SEC Filings


8-K
CUMMINS INC filed this Form 8-K on 02/06/2018
Entire Document
 
Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

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FORM 8-K
 
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of Report:  February 6, 2018
 
  CUMMINS INC.
(Exact name of registrant as specified in its charter)
Indiana
(State or other Jurisdiction of
Incorporation)
1-4949
 (Commission File Number)
35-0257090
 (I.R.S. Employer Identification No.)

500 Jackson Street
P. O. Box 3005
Columbus, IN  47202-3005
(Principal Executive Office)  (Zip Code)

Registrant's telephone number, including area code:  (812) 377-5000
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
 
[ ]
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
[ ]
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
[ ]
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
[ ]
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter)

Emerging growth Company o

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

1


Item 2.02. Results of Operations and Financial Condition.
 
On February 6, 2018, Cummins Inc. (“Cummins,” “the Company,” “the registrant,” “we,” “our,” or “us”) issued the attached press release reporting its financial results for the fourth quarter and full year of 2017, which is furnished herewith as Exhibit 99.

The information furnished pursuant to this Item 2.02, including Exhibit 99, shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise subject to the liabilities under that Section and shall not be deemed to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Exchange Act.


Item 9.01. Financial Statements and Exhibits.
 
(d)
The following exhibit is furnished pursuant to Item 2.02 herewith: 


SIGNATURE

 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
Date: February 6, 2018
 
CUMMINS INC.
 /s/ CHRISTOPHER C. CLULOW
Christopher C. Clulow
Vice President - Corporate Controller
(Principal Accounting Officer)

 

2

CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (a)



 
 
Three months ended
In millions, except per share amounts
 
December 31,
2017
 
December 31,
2016
NET SALES
 
$
5,476

 
$
4,503

Cost of sales
 
4,102

 
3,383

GROSS MARGIN
 
1,374

 
1,120

OPERATING EXPENSES AND INCOME
 
 
 
 
Selling, general and administrative expenses
 
633

 
519

Research, development and engineering expenses
 
207

 
158

Equity, royalty and interest income from investees
 
56

 
67

Loss contingency
 
5

 

Other operating income (expense), net
 
10

 
(3
)
OPERATING INCOME
 
595

 
507

Interest income
 
7

 
5

Interest expense
 
24

 
18

Other income, net
 
18

 
14

INCOME BEFORE INCOME TAXES
 
596

 
508

Income tax expense
 
905

 
112

CONSOLIDATED NET (LOSS) INCOME
 
(309
)
 
396

Less: Net (loss) income attributable to noncontrolling interests
 
(35
)
 
18

NET (LOSS) INCOME ATTRIBUTABLE TO CUMMINS INC.
 
$
(274
)
 
$
378

 
 
 
 
 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
 
 
 
 
Basic
 
$
(1.66
)
 
$
2.26

Diluted
 
$
(1.65
)
 
$
2.25

 
 
 
 
 
WEIGHTED AVERAGE SHARES OUTSTANDING
 
 

 
 
Basic
 
165.4

 
167.6

Diluted
 
166.2

 
168.1

 
 
 
 
 
CASH DIVIDENDS DECLARED PER COMMON SHARE
 
$
1.08

 
$
1.025

 
 
 
 
 
(a)  Prepared on an unaudited basis in accordance with accounting principles generally accepted in the United States of America.







3

CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (a)


 
 
 
Years ended December 31,
In millions, except per share amounts
 
2017
 
2016
NET SALES
 
$
20,428

 
$
17,509

Cost of sales
 
15,338

 
13,057

GROSS MARGIN
 
5,090

 
4,452

OPERATING EXPENSES AND INCOME
 
 
 
 
Selling, general and administrative expenses
 
2,390

 
2,046

Research, development and engineering expenses
 
752

 
636

Equity, royalty and interest income from investees
 
357

 
301

Loss contingency
 
5

 
138

Other operating income (expense), net
 
65

 
(5
)
OPERATING INCOME
 
2,365

 
1,928

Interest income
 
18

 
23

Interest expense
 
81

 
69

Other income, net
 
63

 
48

INCOME BEFORE INCOME TAXES
 
2,365

 
1,930

Income tax expense
 
1,371

 
474

CONSOLIDATED NET INCOME
 
994

 
1,456

Less: Net (loss) income attributable to noncontrolling interests
 
(5
)
 
62

NET INCOME ATTRIBUTABLE TO CUMMINS INC.
 
