IndianaCMI International Finance Partner 2 LLC IndianaCMI International Finance Partner 3 LLC IndianaCMI International Finance Partner 4 LLC IndianaCMI International Finance Partner 5 LLC IndianaCMI Mexico LLC IndianaCMI PGI Holdings LLC IndianaCMI PGI International Holdings LLC IndianaCMI Turkish Holdings B.V. The NetherlandsCMI UK Finance LP United KingdomCMI UK Financing LP United KingdomConsolidated Diesel Company North CarolinaConsolidated Diesel of North Carolina Inc. North CarolinaConsolidated Diesel, Inc. DelawareCummins (China) Investment Co. Ltd. ChinaCummins Africa Middle East (Pty) Ltd. South AfricaCummins Afrique de l'Ouest SenegalCummins Americas, Inc. IndianaCummins Angola Lda. AngolaCummins Argentina-Servicios Mineros S.A. ArgentinaCummins Asia Pacific Pte. Ltd. SingaporeCUMMINS INC.SUBSIDIARIES OF THE REGISTRANTCummins Aust Technologies Pty. Ltd. AustraliaCummins Belgium N.V. BelgiumCummins Botswana (Pty.) Ltd. BotswanaCummins Brasil Ltda. BrazilCummins Burkina Faso SARL Burkina FasoCummins Canada Limited CanadaCummins Caribbean LLC Puerto RicoCummins CDC Holding Inc. IndianaCummins Centroamerica Holding S.de R.L. PanamaCummins Child Development Center, Inc. IndianaCummins Colombia S.A.S. ColombiaCummins Comercializadora S. de R.L. de C.V. MexicoCummins Corporation IndianaCummins Cote d'Ivoire SARL Cote d'IvoireCummins Crosspoint LLC IndianaCummins CV Member LLC IndianaCummins Czech Republic s.r.o. Czech RepublicCummins Deutschland GmbH GermanyCummins Diesel International Ltd. BarbadosCummins Distribution Holdco Inc. IndianaCummins East Asia Research & Development Co. Ltd. ChinaCummins Eastern Canada LP CanadaCummins Eastern Canada Management Inc. CanadaCummins Eastern Marine, Inc. CanadaCummins EMEA Holdings Limited United KingdomCummins Emission Solutions (China) Co., Ltd. ChinaCummins Emission Solutions Inc. IndianaCummins Empresas Filantropicas MexicoCummins Energetica Ltda. BrazilCummins Energy Solutions Business North Europe NV/SA BelgiumCummins Energy Solutions Business Iberia, S.L. SpainCummins Energy Ventures Canada Ltd. CanadaCummins Engine (Beijing) Co. Ltd. ChinaCummins Engine (Shanghai) Co. Ltd. ChinaCummins Engine (Shanghai) Trading & Services Co. Ltd. ChinaCummins Engine Holding Company, Inc. IndianaCummins Engine IP, Inc. DelawareCummins Engine Venture Corporation IndianaCummins Filtration (Shanghai) Co. Ltd. ChinaCummins Filtration GmbH GermanyCummins Filtration Inc. IndianaCummins Filtration International Corp. IndianaCummins Filtration International Corp. External Profit Company South AfricaCummins Filtration IP, Inc. DelawareCummins Filtration Ltd. KoreaCUMMINS INC.SUBSIDIARIES OF THE REGISTRANTCummins Filtration SARL FranceCummins Filtration Trading (Shanghai) Co., Ltd. ChinaCummins Filtros Ltda. BrazilCummins Franchise Holdco LLC IndianaCummins Fuel Systems (Wuhan) Co. Ltd. ChinaCummins Generator Technologies Americas Inc. PennsylvaniaCummins Generator Technologies (China) Co., Ltd. ChinaCummins Generator Technologies Germany GmbH GermanyCummins Generator Technologies India Private Ltd. IndiaCummins Generator Technologies Italy SRL ItalyCummins Generator Technologies Limited United KingdomCummins Generator Technologies Romania S.A. RomaniaCummins Generator Technologies Singapore Pte Ltd. SingaporeCummins Ghana Limited GhanaCummins Ghana Mining Limited GhanaCummins Global Financing LP United KingdomCummins Global Technologies LLP United KingdomCummins Grupo Comercial Y. de Servicios, S. de R.L. de C.V. MexicoCummins Grupo Industrial S. de R.L. de C.V. MexicoCummins Holland B.V. The NetherlandsCummins Hong Kong Ltd. Hong KongCummins India Ltd. IndiaCummins Intellectual Property, Inc. DelawareCummins International Finance LLC IndianaCummins International Holdings Cooperatief U.A. The NetherlandsCummins International Holdings LLC IndianaCummins Italia S.P.A. ItalyCummins Japan Ltd. JapanCummins Korea Co. Ltd. KoreaCummins LLC Member, Inc. DelawareCummins Ltd. United KingdomCummins Maroc SARL MoroccoCummins Middle East FZE DubaiCummins Mining Services S. de R.L. de C.V. MexicoCummins Mobility Services Inc. IndianaCummins Mongolia Investment LLC MongoliaCummins Mozambique Ltda. MozambiqueCummins Namibia Engine Sales and Service PTY LTD NamibiaCummins Natural Gas Engines, Inc. DelawareCummins New Zealand Limited New ZealandCummins Nigeria Ltd. NigeriaCummins Norte de Colombia S.A.S. ColombiaCummins North Africa Regional Office SARL MorroccoCummins Northeast, LLC DelawareCummins Norway