Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
cumminslogo.jpg
FORM 8-K
 
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of Report:  July 31, 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 July 31, 2018, Cummins Inc. (“Cummins,” “the Company,” “the registrant,” “we,” “our,” or “us”) issued the attached press release reporting its financial results for the second quarter of 2018, 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: 
99-Press Release dated July 31, 2018


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: July 31, 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
 
July 1,
2018
 
July 2,
2017
NET SALES
 
$
6,132

 
$
5,078

Cost of sales
 
4,692

 
3,827

GROSS MARGIN
 
1,440

 
1,251

OPERATING EXPENSES AND INCOME
 
 
 
 
Selling, general and administrative expenses
 
613

 
606

Research, development and engineering expenses
 
219

 
175

Equity, royalty and interest income from investees
 
110

 
98

Other operating income (expense), net
 
4

 
18

OPERATING INCOME
 
722

 
586

Interest income
 
10

 
5

Interest expense
 
28

 
21

Other income, net
 
11

 
29

INCOME BEFORE INCOME TAXES
 
715

 
599

Income tax expense
 
161

 
158

CONSOLIDATED NET INCOME
 
554

 
441

Less: Net income attributable to noncontrolling interests
 
9

 
17

NET INCOME ATTRIBUTABLE TO CUMMINS INC.
 
$
545

 
$
424

 
 
 
 
 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
 
 
 
 
Basic
 
$
3.33

 
$
2.53

Diluted
 
$
3.32

 
$
2.53

 
 
 
 
 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
 
 

 
 
Basic
 
163.8

 
167.3

Diluted
 
164.3

 
167.8

 
 
 
 
 
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)


 
 
Six months ended
In millions, except per share amounts
 
July 1,
2018
 
July 2,
2017
NET SALES
 
$
11,702

 
$
9,667

Cost of sales
 
9,062

 
7,284

GROSS MARGIN
 
2,640

 
2,383

OPERATING EXPENSES AND INCOME
 
 
 
 
Selling, general and administrative expenses
 
1,190

 
1,153

Research, development and engineering expenses
 
429

 
333

Equity, royalty and interest income from investees
 
225

 
206

Other operating income (expense), net
 
6

 
23

OPERATING INCOME
 
1,252

 
1,126

Interest income
 
17

 
7

Interest expense
 
52

 
39

Other income, net
 
21

 
53

INCOME BEFORE INCOME TAXES
 
1,238

 
1,147

Income tax expense
 
359

 
301

CONSOLIDATED NET INCOME
 
879

 
846

Less: Net income attributable to noncontrolling interests
 
9

 
26

NET INCOME ATTRIBUTABLE TO CUMMINS INC.
 
$
870

 
$
820

 
 
 
 
 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
 
 
 
 
Basic
 
$
5.30

 
$
4.90

Diluted
 
$
5.27

 
$
4.88

 
 
 
 
 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
 
 
 
 
Basic
 
164.3

 
167.4

Diluted
 
165.0

 
167.9

 
 
 
 
 
CASH DIVIDENDS DECLARED PER COMMON SHARE
 
$
2.16

 
$
2.05

 
 
 
 
 
(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
 
July 1,
2018
 
December 31,
2017
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
1,318

 
$
1,369

Marketable securities
 
214

 
198

Total cash, cash equivalents and marketable securities
 
1,532

 
1,567

Accounts and notes receivable, net
 
4,095

 
3,618

Inventories
 
3,559

 
3,166

Prepaid expenses and other current assets
 
649

 
577

Total current assets
 
9,835

 
8,928

Long-term assets
 
 
 
 
Property, plant and equipment, net
 
3,824

 
3,927

Investments and advances related to equity method investees
 
1,303

 
1,156

Goodwill
 
1,079

 
1,082

Other intangible assets, net
 
940

 
973

Pension assets
 
1,022

 
1,043

Other assets
 
912

 
966

Total assets
 
$
18,915

 
$
18,075

 
 
 
 
 
LIABILITIES
 
 
 
 
Current liabilities
 
 
 
 
Accounts payable (principally trade)
 
$
2,981

 
$
2,579

Loans payable
 
55

 
57

Commercial paper
 
802

 
298

Accrued compensation, benefits and retirement costs
 
468

 
811

Current portion of accrued product warranty
 
464

 
454

Current portion of deferred revenue
 
479

 
500

Other accrued expenses
 
806

 
915

Current maturities of long-term debt
 
49

 
63

Total current liabilities
 
6,104

 
5,677

Long-term liabilities
 
 
 