$
999

 
$
1,394

 
 
 
 
 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
 
 
 
 
Basic
 
$
5.99

 
$
8.25

Diluted
 
$
5.97

 
$
8.23

 
 
 
 
 
WEIGHTED AVERAGE SHARES OUTSTANDING
 
 
 
 
Basic
 
166.6

 
169.0

Diluted
 
167.3

 
169.3

 
 
 
 
 
CASH DIVIDENDS DECLARED PER COMMON SHARE
 
$
4.21

 
$
4.00

 
 
 
 
 
(a)  Prepared on an unaudited basis in accordance with accounting principles generally accepted in the United States of America.




4

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


In millions, except par value
 
December 31,
2017
 
December 31,
2016
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
1,369

 
$
1,120

Marketable securities
 
198

 
260

Total cash, cash equivalents and marketable securities
 
1,567

 
1,380

Accounts and notes receivable, net
 
3,618

 
3,025

Inventories
 
3,166

 
2,675

Prepaid expenses and other current assets
 
577

 
627

Total current assets
 
8,928

 
7,707

Long-term assets
 
 
 
 
Property, plant and equipment, net
 
3,927

 
3,800

Investments and advances related to equity method investees
 
1,156

 
946

Goodwill
 
1,082

 
480

Other intangible assets, net
 
973

 
332

Pension assets
 
1,043

 
731

Other assets
 
966

 
1,015

Total assets
 
$
18,075

 
$
15,011

 
 
 
 
 
LIABILITIES
 
 
 
 
Current liabilities
 
 
 
 
Accounts payable (principally trade)
 
$
2,579

 
$
1,854

Loans payable
 
57

 
41

Commercial paper
 
298

 
212

Accrued compensation, benefits and retirement costs
 
811

 
412

Current portion of accrued product warranty
 
454

 
333

Current portion of deferred revenue
 
500

 
468

Other accrued expenses
 
915

 
970

Current maturities of long-term debt
 
63

 
35

Total current liabilities
 
5,677

 
4,325

Long-term liabilities
 
 
 
 
Long-term debt
 
1,588

 
1,568

Postretirement benefits other than pensions
 
289

 
329

Pensions
 
330

 
326

Other liabilities and deferred revenue
 
2,027

 
1,289

Total liabilities
 
$
9,911

 
$
7,837

 
 
 
 
 
EQUITY
 
 
 
 
Cummins Inc. shareholders’ equity
 
 
 
 
Common stock, $2.50 par value, 500 shares authorized, 222.4 and 222.4 shares issued
 
$
2,210

 
$
2,153

Retained earnings
 
11,464

 
11,040

Treasury 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
 
(1,503
)
 
(1,821
)
Total Cummins Inc. shareholders’ equity
 
7,259

 
6,875

Noncontrolling interests
 
905

 
299

Total equity
 
$
8,164

 
$
7,174

Total liabilities and equity
 
$
18,075

 
$
15,011

 
 
 
 
 
(a)  Prepared on an unaudited basis in accordance with accounting principles generally accepted in the United States of America.



5

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


 
 
Years ended December 31,
In millions
 
2017
 
2016
NET CASH PROVIDED BY OPERATING ACTIVITIES
 
$
2,277

 
$
1,939

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
Capital expenditures
 
(506
)
 
(531
)
Investments in internal use software
 
(81
)
 
(63
)
Proceeds from disposals of property, plant and equipment
 
110

 
14

Investments in and advances to equity investees
 
(66
)
 
(41
)
Acquisitions of businesses, net of cash acquired
 
(662
)
 
(94
)
Investments in marketable securities—acquisitions
 
(194
)
 
(478
)
Investments in marketable securities—liquidations
 
266

 
306

Proceeds from sale of equity investees
 

 
60

Cash flows from derivatives not designated as hedges
 
76

 
(102
)
Other, net
 
5

 
12

Net cash used in investing activities
 
(1,052
)
 
(917
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
Proceeds from borrowings
 
6

 
111

Net borrowings of commercial paper
 
86

 
212

Payments on borrowings and capital lease obligations
 
(60
)
 
