10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended October 2, 2016

Commission File Number 1-4949

CUMMINS INC.

(Exact name of registrant as specified in its charter)

Indiana (State of Incorporation) 35-0257090  (IRS Employer Identification No.)

500 Jackson Street

Box 3005

Columbus, Indiana 47202-3005

(Address of principal executive offices)

Telephone (812) 377-5000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit and post such files).  Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer x Accelerated filer o Non-accelerated filer o Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o   No x

As of October 2, 2016, there were 168,275,116 shares of common stock outstanding with a par value of $2.50 per share.

Website Access to Company’s Reports

Cummins maintains an internet website at www.cummins.com.  Investors can obtain copies of our filings from this website free of charge as soon as reasonably practicable after they are electronically filed with, or furnished, to the Securities and Exchange Commission. Cummins is not including the information provided on the website as part of, or incorporating such information by reference into, this Quarterly Report on Form 10-Q.

CUMMINS INC. AND SUBSIDIARIES

TABLE OF CONTENTS

QUARTERLY REPORT ON FORM 10-Q

		Page
	PART I. FINANCIAL INFORMATION
ITEM 1.	Condensed Consolidated Financial Statements (Unaudited)	3
	Condensed Consolidated Statements of Income for the three and nine months ended October 2, 2016 and September 27, 2015	3
	Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended October 2, 2016 and September 27, 2015	4
	Condensed Consolidated Balance Sheets at October 2, 2016 and December 31, 2015	5
	Condensed Consolidated Statements of Cash Flows for the nine months ended October 2, 2016 and September 27, 2015	6
	Condensed Consolidated Statements of Changes in Equity for the nine months ended October 2, 2016 and September 27, 2015	7
	Notes to Condensed Consolidated Financial Statements	8
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	48
ITEM 4.	Controls and Procedures	48
	PART II. OTHER INFORMATION
ITEM 1.	Legal Proceedings	49
ITEM 1A.	Risk Factors	49
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
ITEM 3.	Defaults Upon Senior Securities	50
ITEM 4.	Mine Safety Disclosures	50
ITEM 5.	Other Information	50
ITEM 6.	Exhibits	50
	Signatures	51
	Cummins Inc. Exhibit Index	52

2

PART I.  FINANCIAL INFORMATION

ITEM 1.  Condensed Consolidated Financial Statements

CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three months ended					Nine months ended
In millions, except per share amounts	October 2, 2016		September 27, 2015			October 2, 2016			September 27, 2015
NET SALES(a)	$	4,187	$	4,620		$	13,006		$	14,344
Cost of sales	3,108		3,412			9,674			10,609
GROSS MARGIN	1,079		1,208			3,332			3,735
OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses	513		530			1,527			1,584
Research, development and engineering expenses	157		197			478			558
Equity, royalty and interest income from investees (Note 4)	74		78			234			240
Loss contingency (Note 10)	99		—			138			—
Other operating expense, net	—		(2		)	(2		)	(5		)
OPERATING INCOME	384		557			1,421			1,828
Interest income	6		9			18			20
Interest expense (Note 8)	16		16			51			47
Other income, net	8		11			34			12
INCOME BEFORE INCOME TAXES	382		561			1,422			1,813
Income tax expense (Note 5)	82		169			362			521
CONSOLIDATED NET INCOME	300		392			1,060			1,292
Less: Net income attributable to noncontrolling interests	11		12			44			54
NET INCOME ATTRIBUTABLE TO CUMMINS INC.	$	289	$	380		$	1,016		$	1,238
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
Basic	$	1.72	$	2.15		$	5.99		$	6.92
Diluted	$	1.72	$	2.14		$	5.99		$	6.90
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic	167.8		177.0			169.5			178.9
Dilutive effect of stock compensation awards	0.4		0.4			0.2			0.4
Diluted	168.2		177.4			169.7			179.3
CASH DIVIDENDS DECLARED PER COMMON SHARE	$	1.025	$	0.975		$	2.975		$	2.535

____________________________________

^(a) Includes sales to nonconsolidated equity investees of $275 million and $793 million and $274 million and $956 million for the three and nine months ended October 2, 2016 and September 27, 2015, respectively.

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

3

CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three months ended						Nine months ended
In millions	October 2, 2016			September 27, 2015			October 2, 2016			September 27, 2015
CONSOLIDATED NET INCOME	$	300		$	392		$	1,060		$	1,292
Other comprehensive (loss) income, net of tax (Note 11)
Foreign currency translation adjustments	(29		)	(221		)	(299		)	(252		)
Unrealized gain (loss) on derivatives	7			7			(20		)	15
Change in pension and other postretirement defined benefit plans	13			15			31			43
Unrealized gain (loss) on marketable securities	—			(1		)	1			(1		)
Total other comprehensive loss, net of tax	(9		)	(200		)	(287		)	(195		)
COMPREHENSIVE INCOME	291			192			773			1,097
Less: Comprehensive income (loss) attributable to noncontrolling interests	14			(1		)	41			39
COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC.	$	277		$	193		$	732		$	1,058

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

4

CUMMINS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
In millions, except par value	October 2, 2016			December 31, 2015
ASSETS
Current assets
Cash and cash equivalents	$	1,251		$	1,711
Marketable securities (Note 6)	250			100
Total cash, cash equivalents and marketable securities	1,501			1,811
Accounts and notes receivable, net
Trade and other	2,680			2,640
Nonconsolidated equity investees	193			180
Inventories (Note 7)	2,820			2,707
Prepaid expenses and other current assets	600			609
Total current assets	7,794			7,947
Long-term assets
Property, plant and equipment	7,460			7,322
Accumulated depreciation	(3,783		)	(3,577		)
Property, plant and equipment, net	3,677			3,745
Investments and advances related to equity method investees	1,077			975
Goodwill	482			482
Other intangible assets, net	319			328
Pension assets	773			735
Other assets	1,014			922
Total assets	$	15,136		$	15,134
LIABILITIES
Current liabilities
Accounts payable (principally trade)	$	1,781		$	1,706
Loans payable (Note 8)	48			24
Commercial paper (Note 8)	273			—
Accrued compensation, benefits and retirement costs	393			409
Current portion of accrued product warranty (Note 9)	333			359
Current portion of deferred revenue	460			403
Other accrued expenses	985			863
Current maturities of long-term debt (Note 8)	35			39
Total current liabilities	4,308			3,803
Long-term liabilities
Long-term debt (Note 8)	1,593			1,576
Postretirement benefits other than pensions	326			349
Pensions	301			298
Other liabilities and deferred revenue	1,344			1,358
Total liabilities	$	7,872		$	7,384
Commitments and contingencies (Note 10)
EQUITY
Cummins Inc. shareholders’ equity
Common stock, $2.50 par value, 500 shares authorized, 222.4 and 222.4 shares issued	$	2,209		$	2,178
Retained earnings	10,833			10,322
Treasury stock, at cost, 54.1 and 47.2 shares	(4,468		)	(3,735		)
Common stock held by employee benefits trust, at cost, 0.7 and 0.9 shares	(8		)	(11		)
Accumulated other comprehensive loss (Note 11)	(1,632		)	(1,348		)
Total Cummins Inc. shareholders’ equity	6,934			7,406
Noncontrolling interests	330			344
Total equity	$	7,264		$	7,750
Total liabilities and equity	$	15,136		$	15,134