 
Long-term debt
 
1,556

 
1,588

Postretirement benefits other than pensions
 
289

 
289

Pensions
 
331

 
330

Other liabilities and deferred revenue
 
2,441

 
2,027

Total liabilities
 
$
10,721

 
$
9,911

 
 
 
 
 
EQUITY
 
 
 
 
Cummins Inc. shareholders’ equity
 
 
 
 
Common stock, $2.50 par value, 500 shares authorized, 222.4 and 222.4 shares issued
 
$
2,239

 
$
2,210

Retained earnings
 
12,009

 
11,464

Treasury stock, at cost, 59.1 and 56.7 shares
 
(5,276
)
 
(4,905
)
Common stock held by employee benefits trust, at cost, 0.5 and 0.5 shares
 
(6
)
 
(7
)
Accumulated other comprehensive loss
 
(1,667
)
 
(1,503
)
Total Cummins Inc. shareholders’ equity
 
7,299

 
7,259

Noncontrolling interests
 
895

 
905

Total equity
 
$
8,194

 
$
8,164

Total liabilities and equity
 
$
18,915

 
$
18,075

 
 
 
 
 
(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)


 
 
Six months ended
In millions
 
July 1,
2018
 
July 2,
2017
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Consolidated net income
 
$
879

 
$
846

Adjustments to reconcile consolidated net income to net cash provided by operating activities
 
 
 
 
Depreciation and amortization
 
308

 
284

Deferred income taxes
 
(21
)
 

Equity in income of investees, net of dividends
 
(163
)
 
(132
)
Pension contributions under (in excess of) expense, net
 
25

 
(44
)
Other post retirement benefits payments in excess of expense, net
 

 
(8
)
Stock-based compensation expense
 
28

 
23

Loss contingency payments
 
(65
)
 

Translation and hedging activities
 
(21
)
 
31

Changes in current assets and liabilities
 
 
 
 
Accounts and notes receivable
 
(555
)
 
(488
)
Inventories
 
(475
)
 
(264
)
Other current assets
 
(42
)
 
21

Accounts payable
 
442

 
403

Accrued expenses
 
94

 
132

Changes in other liabilities and deferred revenue
 
5

 
103

Other, net
 
34

 
(81
)
Net cash provided by operating activities
 
473

 
826

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
Capital expenditures
 
(186
)
 
(182
)
Investments in internal use software
 
(35
)
 
(40
)
Investments in and advances to equity investees
 
(15
)
 
(64
)
Investments in marketable securities—acquisitions
 
(143
)
 
(69
)
Investments in marketable securities—liquidations
 
116

 
162

Cash flows from derivatives not designated as hedges
 
(9
)
 
19

Other, net
 
36

 
14

Net cash used in investing activities
 
(236
)
 
(160
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
Net borrowings (payments) of commercial paper
 
504

 
(78
)
Payments on borrowings and capital lease obligations
 
(33
)
 
(29
)
Distributions to noncontrolling interests
 
(11
)
 
(10
)
Dividend payments on common stock
 
(355
)
 
(343
)
Repurchases of common stock
 
(379
)
 
(120
)
Other, net
 
21

 
36

Net cash used in financing activities
 
(253
)
 
(544
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
 
(35
)
 
51

Net (decrease) increase in cash and cash equivalents
 
(51
)
 
173

Cash and cash equivalents at beginning of year
 
1,369

 
1,120

CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
1,318

 
$
1,293

 
 
 
 
 
(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
 
Power Systems
 
Electrified Power (1)
 
Total Segment
 
Intersegment Eliminations (2)
 
Total
 
Three months ended July 1, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External sales
 
$
2,050

 
$
1,988

 
$
1,402

 
$
691

 
$
1

 
$
6,132

 
$

 
$
6,132

 
Intersegment sales
 
646

 
6

 
485

 
555

 

 
1,692

 
(1,692
)
 

 
Total sales
 
2,696

 
1,994

 
1,887

 
1,246

 
1

 
7,824

 
(1,692
)
 
6,132

 
Research, development and engineering expenses
 
76

 
5

 
62

 
60

 
16

 
219

 

 
219

 
Equity, royalty and interest income from investees
 
67

 
11

 
14

 
18

 

 
110

 

 
110

 
Interest income
 
3

 
3

 
2

 
2

 

 
10

 

 
10

 
Segment EBITDA
 
362

 
145

 
237

 
186

 
(21
)
 
909

 
(12
)
 
897

 
Depreciation and amortization (3)
 