(163
)
Net borrowings under short-term credit agreements
 
12

 
19

Distributions to noncontrolling interests
 
(29
)
 
(65
)
Dividend payments on common stock
 
(701
)
 
(676
)
Repurchases of common stock
 
(451
)
 
(778
)
Acquisitions of noncontrolling interests
 

 
(98
)
Other, net
 
63

 
25

Net cash used in financing activities
 
(1,074
)
 
(1,413
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
 
98

 
(200
)
Net increase (decrease) in cash and cash equivalents
 
249

 
(591
)
Cash and cash equivalents at beginning of year
 
1,120

 
1,711

CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
1,369

 
$
1,120

 
 
 
 
 
(a)  Prepared on an unaudited basis in accordance with accounting principles generally accepted in the United States of America.

6

CUMMINS INC. AND SUBSIDIARIES
SEGMENT INFORMATION
(Unaudited)

 
In millions
 
Engine
 
Distribution
 
Components (1)
 
Power Systems
 
Total Segment
 
Intersegment Eliminations (2)
 
Total
 
Three months ended December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External sales
 
$
1,710

 
$
1,928

 
$
1,180

 
$
658

 
$
5,476

 
$

 
$
5,476

 
Intersegment sales
 
577

 
10

 
378

 
445

 
1,410

 
(1,410
)
 

 
Total sales
 
2,287

 
1,938

 
1,558

 
1,103

 
6,886

 
(1,410
)
 
5,476

 
Depreciation and amortization (3)
 
47

 
26

 
46

 
30

 
149

 

 
149

 
Research, development and engineering expenses
 
79

 
5

 
70

 
53

 
207

 

 
207

 
Equity, royalty and interest income from investees (4)
 
33

 
9

 

 
14

 
56

 

 
56

 
Interest income
 
2

 
2

 
2

 
1

 
7

 

 
7

 
EBIT
 
224

 
97

 
168

 
95

 
584

 
36

 
620

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EBIT as a percentage of total sales
 
9.8
%
 
5.0
%
 
10.8
%
 
8.6
%
 
8.5
%
 
 
 
11.3
%
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External sales
 
$
1,424

 
$
1,664

 
$
860

 
$
555

 
$
4,503

 
$

 
$
4,503

 
Intersegment sales
 
543

 
6

 
317

 
377

 
1,243

 
(1,243
)
 

 
Total sales
 
1,967

 
1,670

 
1,177

 
932

 
5,746

 
(1,243
)
 
4,503

 
Depreciation and amortization (3)
 
41

 
31

 
38

 
28

 
138

 

 
138

 
Research, development and engineering expenses
 
60

 
3

 
47

 
48

 
158

 

 
158

 
Equity, royalty and interest income from investees
 
28

 
14

 
12

 
13

 
67

 

 
67

 
Interest income
 
2

 
1

 
1

 
1

 
5

 

 
5

 
EBIT
 
194

 
122

(5) 
140

 
68

(6) 
524

 
2

 
526

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EBIT as a percentage of total sales
 
9.9
%
 
7.3
%
 
11.9
%
 
7.3
%
 
9.1
%
 
 
 
11.7
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1
)
The 2017 disclosures include Eaton Cummins Automated Transmission Technologies joint venture results consolidated during the third quarter of 2017.
(2
)
Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three months ended December 31, 2017 and 2016.
(3
)
Depreciation and amortization as shown on a segment basis excludes the amortization of debt discount and deferred costs included in the Condensed Consolidated Statements of Income as "Interest expense."
(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 from investees by $23 million, $4 million and $12 million for the Engine, Distribution and Components segments, respectively.
(5
)
Distribution segment EBIT included a gain of $15 million on the fair value adjustment resulting from the acquisition of the controlling interest in a North American distributor in the fourth quarter of 2016.
(6
)
In the fourth quarter of 2016, we sold our remaining 49 percent interest in Cummins Olayan Energy for $61 million and recognized a gain of $17 million.