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

5

CUMMINS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
	Nine months ended
In millions	October 2, 2016			September 27, 2015
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income	$	1,060		$	1,292
Adjustments to reconcile consolidated net income to net cash provided by operating activities
Restructuring payments (Note 12)	(53		)	—
Loss contingency (Note 10)	138			—
Depreciation and amortization	391			383
Gain on fair value adjustment for consolidated investees	—			(17		)
Deferred income taxes	60			(120		)
Equity in income of investees, net of dividends	(94		)	(68		)
Pension contributions in excess of expense (Note 3)	(92		)	(119		)
Other post-retirement benefits payments in excess of expense (Note 3)	(16		)	(18		)
Stock-based compensation expense	28			24
Translation and hedging activities	(39		)	22
Changes in current assets and liabilities, net of acquisitions
Accounts and notes receivable	(112		)	(163		)
Inventories	(150		)	(179		)
Other current assets	138			133
Accounts payable	97			(52		)
Accrued expenses	(279		)	(153		)
Changes in other liabilities and deferred revenue	188			219
Other, net	45			(53		)
Net cash provided by operating activities	1,310			1,131
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures	(312		)	(393		)
Investments in internal use software	(42		)	(38		)
Investments in and advances to equity investees	(29		)	(9		)
Acquisitions of businesses, net of cash acquired	(1		)	(102		)
Investments in marketable securities—acquisitions (Note 6)	(447		)	(175		)
Investments in marketable securities—liquidations (Note 6)	291			228
Cash flows from derivatives not designated as hedges	(64		)	17
Other, net	14			(5		)
Net cash used in investing activities	(590		)	(477		)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings	111			24
Net borrowings of commercial paper (Note 8)	273			—
Payments on borrowings and capital lease obligations	(156		)	(64		)
Net borrowings (payments) under short-term credit agreements	25			(38		)
Distributions to noncontrolling interests	(42		)	(35		)
Dividend payments on common stock	(505		)	(452		)
Repurchases of common stock	(745		)	(650		)
Other, net	(2		)	—
Net cash used in financing activities	(1,041		)	(1,215		)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	(139		)	(52		)
Net decrease in cash and cash equivalents	(460		)	(613		)
Cash and cash equivalents at beginning of year	1,711			2,301
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	1,251		$	1,688

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

6

CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

In millions	Common Stock		Additional Paid-in Capital			Retained Earnings			Treasury Stock			Common Stock Held in Trust			Accumulated Other Comprehensive Loss			Total Cummins Inc. Shareholders’ Equity			Noncontrolling Interests			Total Equity
BALANCE AT DECEMBER 31, 2014	$	556	$	1,583		$	9,545		$	(2,844	)	$	(13	)	$	(1,078	)	$	7,749		$	344		$	8,093
Net income						1,238												1,238			54			1,292
Other comprehensive (loss) income, net of tax (Note 11)															(180		)	(180		)	(15		)	(195		)
Issuance of shares			7															7			—			7
Employee benefits trust activity			21									2						23			—			23
Acquisition of shares									(650		)							(650		)	—			(650		)
Cash dividends on common stock						(452		)										(452		)	—			(452		)
Distributions to noncontrolling interests																		—			(46		)	(46		)
Stock based awards			(4		)				8									4			—			4
Other shareholder transactions			10															10			(5		)	5
BALANCE AT SEPTEMBER 27, 2015	$	556	$	1,617		$	10,331		$	(3,486	)	$	(11	)	$	(1,258	)	$	7,749		$	332		$	8,081
BALANCE AT DECEMBER 31, 2015	$	556	$	1,622		$	10,322		$	(3,735	)	$	(11	)	$	(1,348	)	$	7,406		$	344		$	7,750
Net income						1,016												1,016			44			1,060
Other comprehensive (loss) income, net of tax (Note 11)															(284		)	(284		)	(3		)	(287		)
Issuance of shares			5															5			—			5
Employee benefits trust activity			19									3						22			—			22
Acquisition of shares (Note 2)									(745		)							(745		)	—			(745		)
Cash dividends on common stock						(505		)										(505		)	—			(505		)
Distributions to noncontrolling interests																		—			(49		)	(49		)
Stock based awards			(7		)				12									5			—			5
Other shareholder transactions			14															14			(6		)	8
BALANCE AT OCTOBER 2, 2016	$	556	$	1,653		$	10,833		$	(4,468	)	$	(8	)	$	(1,632	)	$	6,934		$	330		$	7,264

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

7

CUMMINS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. NATURE OF OPERATIONS

Cummins Inc. (“Cummins,” “we,” “our” or “us”) was founded in 1919 as a corporation in Columbus, Indiana, as one of the first diesel engine manufacturers. We are a global power leader that designs, manufactures, distributes and services diesel and natural gas engines and engine-related component products, including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems and electric power generation systems. We sell our products to original equipment manufacturers (OEMs), distributors and other customers worldwide.We serve our customers through a network of approximately600 company-owned and independent distributor locations and over7,200dealer locations in more than 190 countries and territories.

NOTE 2. BASIS OF PRESENTATION

The unaudited Condensed Consolidated Financial Statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of operations, financial position and cash flows. All such adjustments are of a normal recurring nature. The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial information. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted as permitted by such rules and regulations. Certain reclassifications have been made to prior period amounts to conform to the presentation of the current period condensed financial statements.

These interim condensed financial statements should be read in conjunction with the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2015. Our interim period financial results for the three and nine month periods presented are not necessarily indicative of results to be expected for any other interim period or for the entire year. The year-end Condensed Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.

Preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts presented and disclosed in our Condensed Consolidated Financial Statements. Significant estimates and assumptions in these Condensed Consolidated Financial Statementsrequire the exercise of judgment and are used for, but not limited to, allowance for doubtful accounts, useful lives for depreciation and amortization, estimates of future cash flows and other assumptions associated with goodwill and long-lived asset impairment tests, determination of discount rates and other assumptions for pension and other postretirement benefit costs, warranty programs, income taxes and deferred tax valuation allowances, lease classification, contingencies and restructuring costs. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be different from these estimates.

Our reporting period usually ends on the Sunday closest to the last day of the quarterly calendar period. The third quarters of 2016 and 2015 ended on October 2 and September 27, respectively. Our fiscal year ends on December 31, regardless of the day of the week on which December 31 falls.

The weighted-average diluted common shares outstanding excludes the anti-dilutive effect of certain stock options since such options had an exercise price in excess of the monthly average market value of our common stock. The options excluded from diluted earnings per share for the three and nine months ended October 2, 2016 and September 27, 2015, were as follows:

	Three months ended		Nine months ended
	October 2, 2016	September 27, 2015	October 2, 2016	September 27, 2015
Options excluded	936,857	950,345	1,295,664	593,436

In 2016, we entered into an accelerated share repurchase agreement with a third party financial institution to repurchase $500 million of our common stock under our previously announced share repurchase plans and received4.7 million shares at an average purchase price of $105.50 per share.

8

NOTE 3. PENSION AND OTHER POSTRETIREMENT BENEFITS

We sponsor funded and unfunded domestic and foreign defined benefit pension and other postretirement plans. Contributions to these plans were as follows:

	Three months ended				Nine months ended
In millions	October 2, 2016		September 27, 2015		October 2, 2016		September 27, 2015
Defined benefit pension plans
Voluntary contribution	$	16	$	7	$	101	$	79
Mandatory contribution	5		5		23		87
Defined benefit pension contributions	$	21	$	12	$	124	$	166
Other postretirement plans	$	4	$	8	$	32	$	33
Defined contribution pension plans	$	17	$	14	$	53	$	56

We anticipate making additional defined benefit pension contributions during the remainder of 2016 of $22 million for our U.S. and U.K pension plans. The estimated $146 million of pension contributions for the full year include voluntary contributions of approximately $103 million. These contributions may be made from trusts or company funds either to increase pension assets or to make direct benefit payments to plan participants. We expect our 2016 net periodic pension cost to approximate $42 million.