47

 
27

 
47

 
32

 
1

 
154

 

 
154

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EBITDA as a percentage of total sales
 
13.4
%
 
7.3
%
 
12.6
%
 
14.9
%
 
NM

 
11.6
%
 
 
 
14.6
%
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended July 2, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External sales
 
$
1,711

 
$
1,716

 
$
1,064

 
$
587

 
$

 
$
5,078

 
$

 
$
5,078

 
Intersegment sales
 
596

 
6

 
390

 
430

 

 
1,422

 
(1,422
)
 

 
Total sales
 
2,307

 
1,722

 
1,454

 
1,017

 

 
6,500

 
(1,422
)
 
5,078

 
Research, development and engineering expenses
 
63

 
4

 
58

 
50

 

 
175

 

 
175

 
Equity, royalty and interest income from investees
 
56

 
13

 
15

 
14

 

 
98

 

 
98

 
Interest income
 
2

 
1

 
1

 
1

 

 
5

 

 
5

 
Segment EBITDA
 
323

 
127

 
228

 
90

 

 
768

 
(4
)
 
764

 
Depreciation and amortization (3)
 
46

 
31

 
38

 
29

 

 
144

 

 
144

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EBITDA as a percentage of total sales
 
14.0
%
 
7.4
%
 
15.7
%
 
8.8
%
 
%
 
11.8
%
 
 
 
15.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
"NM" - not meaningful information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1
)
We formed the Electrified Power Segment effective January 1, 2018. Our Electrified Power segment provides fully electric and hybrid powertrain solutions along with innovative components and subsystems to serve all our markets as they adopt electrification, meeting the needs of our original equipment manufacturer partners and end customers.
(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 July 1, 2018 and July 2, 2017.
(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." A portion of depreciation expense is included in "Research, development and engineering expenses" above.




7

CUMMINS INC. AND SUBSIDIARIES
SEGMENT INFORMATION
(Unaudited)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
In millions
 
Engine
 
Distribution
 
Components
 
Power Systems
 
Electrified Power (1)
 
Total Segment
 
Intersegment Eliminations (2)
 
Total
 
Six months ended July 1, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External sales
 
$
3,863

 
$
3,835

 
$
2,715

 
$
1,286

 
$
3

 
$
11,702

 
$

 
$
11,702

 
Intersegment sales
 
1,279

 
12

 
925

 
1,034

 

 
3,250

 
(3,250
)
 

 
Total sales
 
5,142

 
3,847

 
3,640

 
2,320

 
3

 
14,952

 
(3,250
)
 
11,702

 
Research, development and engineering expenses
 
155

 
10

 
124

 
117

 
23

 
429

 

 
429

 
Equity, royalty and interest income from investees
 
134

 
24

 
30

 
37

 

 
225

 

 
225

 
Interest income
 
5

 
5

 
3

 
4

 

 
17

 

 
17

 
Segment EBITDA
 
648

 
268

 
464

 
328

 
(31
)
 
1,677

 
(80
)
 
1,597

 
Depreciation and amortization (3)
 
96

 
54

 
93

 
62

 
2

 
307

 

 
307

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EBITDA as a percentage of total sales
 
12.6
%
 
7.0
%
 
12.7
%
 
14.1
%
 
NM

 
11.2
%
 
 
 
13.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended July 2, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External sales
 
$
3,168

 
$
3,353

 
$
2,044

 
$
1,102

 
$

 
$
9,667

 
$

 
$
9,667

 
Intersegment sales
 
1,162

 
14

 
754

 
797

 

 
2,727

 
(2,727
)
 

 
Total sales
 
4,330

 
3,367

 
2,798

 
1,899

 

 
12,394

 
(2,727
)
 
9,667

 
Research, development and engineering expenses
 
117

 
8

 
108

 
100

 

 
333

 

 
333

 
Equity, royalty and interest income from investees
 
128

 
24

 
28

 
26

 

 
206

 

 
206

 
Interest income
 
3

 
2

  
1

 
1

 

 
7

 

 
7

 
Segment EBITDA
 
596

 
257

 
444

 
175

 

 
1,472

 
(3
)
 
1,469

 
Depreciation and amortization (3)
 
90

 
61

 
75

 
57

 

 
283

 

 
283

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EBITDA as a percentage of total sales
 
13.8
%
 
7.6
%
 
15.9
%
 
9.2
%
 
%
 
11.9
%
 
 
 
15.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
"NM" - not meaningful information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1
)
We formed the Electrified Power Segment effective January 1, 2018. Our Electrified Power segment provides fully electric and hybrid powertrain solutions along with innovative components and subsystems to serve all our markets as they adopt electrification, meeting the needs of our original equipment manufacturer partners and end customers.
(2
)
Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the six months ended July 1, 2018 and July 2, 2017.
(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 $1 million for both six month periods ended July 1, 2018 and July 2, 2017. A portion of depreciation expense is included in "Research, development and engineering expenses" above.