7

CUMMINS INC. AND SUBSIDIARIES
SEGMENT INFORMATION
(Unaudited)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
In millions
 
Engine
 
Distribution
 
Components (1)
 
Power Systems
 
Total Segment
 
Intersegment Eliminations (2)
 
Total
 
Year ended December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External sales
 
$
6,661

 
$
7,029

 
$
4,363

 
$
2,375

 
$
20,428

 
$

 
$
20,428

 
Intersegment 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
)
 
20,428

 
Depreciation and amortization (3)
 
184

 
116

 
163

 
117

 
580

 

 
580

 
Research, development and engineering expenses
 
279

 
19

 
240

 
214

 
752

 

 
752

 
Equity, royalty and interest income from investees (4)
 
219

 
44

 
40

 
54

 
357

 

 
357

 
Interest income
 
6

 
6

 
3

 
3

 
18

 

 
18

 
EBIT
 
959

 
384

 
754

 
294

 
2,391

 
55

 
2,446

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EBIT as a percentage of total sales
 
10.7
%
 
5.4
%
 
12.8
%
 
7.2
%
 
9.2
%
 
 
 
12.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year ended December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External sales
 
$
5,774

 
$
6,157

 
$
3,514

 
$
2,064

 
$
17,509

 
$

 
$
17,509

 
Intersegment 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
)
 
17,509

 
Depreciation and amortization (3)
 
163

 
116

 
133

 
115

 
527

 

 
527

 
Research, development and engineering expenses
 
226

 
13

 
208

 
189

 
636

 

 
636

 
Equity, royalty and interest income from investees
 
148

 
70

 
41

 
42

 
301

 

 
301

 
Loss contingency
 
138

 

 

 

 
138

 

 
138

 
Interest income
 
10

 
4

  
4

 
5

 
23

 

 
23

 
EBIT
 
686

 
392

(5) 
641

 
263

(6) 
1,982

 
17

 
1,999

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EBIT as a percentage of total sales
 
8.8
%
 
6.3
%
 
13.3
%
 
7.5
%
 
8.9
%
 
 
 
11.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1
)
The 2017 disclosures include Eaton Cummins Automated Transmission Technologies joint venture results consolidated during the third quarter of 2017.
(2
)
Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the years ended December 31, 2017 and 2016.
(3
)
Depreciation and amortization as shown on a segment basis excludes the amortization of debt discount and deferred costs included in the Condensed Consolidated Statements of Income as "Interest expense." The amortization of debt discount and deferred costs was $3 million for both years ended December 31, 2017 and December 31, 2016.
(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 from investees by $23 million, $4 million and $12 million for the Engine, Distribution and Component segments, respectively.
(5
)
Distribution segment EBIT included a gain of $15 million on the fair value adjustment resulting from the acquisition of the controlling interests in a North American distributor in the fourth quarter of 2016.
(6
)
In the fourth quarter of 2016, we sold our remaining 49 percent interest in Cummins Olayan Energy for $61 million and recognized a gain of $17 million.


A reconciliation of our segment information to the corresponding amounts in the Condensed Consolidated Statements of Income is shown in the table below:
 
 
 
Three months ended
 
Years ended
In millions
 
December 31,
2017
 
December 31,
2016
 
December 31,
2017
 
December 31,
2016
Total EBIT
 
$
620

 
$
526

 
$
2,446

 
$
1,999

Less: Interest expense
 
24

 
18

 
81

 
69

Income before income taxes
 
$
596

 
$
508

 
$
2,365

 
$
1,930



8

CUMMINS INC. AND SUBSIDIARIES
SELECT FOOTNOTE DATA
(Unaudited)


BASIS OF PRESENTATION

Our consolidated financial statements were prepared based on proposed guidance provided by the Financial Accounting Standards Board in their Exposure Draft (ED) released on January 18, 2018, regarding the reclassification of certain stranded effects of income taxes in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017.  The ED was not final on our earnings release date of February 6, 2018, but is expected to be final when we file our 2017 Form 10-K the week of February 12, 2018.  

EQUITY, ROYALTY AND INTEREST INCOME FROM INVESTEES

Equity, royalty and interest income from investees included in our Condensed Consolidated Statements of Income for the reporting periods was as follows:
 
 
Three months ended
 
Years ended
In millions
 
December 31,
2017
 
December 31,
2016
 
December 31,
2017
 
December 31,
2016
Distribution entities
 
 
 
 
 
 
 
 
Komatsu Cummins Chile, Ltda.
 