The components of net periodic pension and other postretirement benefit costs under our plans were as follows:

	Pension
	U.S. Plans						U.K. Plans						Other Postretirement Benefits
	Three months ended
In millions	October 2, 2016			September 27, 2015			October 2, 2016			September 27, 2015			October 2, 2016		September 27, 2015
Service cost	$	22		$	20		$	5		$	7		$	—	$	—
Interest cost	26			25			13			14			4		4
Expected return on plan assets	(50		)	(47		)	(17		)	(23		)	—		—
Recognized net actuarial loss	9			11			3			8			1		1
Net periodic benefit cost	$	7		$	9		$	4		$	6		$	5	$	5

	Pension
	U.S. Plans						U.K. Plans						Other Postretirement Benefits
	Nine months ended
In millions	October 2, 2016			September 27, 2015			October 2, 2016			September 27, 2015			October 2, 2016		September 27, 2015
Service cost	$	68		$	60		$	16		$	20		$	—	$	—
Interest cost	82			76			39			42			12		12
Expected return on plan assets	(152		)	(142		)	(55		)	(68		)	—		—
Recognized net actuarial loss	23			34			11			25			4		3
Net periodic benefit cost	$	21		$	28		$	11		$	19		$	16	$	15

9

NOTE 4. EQUITY, ROYALTY AND INTEREST INCOME FROM INVESTEES

Equity, royalty and interest income from investees included in our Condensed Consolidated Statements of Income for the reporting periods was as follows: 

	Three months ended				Nine months ended
In millions	October 2, 2016		September 27, 2015		October 2, 2016		September 27, 2015
Distribution entities
Komatsu Cummins Chile, Ltda.	$	8	$	8	$	26	$	23
North American distributors	7		9		18		27
All other distributors	1		1		2		2
Manufacturing entities
Beijing Foton Cummins Engine Co., Ltd.	19		18		59		47
Chongqing Cummins Engine Company, Ltd.	11		9		28		32
Dongfeng Cummins Engine Company, Ltd.	10		11		32		40
All other manufacturers	8		13		40		41
Cummins share of net income	64		69		205		212
Royalty and interest income	10		9		29		28
Equity, royalty and interest income from investees	$	74	$	78	$	234	$	240

NOTE 5. INCOME TAXES

Our effective tax rate for the year is expected to approximate 25.5 percent, excluding any one-time items that may arise. Our tax rate is generally less than the 35 percent U.S. statutory income tax rate primarily due to lower tax rates on foreign income and the research tax credit.

Our effective tax rate for the three and nine months ended October 2, 2016, was 21.5 percent and 25.5 percent, respectively.

Our effective tax rate for the three and nine months ended September 27, 2015, was 30.1 percent and 28.7 percent, respectively. The tax rate for the nine months ended September 27, 2015, included an $18 million discrete tax benefit to reflect the release of reserves for uncertain tax positions related to a favorable federal audit settlement.

The decrease in the effective tax rate for the three and nine months ended October 2, 2016, versus the comparable periods in 2015 was primarily due to favorable changes in the jurisdictional mix of pre-tax income.

It is reasonably possible that our existing liabilities for uncertain tax benefits may decrease in an amount ranging from $20 million to $26 million within the next 12 months for U.S. and non-U.S. audits that are in progress.

NOTE 6. MARKETABLE SECURITIES

A summary of marketable securities, all of which are classified as current, was as follows:

	October 2, 2016						December 31, 2015
In millions	Cost		Gross unrealized gains/(losses)		Estimated fair value		Cost		Gross unrealized gains/(losses)			Estimated fair value
Available-for-sale
Level 2(1)
Bank debentures	$	118	$	—	$	118	$	—	$	—		$	—
Debt mutual funds	118		—		118		88		—			88
Equity mutual funds	12		—		12		11		(1		)	10
Government debt securities	2		—		2		2		—			2
Total marketable securities	$	250	$	—	$	250	$	101	$	(1	)	$	100

____________________________________

⁽¹⁾The fair value of Level 2 securities is estimated using actively quoted prices for similar instruments from brokers and observable inputs where available, including market transactions and third-party pricing services, or net asset values provided to investors. We do not currently have any Level 3 securities and there were no transfers between Level 2 or 3 during the first nine months of 2016 or for the year ended December 31, 2015.

10

A description of the valuation techniques and inputs used for our Level 2 fair value measures was as follows:

• Bank debentures— These investments provide us with a contractual rate of return and generally range in maturity fromthree months to one year. The counter-parties to these investments are reputable financial institutions with investment grade credit ratings. Since these instruments are not tradable and must be settled directly by us with the respective financial institution, our fair value measure is the financial institutions’ month-end statement.

• Debt mutual funds— The fair value measure for these investments is the daily net asset value published on a regulated governmental website. Daily quoted prices are available from the issuing brokerage and are used on a test basis to corroborate this Level 2 input.

• Equity mutual funds— The fair value measure for these investments is the net asset value published by the issuing brokerage. Daily quoted prices are available from reputable third party pricing services and are used on a test basis to corroborate this Level 2 input measure.

• Government debt securities-non-U.S.— The fair value measure for these securities is broker quotes received from reputable firms. These securities are infrequently traded on a national stock exchange and these values are used on a test basis to corroborate our Level 2 input measure.

The proceeds from sales and maturities of marketable securities and gross realized gains and losses from the sale of available-for-sale securities were as follows:

	Three months ended				Nine months ended
In millions	October 2, 2016		September 27, 2015		October 2, 2016		September 27, 2015
Proceeds from sales and maturities of marketable securities	$	54	$	73	$	291	$	228
Gross realized gains from the sale of marketable securities(1)	—		—		—		1

____________________________________

⁽¹⁾ Gross realized losses from the sale of available-for-sale securities were immaterial.

At October 2, 2016, the fair value of available-for-sale investments in debt securities that utilize a Level 2 fair value measure is shown by contractual maturity below:

Contractual Maturity	(In millions)
1 year or less	$	237
5 - 10 years	1
Total	$	238

NOTE 7. INVENTORIES

Inventories are stated at the lower of cost or market. Inventories included the following:

In millions	October 2, 2016			December 31, 2015
Finished products	$	1,779		$	1,796
Work-in-process and raw materials	1,146			1,022
Inventories at FIFO cost	2,925			2,818
Excess of FIFO over LIFO	(105		)	(111		)
Total inventories	$	2,820		$	2,707

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NOTE 8. DEBT

Loans Payable and Commercial Paper

Loans payable, commercial paper and the related weighted-average interest rates were as follows:

	October 2, 2016					December 31, 2015
Dollars in millions	Amount		Weighted Average Interest Rate			Amount		Weighted Average Interest Rate
Loans payable (1)	$	48				$	24
Commercial paper (2)	273		0.47	%	(3)	—		—

____________________________________

⁽¹⁾Loans payable consist primarily of notes payable to various domestic and international financial institutions. It is not practical to aggregate these notes and calculate a quarterly weighted-average interest rate.

⁽²⁾In February 2016, the Board of Directors authorized the issuance of up to $1.75 billion of unsecured short-term promissory notes ("commercial paper") pursuant to a commercial paper program. The program will facilitate the private placement of unsecured short-term debt through third party brokers. We intend to use the net proceeds from the commercial paper program for general corporate purposes.