8

CUMMINS INC. AND SUBSIDIARIES
RECONCILIATION OF SEGMENT INFORMATION
(Unaudited)


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
 
Six months ended
In millions
 
July 1,
2018
 
July 2,
2017
 
July 1,
2018
 
July 2,
2017
Total EBITDA
 
$
897

 
$
764

 
$
1,597

 
$
1,469

Less:
 
 
 
 
 
 
 
 
Depreciation and amortization
 
154

 
144

 
307

 
283

Interest expense
 
28

 
21

 
52

 
39

Income before income taxes
 
$
715

 
$
599

 
$
1,238

 
$
1,147



9

CUMMINS INC. AND SUBSIDIARIES
SELECT FOOTNOTE DATA
(Unaudited)




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
 
Six months ended
In millions
 
July 1,
2018
 
July 2,
2017
 
July 1,
2018
 
July 2,
2017
Manufacturing entities
 
 
 
 
 
 
 
 
Beijing Foton Cummins Engine Co., Ltd.
 
$
24

 
$
22

 
$
45

 
$
55

Dongfeng Cummins Engine Company, Ltd.
 
17

 
19

 
34

 
41

Chongqing Cummins Engine Company, Ltd.
 
15

 
10

 
32

 
19

Cummins Westport, Inc.
 
6

 
4

 
12

 
5

Dongfeng Cummins Emission Solutions Co., Ltd.
 
4

 
4

 
9

 
7

All other manufacturers
 
24

 
19

 
49

 
39

Distribution entities
 
 

 
 

 
 

 
 

Komatsu Cummins Chile, Ltda.
 
6

 
8

 
13

 
15

Cummins share of net income
 
96

 
86

 
194

 
181

Royalty and interest income
 
14

 
12

 
31

 
25

Equity, royalty and interest income from investees
 
$
110

 
$
98

 
$
225

 
$
206



PENSIONS AND OTHER POSTRETIREMENT BENEFITS

On January 1, 2018, we retroactively adopted the new accounting standard related to the presentation of pension and other postretirement benefit costs, which resulted in the adjustment of prior period balances in the Condensed Consolidated Statements of Income by the following amounts:

 
 
Favorable / (Unfavorable)
 
 
2017
 
2016
 
In millions
Q1
 
Q2
 
Q3
 
Q4
 
Total
 
Total
 
Cost of sales
$
4

 
$
2

 
$
2

 
$
2

 
$
10

 
$
6

 
Selling, general and administrative expenses
(10
)
 
(10
)
 
(9
)
 
(10
)
 
(39
)
 
(53
)
 
Research, development and engineering expenses (1)

 
(1
)
 

 
(1
)
 
(2
)
 
(1
)
 
Total change in operating income
(6
)
 
(9
)
 
(7
)
 
(9
)
 
(31
)
 
(48
)
 
Other non operating income, net
6

 
9

 
7

 
9

 
31

 
48

 
Total change in income before income taxes
$

 
$

 
$

 
$

 
$

 
$

ENGINE SYSTEM CAMPAIGN ACCRUAL
During 2017, the California Air Resources Board (CARB) and the U.S. Environmental Protection Agency (EPA) selected certain of our pre-2013 model year engine systems for additional emissions testing. Some of these engine systems failed CARB and EPA tests as a result of degradation of an aftertreatment component. We recorded charges of $36 million to cost of sales in our Consolidated Statements of Income during 2017 for the then expected cost of field campaigns to repair some of these engine systems. We concluded based upon additional emission testing performed, and further discussions with the EPA and CARB in the first quarter of 2018, that the field campaigns should be expanded to include a larger population of our engine systems that are subject to the aftertreatment component degradation, including our model years 2010 through 2015. As a result, we recorded an additional charge of $187 million, or $0.87 per share, to cost of sales in our Condensed Consolidated Statements of Income ($94 million recorded in the Components segment and $93 million in the Engine segment) in the first quarter of 2018.
In the second quarter of 2018, we reached agreement with the CARB and EPA regarding our plans to address the affected populations. In finalizing our plans, we have increased the number of systems to be addressed through hardware replacement