$
7

 
$
8

 
$
30

 
$
34

North American distributors
 

 
3

 

 
21

All other distributors
 

 
(2
)
 
(1
)
 

Manufacturing entities
 
 

 
 
 
 

 
 
Dongfeng Cummins Engine Company, Ltd.
 
17

 
14

 
73

 
46

Beijing Foton Cummins Engine Co., Ltd.
 
15

 
(7
)
 
94

 
52

Chongqing Cummins Engine Company, Ltd.
 
11

 
10

 
41

 
38

Dongfeng Cummins Emission Solutions Co., Ltd.
 
3

 
4

 
13

 
9

Shanghai Fleetguard Filter Co., Ltd.
 
2

 
3

 
12

 
10

Cummins Westport, Inc.
 

(1) 
6

 
9

(1) 
11

All other manufacturers
 
(12
)
(1) 
16

 
37

(1) 
39

Cummins share of net income
 
43

 
55

 
308

 
260

Royalty and interest income
 
13

 
12

 
49

 
41

Equity, royalty and interest income from investees
 
$
56

 
$
67

 
$
357

 
$
301

___________________________________________________________
(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 foreign earnings.







9


INCOME TAXES
 
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. statutory rate to 21 percent effective January 1, 2018.  The impact of the Tax Legislation resulted in a net incremental charge to our Condensed Consolidated Statements of Income of $777 million.  The components of the 2017 charge were as follows:
In millions
Impact of Tax Legislation
Increase in income tax expense
$
781

Decrease in equity, royalty and other income from investees
39

Increase in income attributable to noncontrolling interests
(43
)
Net impact of Tax Legislation
$
777

The $781 million increase in tax expense is composed of three elements - the remeasurement of deferred taxes, a one-time transitional tax on unrepatriated earnings and withholding taxes on foreign earnings.
We 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.
The one-time transition tax is based on our total post-1986 unrepatriated earnings and profits not previously subject to U.S. income tax. The recorded provisional amount for our one-time transition tax is a tax expense of $298 million.
Withholding tax is an additional cost associated with the distribution of earnings from some jurisdictions. As a result of the Tax Legislation, we reconsidered previous assertions regarding earnings that were considered permanently reinvested, which requires us to record withholding taxes on earnings likely to be distributed in the foreseeable future. The assertion as to which earnings are permanently reinvested for purposes of calculating withholding tax is provisional as 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 amount for the withholding tax resulted in an incremental tax expense of $331 million.
 
 
Our unconsolidated equity investees were also unfavorably impacted by the new tax legislation by $39 million, due to $32 million of withholding taxes on foreign earnings and $7 million due to the remeasurement of deferred taxes. In addition, our noncontrolling interests included a $43 million credit related to the withholding taxes on foreign earnings.
Our income tax rates are generally less than the 35 percent U.S. statutory income tax rate, primarily because of lower taxes on foreign earnings and research tax credits. Our effective tax rate for 2017 was 151.8 percent and 58.0 percent for the fourth quarter and full year, respectively, compared to 22.0 percent and 24.6 percent for the fourth quarter and full year in 2016. Our 2017 effective tax rate excluding the Tax Legislation was 19.5 percent and 24.5 percent for the fourth quarter and full year, respectively.
We expect our 2018 effective tax rate to be 23 percent, excluding any discrete items (including adjustments to provisional estimates) that may arise.

10

CUMMINS INC. AND SUBSIDIARIES
FINANCIAL MEASURES THAT SUPPLEMENT GAAP
(Unaudited)


Condensed Consolidated Statements of Income excluding impacts of Tax Legislation

Cummins Inc. and Subsidiaries
 Condensed Consolidated Statements of Income
 
 
 
 
 
Three months ended
 
 
December 31, 2017
In millions, except per share amounts
 
As Reported Under GAAP
 
Excluding
Tax Legislation Impact
 
Adjusted Excluding Tax Impact
NET SALES
 
$
5,476

 
$

 
$
5,476

Cost of sales
 
4,102

 

 
4,102

GROSS MARGIN
 
1,374

 

 
1,374

OPERATING EXPENSES AND INCOME
 
 
 
 
 

Selling, general and administrative expenses
 
633

 

 
633

Research, development and engineering expenses
 
207

 