⁽³⁾The weighted average interest rate is inclusive of all brokerage fees.

Long-term Debt

A summary of long-term debt was as follows:

In millions	October 2, 2016			December 31, 2015
Long-term debt
Senior notes, 3.65%, due 2023	$	500		$	500
Debentures, 6.75%, due 2027	58			58
Debentures, 7.125%, due 2028	250			250
Senior notes, 4.875%, due 2043	500			500
Debentures, 5.65%, due 2098 (effective interest rate 7.48%)	165			165
Other debt	49			55
Unamortized discount	(56		)	(57		)
Fair value adjustments due to hedge on indebtedness	77			63
Capital leases	85			81
Total long-term debt	1,628			1,615
Less: Current maturities of long-term debt	35			39
Long-term debt	$	1,593		$	1,576

Principal payments required on long-term debt during the next five years are as follows:

	Required Principal Payments
In millions	2016		2017		2018		2019		2020
Principal payments	$	9	$	28	$	31	$	24	$	7

Fair Value of Debt

Based on borrowing rates currently available to us for bank loans with similar terms and average maturities, considering our risk premium, the fair value and carrying value of total debt, including current maturities, was as follows:

In millions	October 2, 2016		December 31, 2015
Fair value of total debt(1)	$	2,292	$	1,821
Carrying value of total debt	1,949		1,639

_________________________________________________

⁽¹⁾The fair value of debt is derived from Level 2 inputs.

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NOTE 9. PRODUCT WARRANTY LIABILITY

A tabular reconciliation of the product warranty liability, including the deferred revenue related to our extended warranty coverage and accrued recall programs was as follows:

In millions	October 2, 2016			September 27, 2015
Balance, beginning of year	$	1,404		$	1,283
Provision for warranties issued	256			326
Deferred revenue on extended warranty contracts sold	179			217
Payments	(291		)	(282		)
Amortization of deferred revenue on extended warranty contracts	(148		)	(132		)
Changes in estimates for pre-existing warranties	22			18
Foreign currency translation	(6		)	(10		)
Balance, end of period	$	1,416		$	1,420

Warranty related deferred revenue and the long-term portion of the warranty liability on our October 2, 2016, balance sheet were as follows:

In millions	October 2, 2016		Balance Sheet Location
Deferred revenue related to extended coverage programs
Current portion	$	210	Current portion of deferred revenue
Long-term portion	537		Other liabilities and deferred revenue
Total	$	747
Long-term portion of warranty liability	$	336	Other liabilities and deferred revenue

NOTE 10. COMMITMENTS AND CONTINGENCIES

We are subject to numerous lawsuits and claims arising out of the ordinary course of our business, including actions related to product liability; personal injury; the use and performance of our products; warranty matters; patent, trademark or other intellectual property infringement; contractual liability; the conduct of our business; tax reporting in foreign jurisdictions; distributor termination; workplace safety; and environmental matters. We also have been identified as a potentially responsible party at multiple waste disposal sites under U.S. federal and related state environmental statutes and regulations and may have joint and several liability for any investigation and remediation costs incurred with respect to such sites. We have denied liability with respect to many of these lawsuits, claims and proceedings and are vigorously defending such lawsuits, claims and proceedings. We carry various forms of commercial, property and casualty, product liability and other forms of insurance; however, such insurance may not be applicable or adequate to cover the costs associated with a judgment against us with respect to these lawsuits, claims and proceedings. We do not believe that these lawsuits are material individually or in the aggregate. While we believe we have also established adequate accruals for our expected future liability with respect to pending lawsuits, claims and proceedings, where the nature and extent of any such liability can be reasonably estimated based upon then presently available information, there can be no assurance that the final resolution of any existing or future lawsuits, claims or proceedings will not have a material adverse effect on our business, results of operations, financial condition or cash flows.

We conduct significant business operations in Brazil that are subject to the Brazilian federal, state and local labor, social security, tax and customs laws. While we believe we comply with such laws, they are complex, subject to varying interpretations and we are often engaged in litigation regarding the application of these laws to particular circumstances.

Loss Contingency

Engine systems sold in the U.S. must be certified to comply with the Environmental Protection Agency (EPA) and California Air Resources Board (CARB) emission standards. EPA and CARB regulations require that in-use testing be performed on vehicles by the emission certificate holder and reported to the EPA and CARB in order to ensure ongoing compliance with these emission standards. We are the holder of this emission certificate for our engines, including engines installed in certain vehicles with one customer on which we did not also manufacture or sell the emission aftertreatment system. During 2015, a

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quality issue in certain of these third party aftertreatment systems caused some of our inter-related engines to fail in-use emission testing. In the fourth quarter of 2015, the vehicle manufacturer made a request that we assist in the design and bear the financial cost of a field campaign (Campaign) to address the technical issue purportedly causing some vehicles to fail the in-use testing.

While we are not responsible for the warranty issues related to a component that we did not manufacture or sell, as the emission compliance certificate holder, we are responsible for proposing a remedy to the EPA and CARB. As a result, we have proposed actions to the agencies that we believe will address the emission failures. As the certificate holder, we expect to participate in the cost of the proposed voluntary Campaign and recorded a charge of$60 million in 2015. The Campaign design was finalized with our OEM customer, reviewed with the EPA and submitted for final approval in the second quarter of 2016, and we recorded an additional accrual of $39 million. We have concluded based upon additional in-use emission testing performed in the third quarter of 2016, that the Campaign should be expanded to include a larger population of vehicles manufactured by this one OEM. As a result, we recorded an additional accrual of $99 million in the third quarter to reflect the estimated cost of our participation in the expanded Campaign. We continue to work with our OEM customer to resolve the allocation of costs for the Campaign, including pending litigation between the parties. The Campaign is not expected to be completed for some time and our final cost could differ from the amount we have recorded.

We do not currently expect any fines or penalties from the EPA or CARB related to this matter.

The accrual related to the Campaign is included in "Other accrued expenses" in our Condensed Consolidated Balance Sheets.

Guarantees and Commitments

From time to time we enter into guarantee arrangements, including guarantees of non-U.S. distributor financings, residual value guarantees on equipment under operating leases and other miscellaneous guarantees of joint ventures or third-party obligations. At October 2, 2016, the maximum potential loss related to these guarantees was $24 million.

We have arrangements with certain suppliers that require us to purchase minimum volumes or be subject to monetary penalties. At October 2, 2016, if we were to stop purchasing from each of these suppliers, the aggregate amount of the penalty would be approximately $108 million, of which$55 millionrelates to a contract with a components supplier that extends to 2018. Most of these arrangements enable us to secure critical components. We do not currently anticipate paying any penalties under these contracts.

We enter into physical forward contracts with suppliers of platinum, palladium and copper to purchase minimum volumes of the commodities at contractually stated prices for various periods, not to exceedtwo years. At October 2, 2016, the total commitments under these contracts were $27 million. These arrangements enable us to fix the prices of these commodities, which otherwise are subject to market volatility.

We have guarantees with certain customers that require us to satisfactorily honor contractual or regulatory obligations, or compensate for monetary losses related to nonperformance. These performance bonds and other performance-related guarantees were$79 million at October 2, 2016.

Indemnifications

Periodically, we enter into various contractual arrangements where we agree to indemnify a third-party against certain types of losses. Common types of indemnities include:

• product liability and license, patent or trademark indemnifications;

• asset sale agreements where we agree to indemnify the purchaser against future environmental exposures related to the asset sold; and

• any contractual agreement where we agree to indemnify the counter-party for losses suffered as a result of a misrepresentation in the contract.