10

CUMMINS INC. AND SUBSIDIARIES
SELECT FOOTNOTE DATA
(Unaudited)


compared to our assumptions last quarter. As a result of this agreement and considering that the hardware replacement solution is a higher cost approach than that previously assumed on some of the engine systems, we recorded an additional charge of $181 million, or $0.85 per share, to cost of sales in our Condensed Consolidated Statements of Income ($91 million recorded in the Engine segment and $90 million in the Components segment) in the second quarter of 2018. With the additional charge in the second quarter of 2018, the total accrual related to this matter is $404 million, which represents our best estimate of the cost to execute the campaigns. The campaigns will launch in phases across the affected population and are expected to begin in the third quarter of 2018 with a projection to be substantially completed by December 31, 2020.

11

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 (EBITDA)

Effective January 1, 2018, we use EBITDA as a primary basis for the Chief Operating Decision Maker to evaluate the performance of each of our operating segments and our consolidated results. It is also a component in measuring our variable compensation programs. We believe EBITDA is a useful measure for our operating performance as it assists investors and debt holders in comparing our performance on a consistent basis without regard for financing methods, capital structure, income taxes or depreciation and amortization methods, which can vary significantly depending upon many factors. Our 2017 and 2016 EBITDA measures, as restated, were as follows:

In millions
 
Engine
 
Distribution
 
Components
 
Power Systems
 
Total Segment
 
Intersegment Eliminations
 
 
Total
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Q1
 
$
273

 
$
130

 
$
216

 
$
85

 
$
704

 
$
1

 
 
$
705

Q2
 
323

 
127

 
228

 
90

 
768

 
(4
)
 
 
764

Q3
 
276

 
120

 
259

 
111

 
766

 
22

 
 
788

Q4
 
271

 
123

 
214

 
125

 
733

 
36

 
 
769

2017 Total
 
$
1,143

 
$
500

 
$
917

 
$
411

 
$
2,971

 
$
55

 
 
$
3,026

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2016 Total
 
$
849

 
$
508

 
$
774

 
$
378

 
$
2,509

 
$
17

 
 
$
2,526

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
EBITDA is not in accordance with, or an alternative for, accounting principles generally accepted in the United States (GAAP) and may not be consistent with measures used by other companies. It should be considered supplemental data; however, the amounts included in the EBITDA calculation are derived from amounts included in the Condensed Consolidated Statements of Income. Below is a reconciliation of “Net income attributable to Cummins Inc.” to EBITDA for each of the applicable periods:
 
 
Three months ended
 
Six months ended
In millions
 
July 1, 2018
 
July 2, 2017
 
July 1, 2018
 
July 2, 2017
Net income attributable to Cummins Inc.
 
$
545

 
$
424

 
$
870

 
$
820

 
 
 
 
 
 
 
 
 
Net income attributable to Cummins Inc. as a percentage of net sales
 
8.9
%
 
8.3
%
 
7.4
%
 
8.5
%
 
 
 
 
 
 
 
 
 
Add:
 
 
 
 
 
 
 
 
Net income attributable to noncontrolling interests
 
9

 
17

 
9

 
26

Consolidated net income
 
554

 
441

 
879

 
846

 
 
 
 
 
 
 
 
 
Add:
 
 
 
 
 
 
 
 
Interest expense
 
28

 
21

 
52

 
39

Income tax expense
 
161

 
158

 
359

 
301

Depreciation and amortization
 
154

 
144

 
307

 
283

EBITDA
 
$
897

 
$
764

 
$
1,597

 
$
1,469

 
 
 
 
 
 
 
 
 
EBITDA as a percentage of net sales
 
14.6
%
 
15.0
%
 
13.6
%
 
15.2
%
 
 
 
 
 
 
 
 
 
Add: Engine system campaign charge
 
181

 

 
368

 

 
 
 
 
 
 
 
 
 
EBITDA, excluding engine system campaign charge
 
$
1,078

 
$
764

 
$
1,965

 
$
1,469

 
 
 
 
 
 
 
 
 
EBITDA, excluding engine system campaign charge, as a percentage of net sales
 
17.6
%
 
15.0
%
 
16.8
%
 
15.2
%

 

12

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

Net income and diluted earnings per share (EPS) attributable to Cummins Inc. excluding discrete tax items

We believe these are useful measures of our operating performance for the periods presented as they illustrate our operating performance without regard to special items including tax adjustments. These measures are not in accordance with, or an alternative for GAAP and may not be consistent with measures used by other companies. This should be considered supplemental data. The following table reconciles net income attributable to Cummins Inc. to net income attributable to Cummins Inc. excluding discrete tax items for the following periods:

 
 
 
Three months ended
 
 
 
July 1, 2018
 
July 2, 2017
In millions
 
Net Income
 
Diluted EPS
 
Net Income
 
Diluted EPS
Net income attributable to Cummins Inc.
 