 
207

Equity, royalty and interest income from investees
 
56

 
39

 
95

Loss contingency
 
5

 

 
5

Other operating income (expense), net
 
10

 

 
10

OPERATING INCOME
 
595

 
39

 
634

Interest income
 
7

 

 
7

Interest expense
 
24

 

 
24

Other income, net
 
18

 

 
18

INCOME BEFORE INCOME TAXES
 
596

 
39

 
635

Income tax expense
 
905

 
(781
)
 
124

CONSOLIDATED NET (LOSS) INCOME
 
(309
)
 
820

 
511

Less: Net (loss) income attributable to noncontrolling interests
 
(35
)
 
43

 
8

NET (LOSS) INCOME ATTRIBUTABLE TO CUMMINS INC.
 
$
(274
)
 
$
777

 
$
503

 
 
 
 
 
 
 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
 
 
 
 
 
 
Basic
 
$
(1.66
)
 
$
4.70

 
$
3.04

Diluted
 
$
(1.65
)
 
$
4.68

 
$
3.03

 
 
 
 
 
 
 
WEIGHTED AVERAGE SHARES OUTSTANDING
 
 

 
 
 
 
Basic
 
165.4

 

 
165.4

Diluted
 
166.2

 

 
166.2

 
 
 
 
 
 
 
CASH DIVIDENDS DECLARED PER COMMON SHARE
 
$
1.08

 
$

 
$
1.08

 
 
 
 
 
 
 




11

CUMMINS INC. AND SUBSIDIARIES
FINANCIAL MEASURES THAT SUPPLEMENT GAAP
(Unaudited)

Cummins Inc. and Subsidiaries
Condensed Consolidated Statements of Income
 
 
 
 
 
 
 
 
 
Year ended
 
 
December 31, 2017
In millions, except per share amounts
 
As Reported Under GAAP
 
Excluding
Tax Legislation Impact
 
Adjusted Excluding Tax Impact
NET SALES
 
$
20,428

 
$

 
$
20,428

Cost of sales
 
15,338

 

 
15,338

GROSS MARGIN
 
5,090

 

 
5,090

OPERATING EXPENSES AND INCOME
 
 
 
 
 
 
Selling, general and administrative expenses
 
2,390

 

 
2,390

Research, development and engineering expenses
 
752

 

 
752

Equity, royalty and interest income from investees
 
357

 
39

 
396

Loss contingency
 
5

 

 
5

Other operating income (expense), net
 
65

 

 
65

OPERATING INCOME
 
2,365

 
39

 
2,404

Interest income
 
18

 

 
18

Interest expense
 
81

 

 
81

Other income, net
 
63

 

 
63

INCOME BEFORE INCOME TAXES
 
2,365

 
39

 
2,404

Income tax expense
 
1,371

 
(781
)
 
590

CONSOLIDATED NET INCOME
 
994

 
820

 
1,814

Less: Net (loss) income attributable to noncontrolling interests
 
(5
)
 
43

 
38

NET INCOME ATTRIBUTABLE TO CUMMINS INC.
 
$
999

 
$
777

 
$
1,776

 
 
 
 
 
 
 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
 
 
 
 
 
 
Basic
 
$
5.99

 
$
4.66

 
$
10.65

Diluted
 
$
5.97

 
$
4.65

 
$
10.62

 
 
 
 
 
 
 
WEIGHTED AVERAGE SHARES OUTSTANDING
 
 
 
 
 
 
Basic
 
166.6

 

 
166.6

Diluted
 
167.3

 

 
167.3

 
 
 
 
 
 
 
CASH DIVIDENDS DECLARED PER COMMON SHARE
 
$
4.21

 
$

 
$
4.21

 
 
 
 
 
 
 


12

CUMMINS INC. AND SUBSIDIARIES
FINANCIAL MEASURES THAT SUPPLEMENT GAAP
(Unaudited)


Reconciliation of Non GAAP measures - Earnings before interest, income taxes and noncontrolling interests
We define EBIT as earnings before interest expense, income tax expense and noncontrolling interests in income of consolidated subsidiaries. We use EBIT to assess and measure the performance of our operating segments and also as a component in measuring our variable compensation programs. This measure is not in accordance with, or an alternative for, accounting principles generally accepted in the United States and may not be consistent with measures used by other companies. It should be considered supplemental data. Below is a reconciliation of “Net income attributable to Cummins Inc.” to EBIT for each of the applicable periods:
 
 
Three months ended
 
Years ended
In millions
 
December 31, 2017
 
December 31, 2016
 
December 31, 2017
 
December 31, 2016
Net (loss) income attributable to Cummins Inc.
 