We regularly evaluate the probability of having to incur costs associated with these indemnities and accrue for expected losses that are probable. Because the indemnifications are not related to specified known liabilities and due to their uncertain nature, we are unable to estimate the maximum amount of the potential loss associated with these indemnifications.

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NOTE 11. ACCUMULATED OTHER COMPREHENSIVE LOSS

Following are the changes in accumulated other comprehensive (loss) income by component for the three and nine months ended:

	Three months ended
In millions	Change in pensions and other postretirement defined benefit plans			Foreign currency translation adjustment			Unrealized gain (loss) on marketable securities			Unrealized gain (loss) on derivatives			Total attributable to Cummins Inc.			Noncontrolling interests			Total other comprehensive income (loss)
Balance at June 28, 2015	$	(641	)	$	(435	)	$	(1	)	$	6		$	(1,071	)
Other comprehensive income before reclassifications
Before tax amount	—			(239		)	(1		)	13			(227		)	$	(13	)	$	(240	)
Tax benefit (expense)	—			31			—			(1		)	30			—			30
After tax amount	—			(208		)	(1		)	12			(197		)	(13		)	(210		)
Amounts reclassified from accumulated other comprehensive income(1)(2)	15			—			—			(5		)	10			—			10
Net current period other comprehensive income (loss)	15			(208		)	(1		)	7			(187		)	$	(13	)	$	(200	)
Balance at September 27, 2015	$	(626	)	$	(643	)	$	(2	)	$	13		$	(1,258	)
Balance at July 3, 2016	$	(636	)	$	(960	)	$	(1	)	$	(23	)	$	(1,620	)
Other comprehensive income before reclassifications
Before tax amount	5			(51		)	—			(4		)	(50		)	$	3		$	(47	)
Tax (expense) benefit	(1		)	19			—			1			19			—			19
After tax amount	4			(32		)	—			(3		)	(31		)	3			(28		)
Amounts reclassified from accumulated other comprehensive income(1)(2)	9			—			—			10			19			—			19
Net current period other comprehensive income (loss)	13			(32		)	—			7			(12		)	$	3		$	(9	)
Balance at October 2, 2016	$	(623	)	$	(992	)	$	(1	)	$	(16	)	$	(1,632	)

____________________________________

⁽¹⁾Amounts are net of tax.

⁽²⁾See reclassifications out of accumulated other comprehensive (loss) income disclosure below for further details.

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	Nine months ended
In millions	Change in pensions and other postretirement defined benefit plans			Foreign currency translation adjustment			Unrealized gain (loss) on marketable securities			Unrealized gain (loss) on derivatives			Total attributable to Cummins Inc.			Noncontrolling interests			Total other comprehensive income (loss)
Balance at December 31, 2014	$	(669	)	$	(406	)	$	(1	)	$	(2	)	$	(1,078	)
Other comprehensive income before reclassifications
Before tax amount	(3		)	(290		)	—			23			(270		)	$	(15	)	$	(285	)
Tax benefit (expense)	1			53			—			(3		)	51			—			51
After tax amount	(2		)	(237		)	—			20			(219		)	(15		)	(234		)
Amounts reclassified from accumulated other comprehensive income(1)(2)	45			—			(1		)	(5		)	39			—			39
Net current period other comprehensive income (loss)	43			(237		)	(1		)	15			(180		)	$	(15	)	$	(195	)
Balance at September 27, 2015	$	(626	)	$	(643	)	$	(2	)	$	13		$	(1,258	)
Balance at December 31, 2015	$	(654	)	$	(696	)	$	(2	)	$	4		$	(1,348	)
Other comprehensive income before reclassifications
Before tax amount	5			(316		)	1			(40		)	(350		)	$	(3	)	$	(353	)
Tax (expense) benefit	(1		)	20			—			7			26			—			26
After tax amount	4			(296		)	1			(33		)	(324		)	(3		)	(327		)
Amounts reclassified from accumulated other comprehensive income(1)(2)	27			—			—			13			40			—			40
Net current period other comprehensive income (loss)	31			(296		)	1			(20		)	(284		)	$	(3	)	$	(287	)
Balance at October 2, 2016	$	(623	)	$	(992	)	$	(1	)	$	(16	)	$	(1,632	)

____________________________________

⁽¹⁾Amounts are net of tax.

⁽²⁾See reclassifications out of accumulated other comprehensive (loss) income disclosure below for further details.

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Following are the items reclassified out of accumulated other comprehensive (loss) income and the related tax effects:

In millions	Three months ended						Nine months ended
(Gain)/Loss Components	October 2, 2016			September 27, 2015			October 2, 2016			September 27, 2015			Statement of Income Location
Change in pensions and other postretirement defined benefit plans
Recognized actuarial loss	$	14		$	22		$	40		$	65		(1)
Tax effect	(5		)	(7		)	(13		)	(20		)	Income tax expense
Net change in pensions and other postretirement defined benefit plans	9			15			27			45
Realized (gain) on marketable securities	—			—			—			(1		)	Other income, net
Tax effect	—			—			—			—			Income tax expense
Net realized (gain) on marketable securities	—			—			—			(1		)
Realized loss (gain) on derivatives
Foreign currency forward contracts	12			(6		)	17			(6		)	Net sales
Tax effect	(2		)	1			(4		)	1			Income tax expense
Net realized loss (gain) on derivatives	10			(5		)	13			(5		)
Total reclassifications for the period	$	19		$	10		$	40		$	39

____________________________________

⁽¹⁾ These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 3, ''PENSION AND OTHER POSTRETIREMENT BENEFITS'').

NOTE 12. RESTRUCTURING ACTIONS AND OTHER CHARGES

We executed restructuring actions primarily in the form of professional voluntary and involuntary employee separation programs in the fourth quarter of 2015. These actions were in response to the continued deterioration in our global markets in the second half of 2015, as well as expected reductions in orders in most U.S. and global markets in 2016. We reduced our worldwide workforce by approximately 1,900employees, including approximately 370 employees accepting voluntary retirement packages with the remainder of the reductions being involuntary. We incurred a charge of $90 million in the fourth quarter of 2015, of which $86 million related to severance costs for both voluntary and involuntary terminations and $4 million for asset impairments and other charges.

Employee termination and severance costs were recorded based on approved plans developed by the businesses and corporate management which specified positions to be eliminated, benefits to be paid under existing severance plans or statutory requirements and the expected timetable for completion of the plan. Estimates of restructuring costs and benefits were made based on information available at the time charges were recorded. Due to the inherent uncertainty involved, actual amounts paid for such activities may differ from amounts initially recorded and we may need to revise previous estimates.

Restructuring actions and other charges were included in each segment in our operating results as follows:

In millions	Year ended December 31, 2015 (1)
Power Systems	26
Distribution	23
Engine	17
Components	13
Non-segment	11
Restructuring actions and other charges	$	90

____________________________________________________

⁽¹⁾ Restructuring actions and other charges by segment were re-allocated in conjunction with our segment realignment. See Note 13, "OPERATING SEGMENTS," for additional information.

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At October 2, 2016, substantially all terminations have been completed.

The table below summarizes the activity and balance of accrued workforce reductions, which is included in "Other accrued expenses" in our Condensed Consolidated Balance Sheets:

In millions	October 2, 2016
Balance, beginning of year	$	60
Cash payments for 2015 actions	(53		)
Balance, end of period	$	7

NOTE 13. OPERATING SEGMENTS

Operating segments under GAAP are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (CODM), or decision-making group, in deciding how to allocate resources and in assessing performance. Our CODM is the Chief Operating Officer.