AS NorwayCUMMINS INC.SUBSIDIARIES OF THE REGISTRANTCummins NV BelgiumCummins Pacific LLC DelawareCummins PGI Holdings Ltd. United KingdomCummins Power (Construction) Inc. CanadaCummins Power Generation (China) Co., Ltd. ChinaCummins Power Generation (S) Pte. Ltd. SingaporeCummins Power Generation (U.K.) Limited United KingdomCummins Power Generation Deutschland GmbH GermanyCummins Power Generation Inc. DelawareCummins Power Generation Limited United KingdomCummins Power Generation Mali S.A. South AfricaCummins PowerGen IP, Inc. DelawareCummins Research and Technology India Private Ltd. IndiaCummins Romania Srl RomaniaCummins S. de R.L. de C.V. MexicoCummins Sales and Service Korea Co., Ltd. KoreaCummins Sales and Service Philippines Inc. PhilippinesCummins Sales and Service Private Limited IndiaCummins Sales and Service Singapore Pte. Ltd. SingaporeCummins Sales and Service Sdn. Bhd. MalaysiaCummins Sinai ve Otomotiv Urunleri Sanayi ve Ticaret Limited Sirketi TurkeyCummins South Africa (Pty.) Ltd. South AfricaCummins Southern Plains LLC TexasCummins South Pacific Pty. Limited AustraliaCummins Spain, S.L. SpainCummins Sweden AB SwedenCummins Technologies India Private Limited IndiaCummins Trade Receivables, LLC DelawareCummins Turbo Technologies B.V. The NetherlandsCummins Turbo Technologies Limited United KingdomCummins Turkey Motor Güç Sistemleri Satış Servis Limited Şirketi TurkeyCummins UK Global Holdings Ltd. United KingdomCummins U.K. Holdings Ltd. United KingdomCummins U.K. Pension Plan Trustee Ltd. United KingdomCummins UK Holdings LLC IndianaCummins Vendas e Servicos de Motores e Geradores Ltda. BrazilCummins Venture Corporation DelawareCummins West Africa Limited NigeriaCummins West Balkans d.o.o. Nova Pasova SerbiaCummins Western Canada Limited Partnership CanadaCummins (Xiangyang) Machining Co. Ltd. ChinaCummins Zambia Ltd. ZambiaCummins Zimbabwe Pvt. Ltd. ZimbabweCWC General Partner Ltd. CanadaDistribuidora Cummins Centroamerica Costa Rica, S.de R.L. Costa RicaCUMMINS INC.SUBSIDIARIES OF THE REGISTRANTDistribuidora Cummins Centroamerica El Salvador, S.de R.L. El SalvadorDistribuidora Cummins Centroamerica Guatemala, Ltda. GuatemalaDistribuidora Cummins Centroamerica Honduras, S.de R.L. HondurasDistribuidora Cummins de Panama, S. de R.L. PanamaDistribuidora Cummins S.A. ArgentinaDistribuidora Cummins S.A. Sucursal Bolivia BoliviaDistribuidora Cummins Sucursal Paraguay SRL ParaguayDynamo Insurance Company, Inc. VermontMarkon Engineering Company Ltd. United KingdomNelson Burgess Ltd. United KingdomNewage Engineers GmbH GermanyNewage Ltd. (U.K.) United KingdomNewage Machine Tools Ltd. United KingdomOOO Cummins RussiaPetbow Limited United KingdomPower Group International (Overseas Holdings) B.V. HollandPower Group International (Overseas Holdings) Ltd. United KingdomPower Group International Ltd. United KingdomQuickstart Energy Projects SpA ChiliShanghai Cummins Trading Co., Ltd. ChinaShenzhen Chongfa Cummins Engine Co., Ltd. Hong KongTOO Cummins KazakhstanWorldwide Partner CV Member LLC IndianaWuxi Cummins Turbo Technologies Co. Ltd. ChinaZED Connect Inc. DelawareEXHIBIT 23CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-209544) and Form S-8 (Nos. 333-67391, 333-123368, 333-162796 (as amended by Post-Effective Amendment No.1), 333-172650, 333-181927 (as amended by Post-Effective Amendment No. 1), 333-184786, 333-218381 and 333-218387) of Cummins Inc. of our report dated February 12, 2018 relating to the financial statements and the effectiveness ofinternal control over financial reporting, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLPIndianapolis, Indiana February 14, 2018EXHIBIT 24CUMMINS INC.2017 Form 10-KPOWER OF ATTORNEYI hereby legally appoint each of Patrick J. Ward and Christopher C. Clulow as my attorneys-in-fact and agents, with full power of substitution and re-substitution, to sign on my behalf the Annual Report on Form 10-K, and any and all amendments thereto, of Cummins Inc. (the “Company”) for theCompany’s year ended December 31, 2017 and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securitiesand Exchange Commission, and to do anything else that said attorneys-in-fact and agents or any of them, or his or her substitute or substitutes, may lawfullydo or cause to be done consistent herewith.Dated:February 12, 2018/s/ ROBERT J. BERNHARD Robert J. Bernhard DirectorCUMMINS INC.2017 Form 10-KPOWER OF ATTORNEYI hereby legally appoint each of Patrick J. Ward and Christopher C. Clulow