$
(274
)
 
$
378

 
$
999

 
$
1,394

 
 
 
 
 
 
 
 
 
Net (loss) income attributable to Cummins Inc. as a percentage of net sales
 
(5.0
)%
 
8.4
%
 
4.9
%
 
8.0
%
 
 
 
 
 
 
 
 
 
Add
 
 
 
 
 
 
 
 
Net (loss) income attributable to noncontrolling interests
 
(35
)
 
18

 
(5
)
 
62

Consolidated net (loss) income
 
(309
)
 
396

 
994

 
1,456

 
 
 
 
 
 
 
 
 
Add
 
 
 
 
 
 
 
 
Interest expense
 
24

 
18

 
81

 
69

Income tax expense
 
905

 
112

 
1,371

 
474

EBIT
 
620

 
526

 
2,446

 
1,999

 
 
 
 
 
 
 
 
 
EBIT as a percentage of net sales
 
11.3
 %
 
11.7
%
 
12.0
%
 
11.4
%
 
 
 
 
 
 
 
 
 
Impact of tax legislation on equity investees
 
39

 

 
39

 

 
 
 
 
 
 
 
 
 
EBIT, excluding impact of tax legislation on equity investees
 
$
659

 
$
526

 
$
2,485

 
$
1,999

 
 
 
 
 
 
 
 
 
EBIT, excluding impact of tax legislation on equity investees, as a percentage of net sales
 
12.0
 %
 
11.7
%
 
12.2
%
 
11.4
%


13

CUMMINS INC. AND SUBSIDIARIES
FINANCIAL MEASURES THAT SUPPLEMENT GAAP
(Unaudited)


Reconciliation of Non GAAP measures - Earnings before interest, income taxes, noncontrolling interests, depreciation and amortization
We define EBITDA as earnings before interest expense, income tax expense, noncontrolling interests, depreciation and amortization in income of consolidated subsidiaries. We will use EBITDA to assess and measure the performance of our operating segments and also as a component in measuring our variable compensation programs beginning January 1, 2018. This measure is not in accordance with, or an alternative for, accounting principles generally accepted in the United States and may not be consistent with measures used by other companies. It should be considered supplemental data. Below is a reconciliation of “Net income attributable to Cummins Inc.” to EBITDA for each of the applicable periods:


 
 
Three months ended
 
Years ended
In millions
 
December 31, 2017
 
December 31, 2016
 
December 31, 2017
 
December 31, 2016
Net (loss) income attributable to Cummins Inc.
 
$
(274
)
 
$
378

 
$
999

 
$
1,394

 
 
 
 
 
 
 
 
 
Net (loss) income attributable to Cummins Inc. as a percentage of net sales
 
(5.0
)%
 
8.4
%
 
4.9
%
 
8.0
%
 
 
 
 
 
 
 
 
 
Add
 
 
 
 
 
 
 
 
Net (loss) income attributable to noncontrolling interests
 
(35
)
 
18

 
(5
)
 
62

Consolidated net (loss) income
 
(309
)
 
396

 
994

 
1,456

 
 
 
 
 
 
 
 
 
Add
 
 
 
 
 
 
 
 
Interest expense
 
24

 
18

 
81

 
69

Income tax expense
 
905

 
112

 
1,371

 
474

EBIT
 
620

 
526

 
2,446

 
1,999

 
 
 
 
 
 
 
 
 
Add
 
 
 
 
 
 
 
 
Depreciation and amortization
 
149

 
138

 
580

 
527

EBITDA
 
769

 
664

 
3,026

 
2,526

 
 
 
 
 
 
 
 
 
EBITDA as a percentage of net sales
 
14.0
 %
 
14.7
%
 
14.8
%
 
14.4
%
 
 
 
 
 
 
 
 
 
Impact of tax legislation on equity investees
 
39

 

 
39

 

 
 
 
 
 
 
 
 