We use segment EBIT (defined as earnings before interest expense, income taxes and noncontrolling interests) as a primary basis for the CODM to evaluate the performance of each of our operating segments. Segment amounts exclude certain expenses not specifically identifiable to segments.

As previously announced, beginning with the second quarter of 2016, we realigned certain of our reportable segments to be consistent with changes to our organizational structure and how the CODM monitors the performance of our segments. We reorganized our business to combine our Power Generation segment and our high-horsepower engine business to create the new Power Systems segment. Our reportable operating segments consist of Engine, Distribution, Components and Power Systems. We began to report results for our new reporting structure in the second quarter of 2016 and also reflected this change for historical periods.

We allocate certain common costs and expenses, primarily corporate functions, among segments. These include certain costs and expenses of shared services, such as information technology, human resources, legal, finance and supply chain management. In addition to the reorganization noted above, we reevaluated the allocation of these costs, considering the new segment structure created in April 2016 and adjusted our allocation methodology accordingly. The revised methodology, which is based on a combination of relative segment sales and relative service usage levels, is effective for the periods beginning after January 1, 2016 and resulted in the revision of our segment operating results, including segment EBIT, for all four segments for the first quarter of 2016 with a greater share of costs allocated to the Distribution and Components segments than in previous years. Prior periods were not revised for the new allocation methodology. These changes had no impact on our consolidated results.

Our new reporting structure is organized according to the products and markets each segment serves. The Engine segment produces engines (15 liters and less in size) and associated parts for sale to customers in on-highway and various off-highway markets. Our engines are used in trucks of all sizes, buses and recreational vehicles, as well as in various industrial applications, including construction, agriculture, power generation systems and other off-highway applications. The Distribution segment includes wholly-owned and partially-owned distributorships engaged in wholesaling engines, generator sets and service parts, as well as performing service and repair activities on our products and maintaining relationships with various OEMs throughout the world. The Components segment sells filtration products, aftertreatment systems, turbochargers and fuel systems. The Power Systems segment is an integrated power provider, which designs, manufactures and sells engines (16 liters and larger) for industrial applications (including mining, oil and gas and marine), standby and prime power generator sets, alternators and other power components.

The accounting policies of our operating segments are the same as those applied in our Condensed Consolidated Financial Statements. We prepared the financial results of our operating segments on a basis that is consistent with the manner in which we internally disaggregate financial information to assist in making internal operating decisions. As noted above, we allocate certain common costs and expenses, primarily corporate functions, among segments. We do not allocate debt-related items, actuarial gains or losses, prior service costs or credits, changes in cash surrender value of corporate owned life insurance or income taxes to individual segments. Segment EBIT may not be consistent with measures used by other companies.

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Summarized financial information regarding our reportable operating segments for the three and nine month periods is shown in the table below:

In millions	Engine			Distribution		Components		Power Systems		Non-segment Items (1)			Total
Three months ended October 2, 2016
External sales	$	1,357		$	1,497	$	824	$	509	$	—		$	4,187
Intersegment sales	502			7		319		347		(1,175		)	—
Total sales	1,859			1,504		1,143		856		(1,175		)	4,187
Depreciation and amortization(2)	42			28		32		29		—			131
Research, development and engineering expenses	56			3		54		44		—			157
Equity, royalty and interest income from investees	38			19		9		8		—			74
Loss contingency	99		(3)	—		—		—		—			99
Interest income	3			1		1		1		—			6
Segment EBIT	89			96		148		59		6			398
Three months ended September 27, 2015
External sales	$	1,627		$	1,543	$	891	$	559	$	—		$	4,620
Intersegment sales	475			8		349		423		(1,255		)	—
Total sales	2,102			1,551		1,240		982		(1,255		)	4,620
Depreciation and amortization(2)	47			26		28		27		—			128
Research, development and engineering expenses	73			2		65		57		—			197
Equity, royalty and interest income from investees	33			19		9		17		—			78
Interest income	6			1		1		1		—			9
Segment EBIT	217			123		156		74		7			577
Nine months ended October 2, 2016
External sales	$	4,350		$	4,493	$	2,654	$	1,509	$	—		$	13,006
Intersegment sales	1,487			18		1,005		1,076		(3,586		)	—
Total sales	5,837			4,511		3,659		2,585		(3,586		)	13,006
Depreciation and amortization(2)	121			86		95		87		—			389
Research, development and engineering expenses	166			10		161		141		—			478
Equity, royalty and interest income from investees	120			56		29		29		—			234
Loss contingency	138		(3)	—		—		—		—			138
Interest income	8			3		3		4		—			18
Segment EBIT	492			270		501		195		15			1,473
Nine months ended September 27, 2015
External sales	$	5,150		$	4,499	$	2,839	$	1,856	$	—		$	14,344
Intersegment sales	1,422			23		1,097		1,225		(3,767		)	—
Total sales	6,572			4,522		3,936		3,081		(3,767		)	14,344
Depreciation and amortization(2)	140			78		82		81		—			381
Research, development and engineering expenses	195			8		183		172		—			558
Equity, royalty and interest income from investees	107			60		26		47		—			240
Interest income	10			3		3		4		—			20
Segment EBIT	695			324		574		302		(35		)	1,860

____________________________________

⁽¹⁾ Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three and nine months ended October 2, 2016 and September 27, 2015.

⁽²⁾ Depreciation and amortization as shown on a segment basis excludes the amortization of debt discount and deferred costs included in theCondensed Consolidated Statements of Income as "Interest expense."The amortization of debt discount and deferred costs was $2 million for the nine months ended October 2, 2016 and September 27, 2015.

⁽³⁾ See Note 10, "COMMITMENTS AND CONTINGENCIES," for additional information.

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A reconciliation of our segment information to the corresponding amounts in the Condensed Consolidated Statements of Income is shown in the table below:

	Three months ended				Nine months ended
In millions	October 2, 2016		September 27, 2015		October 2, 2016		September 27, 2015
Total segment EBIT	$	398	$	577	$	1,473	$	1,860
Less: Interest expense	16		16		51		47
Income before income taxes	$	382	$	561	$	1,422	$	1,813

NOTE 14. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In August 2016, the Financial Accounting Standards Board (FASB) amended its standards related to the classification of certain cash receipts and cash payments. The new standard will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case it would be required to apply the amendments prospectively as of the earliest date practicable. We are in the process of evaluating the impact this standard will have on our Consolidated Statements of Cash Flows.

In June 2016, the FASB amended its standards related to the accounting for credit losses on financial instruments. This amendment introduces new guidance for accounting for credit losses on instruments including trade receivables and held-to-maturity debt securities. The new rules are effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are in the process of evaluating the impact the amendment will have on our Consolidated Financial Statements.

In March 2016, the FASB amended its standards related to the accounting for stock compensation. This amendment addresses several aspects of the accounting for share-based payment transactions that could impact us including, but not limited to, recognition of excess tax benefits or deficiencies in the income statement each period and classification of the excess tax benefits or deficiencies as operating activities in the cash flow statement. The new standard is effective for annual periods beginning after December 15, 2016, with early adoption permitted. We are in the process of evaluating the impact the amendment will have on our Consolidated Financial Statements.