as my attorneys-in-fact and agents, with full power of substitution and re-substitution, to sign on my behalf the Annual Report on Form 10-K, and any and all amendments thereto, of Cummins Inc. (the “Company”) for theCompany’s year ended December 31, 2017 and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securitiesand Exchange Commission, and to do anything else that said attorneys-in-fact and agents or any of them, or his or her substitute or substitutes, may lawfullydo or cause to be done consistent herewith.Dated:February 12, 2018/s/ FRANKLIN R. CHANG DIAZ Franklin R. Chang Diaz DirectorCUMMINS INC.2017 Form 10-KPOWER OF ATTORNEYI hereby legally appoint each of Patrick J. Ward and Christopher C. Clulow as my attorneys-in-fact and agents, with full power of substitution and re-substitution, to sign on my behalf the Annual Report on Form 10-K, and any and all amendments thereto, of Cummins Inc. (the “Company”) for theCompany’s year ended December 31, 2017 and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securitiesand Exchange Commission, and to do anything else that said attorneys-in-fact and agents or any of them, or his or her substitute or substitutes, may lawfullydo or cause to be done consistent herewith.Dated:February 12, 2018/s/ BRUNO V. DI LEO ALLEN Bruno V. Di Leo Allen DirectorCUMMINS INC.2017 Form 10-KPOWER OF ATTORNEYI hereby legally appoint each of Patrick J. Ward and Christopher C. Clulow as my attorneys-in-fact and agents, with full power of substitution and re-substitution, to sign on my behalf the Annual Report on Form 10-K, and any and all amendments thereto, of Cummins Inc. (the “Company”) for theCompany’s year ended December 31, 2017 and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securitiesand Exchange Commission, and to do anything else that said attorneys-in-fact and agents or any of them, or his or her substitute or substitutes, may lawfullydo or cause to be done consistent herewith.Dated:February 12, 2018/s/ STEPHEN B. DOBBS Stephen B. Dobbs DirectorCUMMINS INC.2017 Form 10-KPOWER OF ATTORNEYI hereby legally appoint each of Patrick J. Ward and Christopher C. Clulow as my attorneys-in-fact and agents, with full power of substitution and re-substitution, to sign on my behalf the Annual Report on Form 10-K, and any and all amendments thereto, of Cummins Inc. (the “Company”) for theCompany’s year ended December 31, 2017 and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securitiesand Exchange Commission, and to do anything else that said attorneys-in-fact and agents or any of them, or his or her substitute or substitutes, may lawfullydo or cause to be done consistent herewith.Dated:February 12, 2018/s/ RICHARD J. FREELAND Richard J. Freeland DirectorCUMMINS INC.2017 Form 10-KPOWER OF ATTORNEYI hereby legally appoint each of Patrick J. Ward and Christopher C. Clulow as my attorneys-in-fact and agents, with full power of substitution and re-substitution, to sign on my behalf the Annual Report on Form 10-K, and any and all amendments thereto, of Cummins Inc. (the “Company”) for theCompany’s year ended December 31, 2017 and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securitiesand Exchange Commission, and to do anything else that said attorneys-in-fact and agents or any of them, or his or her substitute or substitutes, may lawfullydo or cause to be done consistent herewith.Dated:February 12, 2018/s/ ROBERT K. HERDMAN Robert K. Herdman DirectorCUMMINS INC.2017 Form 10-KPOWER OF ATTORNEYI hereby legally appoint each of Patrick J. Ward and Christopher C. Clulow as my attorneys-in-fact and agents, with full power of substitution and re-substitution, to sign on my behalf the Annual Report on Form 10-K, and any and all amendments thereto, of Cummins Inc. (the “Company”) for theCompany’s year ended December 31, 2017 and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securitiesand Exchange Commission, and to do anything else that said attorneys-in-fact and agents or any of them, or his or her substitute or substitutes, may lawfullydo or cause to be done consistent herewith.Dated:February 12, 2018/s/ ALEXIS M. HERMAN Alexis M. Herman DirectorCUMMINS INC.2017 Form 10-KPOWER OF ATTORNEYI hereby legally appoint each of Patrick J. Ward and Christopher C. Clulow as my attorneys-in-fact and agents, with full power of substitution and re-substitution, to sign on my behalf the Annual Report on Form 10-K, and any and all amendments thereto, of Cummins Inc. (the “Company”) for