 
EBITDA, excluding impact of tax legislation on equity investees
 
$
730

 
$
664

 
$
3,065

 
$
2,526

 
 
 
 
 
 
 
 
 
EBITDA, excluding tax legislation impact on equity investees, as a percentage of net sales
 
13.3
 %
 
14.7
%
 
15.0
%
 
14.4
%


 
 
 
 
 
 
 
 
 

14

CUMMINS INC. AND SUBSIDIARIES
BUSINESS UNIT SALES DATA
(Unaudited)


Engine Segment Sales by Market and Unit Shipments by Engine Classification
Sales for our Engine segment by market were as follows:
2017
 
 
 
 
 
 
 
 
 
 
In millions
 
Q1
 
Q2
 
Q3
 
Q4
 
YTD
Heavy-duty truck
 
$
620

 
$
714

 
$
776

 
$
730

 
$
2,840

Medium-duty truck and bus
 
544

 
701

 
625

 
643

 
2,513

Light-duty automotive
 
423

 
429

 
452

 
423

 
1,727

Off-highway
 
436

 
463

 
483

 
491

 
1,873

Total sales
 
$
2,023

 
$
2,307

 
$
2,336

 
$
2,287

 
$
8,953

 
 
 
 
 
 
 
 
 
 
 
2016
 
 
 
 
 
 
 
 
 
 
In millions
 
Q1
 
Q2
 
Q3
 
Q4
 
YTD
Heavy-duty truck
 
$
631

 
$
622

 
$
625

 
$
565

 
$
2,443

Medium-duty truck and bus
 
549

 
600

 
517

 
606

 
2,272

Light-duty automotive
 
433

 
394

 
345

 
409

 
1,581

Off-highway
 
363

 
386

 
372

 
387

 
1,508

Total sales
 
$
1,976

 
$
2,002

 
$
1,859

 
$
1,967

 
$
7,804

Unit shipments by engine classification (including unit shipments to Power Systems and off-highway engine units included in their respective classification) were as follows:
2017
 
 
 
 
 
 
 
 
 
 
Units
 
Q1
 
Q2
 
Q3
 
Q4
 
YTD
Heavy-duty
 
19,200

 
24,100

 
28,100

 
24,500

 
95,900

Medium-duty
 
60,300

 
71,600

 
68,500

 
67,700

 
268,100

Light-duty
 
63,100

 
65,600

 
66,300

 
62,500

 
257,500

Total units
 
142,600

 
161,300

 
162,900

 
154,700

 
621,500

 
 
 
 
 
 
 
 
 
 
 
2016
 
 
 
 
 
 
 
 
 
 
Units
 
Q1
 
Q2
 
Q3
 
Q4
 
YTD
Heavy-duty
 
19,700

 
20,700

 
20,100

 
18,500

 
79,000

Medium-duty
 
55,400

 
62,300

 
53,400

 
58,000

 
229,100

Light-duty
 
61,700

 
57,100

 
49,800

 
60,000

 
228,600

Total units
 
136,800

 
140,100

 
123,300

 
136,500

 
536,700


15

CUMMINS INC. AND SUBSIDIARIES
BUSINESS UNIT SALES DATA
(Unaudited)


Distribution Segment Sales by Product Line
Sales for our Distribution segment by product line were as follows:
2017
 
 
 
 
 
 
 
 
 
 
In millions
 
Q1
 
Q2
 
Q3
 
Q4
 
YTD
Parts
 
$
745

 
$
759

 
$
768

 
$
768

 
$
3,040

Service
 
319

 
320

 
326

 
347

 
1,312

Power generation
 
306

 
329

 
317

 
385

 
1,337

Engines
 
275

 
314

 
342

 
438

 
1,369

Total sales
 
$
1,645

 
$
1,722

 
$
1,753

 
$
1,938

 
$
7,058

 
 
 
 
 
 
 
 
 
 
 
2016
 
 
 
 
 
 
 
 
 
 
In millions
 
Q1
 
Q2
 
Q3
 
Q4
 
YTD
Parts
 
$
648

 
$
642

 
$
643

 
$
694

 
$
2,627

Service
 
299

 
297

 
299

 
320

 
1,215

Power generation
 
275

 
326

 
291

 
347

 
1,239

Engines
 
241

 
279

 
271