In February 2016, the FASB amended its standards related to the accounting for leases. Under the new standard, lessees will now be required to recognize substantially all leases on the balance sheet as both a right-of-use-asset and a liability. The standard will continue to have two types of leases for income statement recognition purposes: operating leases and finance leases. Operating leases will result in the recognition of a single lease expense on a straight-line basis over the lease term similar to the treatment for operating leases under today's standards. Finance leases will result in an accelerated expense similar to the accounting for capital leases under today's standards. The determination of a lease classification as operating or finance will be done in a manner very similar to today's standard. The new standard also contains amended guidance regarding the identification of embedded leases in service contracts and the identification of lease and non-lease components in an arrangement. The new standard is effective for us on January 1, 2019, with early adoption permitted. We are still evaluating the impact the standard could have on our Consolidated Financial Statements; however, while we have not yet quantified the amount, we do expect the standard will have a material impact on our Consolidated Balance Sheets due to the recognition of additional assets and liabilities for operating leases.

In January 2016, the FASB amended its standards related to the accounting for certain financial instruments. This amendment addresses certain aspects of recognition, measurement, presentation and disclosure. The new rules will become effective for annual and interim periods beginning after December 15, 2017. Early adoption is not permitted. We are in the process of evaluating the impact the amendment will have on our Consolidated Financial Statements.

In May 2014, the FASB amended its standards related to revenue recognition. This amendment replaces all existing revenue recognition guidance and provides a single, comprehensive revenue recognition model for all contracts with customers. The standard contains principles that we will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that we will recognize revenue in a manner that depicts the transfer of goods or services to customers at an amount that we expect to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization

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of certain contract costs, consideration of the time value of money in the transaction price and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The amendment also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in those judgments and assets recognized from costs incurred to fulfill a contract. The standard allows either full or modified retrospective adoption effective for annual and interim periods beginning January 1, 2018. We are in the process of evaluating the impact the amendment will have on our Consolidated Financial Statements.We expect to adopt the standard using the modified retrospective approach. While we have not yet completed our evaluation process, we have identified transactions where revenue recognition is currently limited to the amount of billings not contingent on our future performance. With the allocation provisions of the new model, we expect to accelerate the timing of revenue recognition for amounts related to satisfied performance obligations that would have been delayed under the current guidance. We do not expect the impact of this change to be material, but we are still quantifying the impact.

NOTE 15. SUBSEQUENT EVENT

Acquisition of Cummins Pacific, LLC

In October 2016, we acquired the remaining 50 percent interest in Cummins Pacific, LLC from the former distributor principal. The purchase consideration was $97 million, which included $17 million in cash and an additional $66 million paid to eliminate outstanding debt. The remaining $14 million will be paid in future periods, subject to customary purchase price adjustments. We will recognize a gain of $13 million on the fair value adjustment in the fourth quarter of 2016, resulting from this acquisition.

This is the final acquisition of the plan we announced on September 17, 2013, to acquire the equity that we did not already own in most of our partially-owned U.S. and Canadian distributors.

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ITEM 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cummins Inc. and its consolidated subsidiaries are hereinafter sometimes referred to as “Cummins,” “we,” “our” or “us.”

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

Certain parts of this quarterly report contain forward-looking statements intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include those that are based on current expectations, estimates and projections about the industries in which we operate and management’s beliefs and assumptions. Forward-looking statements are generally accompanied by words such as "anticipates," "expects," "forecasts," "intends," "plans," "believes," "seeks," "estimates," "could," "should" or words of similar meaning. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which we refer to as "future factors," which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Some future factors that could cause our results to differ materially from the results discussed in such forward-looking statements are discussed below and shareholders, potential investors and other readers are urged to consider these future factors carefully in evaluating forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. Future factors that could affect the outcome of forward-looking statements include the following:

• a sustained slowdown or significant downturn in our markets;

• a downturn in the North American truck industry;

• a major customer experiencing financial distress;

• changes in the engine outsourcing practices of significant customers;

• any significant problems in our new engine platforms;

• a further slowdown in infrastructure development;

• unpredictability in the adoption, implementation and enforcement of emission standards around the world;

• foreign currency exchange rate changes;

• the actions of, and income from, joint ventures and other investees that we do not directly control;

• the integration of our previously partially-owned United States and Canadian distributors;

• our plan to grow through strategic acquisitions and related uncertainties of entering into such transactions;

• challenges or unexpected costs in completing restructuring and cost reduction initiatives;

• supply shortages and supplier financial risk, particularly from any of our single-sourced suppliers;

• variability in material and commodity costs;

• product recalls;

• the development of new technologies;

• competitor pricing activity;

• increasing competition, including increased global competition among our customers in emerging markets; 

• exposure to potential security breaches or other disruptions to our information technology systems and data security;

• political, economic and other risks from operations in numerous countries;

• changes in taxation;

• global legal and ethical compliance costs and risks;

• aligning our capacity and production with our demand;

• product liability claims;

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• increasingly stringent environmental laws and regulations;

• the price and availability of energy;

• the performance of our pension plan assets and volatility of discount rates;

• labor relations;

• changes in actuarial and 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 cyclical nature of some of our markets;

• the outcome of pending and future litigation and governmental proceedings;

• continued availability of financing, financial instruments and financial resources in the amounts, at the times and on the terms required to support our future business; and

• other risk factors described in our Form 10-K, Part I, Item 1A under the caption “Risk Factors.”

Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are made only as of the date of this quarterly report and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

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ORGANIZATION OF INFORMATION

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) was prepared to provide the reader with a view and perspective of our business through the eyes of management and should be read in conjunction with our Management's Discussion and Analysis of Financial Condition and Results of Operations section of our 2015 Form 10-K and our July 26, 2016, 8-K addressing the segment reorganization. Our MD&A is presented in the following sections:

•Executive Summary and Financial Highlights

•Outlook

•Results of Operations

•Operating Segment Results

•Liquidity and Capital Resources

•Application of Critical Accounting Estimates

•Recently Issued Accounting Pronouncements

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EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS

We are a global power leader that designs, manufactures, distributes and services diesel and natural gas engines and engine-related component products, including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems and electric power generation systems. We sell our products to original equipment manufacturers (OEMs), distributors and other customers worldwide.We have long-standing relationships with many of the leading manufacturers in the markets we serve, including PACCAR Inc, Daimler Trucks North America, Navistar International Corporation, Fiat Chrysler Automobiles, Volvo AB, Komatsu and MAN Nutzfahrzeuge AG.We serve our customers through a network of approximately600 company-owned and independent distributor locations and over7,200dealer locations in more than 190 countries and territories.

Our reportable operating segments consist of Engine, Distribution, Components and Power Systems. This reporting structure is organized according to the products and markets each segment serves. The Engine segment produces engines (15 liters and less in size) and associated parts for sale to customers in on-highway and various off-highway markets. Our engines are used in trucks of all sizes, buses and recreational vehicles, as well as in various industrial applications, including construction, agriculture, power generation systems and other off-highway applications. The Distribution segment includes wholly-owned and partially-owned distributorships engaged in wholesaling engines, generator sets and service parts, as well as performing service and repair activities on our products and maintaining relationships with various OEMs throughout the world. The Components segment sells filtration products, aftertreatment systems, turbochargers and fuel systems. The Power Systems segment is an integrated power provider, which designs, manufactures and sells engines (16 liters and larger) for industrial applications (including mining, oil and gas and marine), standby and prime power generator sets, alternators and other power components.

Our financial performance depends, in large part, on varying conditions in the markets we serve, particularly the on-highway, construction and general industrial markets. Demand in these markets tends to fluctuate in response to overall economic conditions. Our sales may also be impacted by OEM inventory levels, production schedules and stoppages. Economic downturns in markets we serve generally result in reduced sales of our products and can result in price reductions in certain products and/or markets. As a worldwide business, our operations are also affected by currency, political, economic and regulatory matters, including adoption and enforcement of environmental and emission standards, in the countries we serve. As part of our growth strategy, we invest in businesses in certain countries that carry high levels of these risks such as China, Brazil, India, Mexico, Russia and countries in Middle East and Africa. At the same time, our geographic diversity and broad product and service offerings have helped limit the impact from a drop in demand in any one industry or customer or the economy of any single country on our consolidated results.