theCompany’s year ended December 31, 2017 and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securitiesand Exchange Commission, and to do anything else that said attorneys-in-fact and agents or any of them, or his or her substitute or substitutes, may lawfullydo or cause to be done consistent herewith.Dated:February 12, 2018/s/ THOMAS J. LYNCH Thomas J. Lynch DirectorCUMMINS INC.2017 Form 10-KPOWER OF ATTORNEYI hereby legally appoint each of Patrick J. Ward and Christopher C. Clulow as my attorneys-in-fact and agents, with full power of substitution and re-substitution, to sign on my behalf the Annual Report on Form 10-K, and any and all amendments thereto, of Cummins Inc. (the “Company”) for theCompany’s year ended December 31, 2017 and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securitiesand Exchange Commission, and to do anything else that said attorneys-in-fact and agents or any of them, or his or her substitute or substitutes, may lawfullydo or cause to be done consistent herewith.Dated:February 12, 2018/s/ WILLIAM I. MILLER William I. Miller DirectorCUMMINS INC.2017 Form 10-KPOWER OF ATTORNEYI hereby legally appoint each of Patrick J. Ward and Christopher C. Clulow as my attorneys-in-fact and agents, with full power of substitution and re-substitution, to sign on my behalf the Annual Report on Form 10-K, and any and all amendments thereto, of Cummins Inc. (the “Company”) for theCompany’s year ended December 31, 2017 and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securitiesand Exchange Commission, and to do anything else that said attorneys-in-fact and agents or any of them, or his or her substitute or substitutes, may lawfullydo or cause to be done consistent herewith.Dated:February 12, 2018/s/ GEORGIA R. NELSON Georgia R. Nelson DirectorCUMMINS INC.2017 Form 10-KPOWER OF ATTORNEYI hereby legally appoint each of Patrick J. Ward and Christopher C. Clulow as my attorneys-in-fact and agents, with full power of substitution and re-substitution, to sign on my behalf the Annual Report on Form 10-K, and any and all amendments thereto, of Cummins Inc. (the “Company”) for theCompany’s year ended December 31, 2017 and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securitiesand Exchange Commission, and to do anything else that said attorneys-in-fact and agents or any of them, or his or her substitute or substitutes, may lawfullydo or cause to be done consistent herewith.Dated:February 12, 2018/s/ KAREN H. QUINTOS Karen H. Quintos DirectorEXHIBIT 31(a)CertificationI, N. Thomas Linebarger, certify that:1.I have reviewed this report on Form 10-K of Cummins Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have:a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the periods in which the report is being prepared;b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles;c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectivenessof the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; andb)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlsover financial reporting.Date:February 12, 2018 /s/ N. THOMAS LINEBARGER N. Thomas Linebarger Chairman and Chief Executive OfficerEXHIBIT 31(b)CertificationI, Patrick J. Ward, certify that:1.I have reviewed this report on Form 10-K of Cummins Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have:a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the periods in which the report is being prepared;b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles;c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectivenessof the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; andb)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlsover financial reporting.Date:February 12, 2018 /s/ PATRICK J. WARD Patrick J. Ward Vice President and Chief Financial OfficerEXHIBIT 32Cummins Inc.CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Cummins Inc. (the “Company”) on Form 10-K for the period ended December 31, 2017, as filed with the Securitiesand Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the Company, certify, pursuant to 18 U.S.C. ss. 1350, asadopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to the best of such officer's knowledge:(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.February 12, 2018/s/ N. THOMAS LINEBARGER N. Thomas Linebarger Chairman and Chief Executive Officer February 12, 2018/s/ PATRICK J. WARD Patrick J. Ward Vice President and Chief Financial Officer

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