$
545

 
$
3.32

 
$
424

 
$
2.53

Add:
 
 

 
 

 
 

 
 

Discrete tax items
 
(4
)
 
(0.03
)
 

 

Net income attributable to Cummins Inc. excluding discrete tax items
 
$
541

 
$
3.29


$
424

 
$
2.53


 
 
 
Six months ended
 
 
 
July 1, 2018
 
July 2, 2017
In millions
 
Net Income
 
Diluted EPS
 
Net Income
 
Diluted EPS
Net income attributable to Cummins Inc.
 
$
870

 
$
5.27

 
$
820

 
$
4.88

Add:
 
 
 
 
 
 
 
 
Discrete tax items
 
74


0.45



 

Net income attributable to Cummins Inc. excluding discrete tax items
 
$
944

 
$
5.72

 
$
820

 
$
4.88


13

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:
2018
 
 
 
 
 
 
 
 
 
 
In millions
 
Q1
 
Q2
 
Q3
 
Q4
 
YTD
Heavy-duty truck
 
$
815

 
$
920

 
$

 
$

 
$
1,735

Medium-duty truck and bus
 
692

 
777

 

 

 
1,469

Light-duty automotive
 
402

 
444

 

 

 
846

Off-highway
 
537

 
555

 

 

 
1,092

Total sales
 
$
2,446

 
$
2,696

 
$

 
$

 
$
5,142

 
 
 
 
 
 
 
 
 
 
 
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

Unit shipments by engine classification (including unit shipments to Power Systems and off-highway engine units included in their respective classification) were as follows:
2018
 
 
 
 
 
 
 
 
 
 
Units
 
Q1
 
Q2
 
Q3
 
Q4
 
YTD
Heavy-duty
 
26,600

 
32,000

 

 

 
58,600

Medium-duty
 
74,000

 
83,500

 

 

 
157,500

Light-duty
 
61,900

 
68,500

 

 

 
130,400

Total units
 
162,500

 
184,000

 

 

 
346,500

 
 
 
 
 
 
 
 
 
 
 
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


14

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:
2018
 
 
 
 
 
 
 
 
 
 
In millions
 
Q1
 
Q2
 
Q3
 
Q4
 
YTD
Parts
 
$
808

 
$
817

 
$

 
$

 
$
1,625

Engines
 
367

 
461

 

 

 
828

Service
 
352

 
370

 

 

 
722

Power generation
 
326

 
346

 

 

 
672

Total sales
 
$
1,853

 
$
1,994

 
$

 
$

 
$
3,847

 
 
 
 
 
 
 
 
 
 
 
2017
 
 
 
 
 
 
 
 
 
 
In millions
 
Q1
 
Q2
 
Q3
 
Q4
 
YTD
Parts
 
$
745

 
$
759

 
$
768

 
$
768

 
$
3,040

Engines
 
275

 
314

 
342

 
438

 
1,369

Service
 
319

 
320

 
326

 
347

 
1,312

Power generation
 
306

 
329

 
317

 
385

 
1,337

Total sales
 
$
1,645

 
$
1,722

 
$
1,753

 
$
1,938

 
$
7,058

Component Segment Sales by Business
Sales for our Components segment by product line were as follows:
2018
 
 
 
 
 
 
 
 
 
 
In millions
 
Q1
 
Q2
 
Q3
 
Q4
 
YTD
Emission solutions
 
$
775

 
$
841

 
$

 
$

 
$
1,616

Turbo technologies
 
340

 
355

 

 

 
695

Filtration
 
320

 
324

 

 

 
644

Electronics and fuel systems
 
201

 
226

 

 

 
427

Automated transmissions
 
117

 
141

 

 

 
258

Total sales
 
$
1,753

 
$
1,887

 
$

 
$

 
$
3,640

 
 
 
 
 
 
 
 
 
 
 
2017
 
 
 
 
 
 
 
 
 
 
In millions
 
Q1
 
Q2
 
Q3
 
Q4
 
YTD
Emission solutions
 
$
616

 
$
674

 
$
696

 
$
689