Worldwide revenues decreased9 percent in the three months ended October 2, 2016, as compared to the same period in 2015, primarily due to lower demand in most global on-highway markets, decreased demand in most global power generation markets, lower demand in most distribution markets and unfavorable foreign currency fluctuations, partially offset by sales increases related to the consolidation of North American distributors since December 31, 2014. Revenue in the U.S. and Canada declined by 13 percent primarily due to decreased demand in the North American on-highway markets, partially offset by increased Distribution segment sales related to the consolidation of North American distributors. Continued global economic weakness in the third quarter of 2016 negatively impacted our international revenues (excludes the U.S. and Canada), which declined by 3 percent, with sales down in many of our markets, especially in Africa, Korea, Mexico and Middle East. The decline in international sales was primarily due to unfavorable foreign currency impacts of 3 percent of international sales (primarily in the British pound and Chinese renminbi) and lower demand in the power generation markets, especially in Middle East and Asia (excluding China).

Worldwide revenues declined 9 percent in the first nine months of 2016 as compared to the same period in 2015, primarily due to lower demand in most global on-highway markets, decreased demand in most global power generation markets, unfavorable foreign currency fluctuations and lower demand in most global high-horsepower industrial markets, partially offset by sales increases related to the consolidation of North American distributors since December 31, 2014. Revenue in the U.S. and Canada declined by 12 percent primarily due to decreased demand in the North American on-highway markets and lower demand in the industrial oil and gas, construction and mining markets, partially offset by increased Distribution segment sales related to the consolidation of North American distributors. Continued global economic weakness in 2016 negatively impacted our international revenues (excludes the U.S. and Canada), which declined by 5 percent, with sales down in most of our markets, especially in South America, Mexico, Middle East and the U.K. The decline in international sales was primarily due to declines in most international power generation markets, unfavorable foreign currency impacts of 4 percent of international sales (primarily in the Chinese renminbi, British pound, Brazilian real, Indian rupee, Australian dollar and South African rand), lower demand in the on-highway markets in Brazil and Mexico and decreased demand in international high-horsepower industrial markets led by declines in marine and mining.

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The following tables contain sales and earnings before interest expense, income tax expense and noncontrolling interests (EBIT) results by operating segment for the three and nine months ended October 2, 2016 and September 27, 2015. Refer to the section titled “Operating Segment Results” for a more detailed discussion of net sales and EBIT by operating segment, including the reconciliation of segment EBIT to income before income taxes.

	Three months ended
Operating Segments	October 2, 2016							September 27, 2015							Percent change
				Percent							Percent				2016 vs. 2015
In millions	Sales			of Total		EBIT		Sales (1)			of Total		EBIT (1)		Sales		EBIT
Engine	$	1,859		44	%	$	89	$	2,102		45	%	$	217	(12	)%	(59	)%
Distribution	1,504			36	%	96		1,551			34	%	123		(3	)%	(22	)%
Components	1,143			27	%	148		1,240			27	%	156		(8	)%	(5	)%
Power Systems	856			21	%	59		982			21	%	74		(13	)%	(20	)%
Intersegment eliminations	(1,175		)	(28	)%	—		(1,255		)	(27	)%	—		(6	)%	—
Non-segment	—			—		6		—			—		7		—		(14	)%
Total	$	4,187		100	%	$	398	$	4,620		100	%	$	577	(9	)%	(31	)%

____________________________________

⁽¹⁾ Sales and EBIT numbers were adjusted for the segment reorganization. See Note 13, "OPERATING SEGMENTS," to the Condensed Consolidated Financial Statements for additional information.

Net income attributable to Cummins was $289 million, or $1.72 per diluted share, on sales of $4.2 billion for the three months ended October 2, 2016, versus the comparable prior year period net income attributable to Cummins of $380 million, or $2.14 per diluted share, on sales of $4.6 billion. The decrease in net income and earnings per diluted share was driven by lower gross margin and an accrual for a loss contingency, partially offset by decreased research, development and engineering expenses, a lower effective tax rate and decreased selling, general and administrative expenses. The decrease in gross margin was primarily due to lower volume and unfavorable mix, partially offset by lower material and commodity costs.

	Nine months ended
Operating Segments	October 2, 2016							September 27, 2015								Percent change
				Percent							Percent					2016 vs. 2015
In millions	Sales			of Total		EBIT		Sales (1)			of Total		EBIT (1)			Sales		EBIT
Engine	$	5,837		45	%	$	492	$	6,572		46	%	$	695		(11	)%	(29	)%
Distribution	4,511			35	%	270		4,522			32	%	324			—	%	(17	)%
Components	3,659			28	%	501		3,936			27	%	574			(7	)%	(13	)%
Power Systems	2,585			20	%	195		3,081			21	%	302			(16	)%	(35	)%
Intersegment eliminations	(3,586		)	(28	)%	—		(3,767		)	(26	)%	—			(5	)%	—
Non-segment	—			—		15		—			—		(35		)	—		NM
Total	$	13,006		100	%	$	1,473	$	14,344		100	%	$	1,860		(9	)%	(21	)%

____________________________________

"NM" - not meaningful information

⁽¹⁾ Sales and EBIT numbers were adjusted for the segment reorganization. See Note 13, "OPERATING SEGMENTS," to the Condensed Consolidated Financial Statements for additional information.

Net income attributable to Cummins was $1.0 billion, or $5.99 per diluted share, on sales of $13.0 billion for the nine months ended October 2, 2016, versus the comparable prior year period net income attributable to Cummins of $1.2 billion, or $6.90 per diluted share, on sales of $14.3 billion. The decrease in net income and earnings per diluted share was driven by lower gross margin and an accrual for a loss contingency, partially offset by lower research, development and engineering expenses, decreased selling, general and administrative expenses and a lower effective tax rate. The decrease in gross margin was primarily due to lower volumes, unfavorable mix and unfavorable foreign currency fluctuations (primarily in the Canadian dollar, Australian dollar, Brazilian real and South African rand), partially offset by lower material and commodity costs, lower warranty expense and improved Distribution segment margins related to the acquisition of North American distributors since December 31, 2014. Diluted earnings per share for the nine months ended October 2, 2016, benefited $0.18 from fewer weighted average shares outstanding, primarily due to purchases under the stock repurchase programs.

We generated $1.3 billion of operating cash flows for the nine months ended October 2, 2016, compared to $1.1 billion for the same period in 2015. Refer to the section titled "Cash Flows" in the "Liquidity and Capital Resources" section for a discussion of items impacting cash flows.

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During the first nine months of 2016, we repurchased $745 million, or 7.1 million shares of common stock, including completion of the accelerated share repurchase agreement finalized in the second quarter of 2016. See Note 2, "BASIS OF PRESENTATION," to the Condensed Consolidated Financial Statements for additional information.

Our debt to capital ratio (total capital defined as debt plus equity) at October 2, 2016, was 21.2 percent, compared to 17.5 percent at December 31, 2015. The increase was due to the repurchases of common stock and higher total debt, primarily due to the commercial paper program. At October 2, 2016, we had $1.5 billion in cash and marketable securities on hand and access to our credit facilities, if necessary, to meet currently anticipated investment and funding needs.

In July 2016, our Board of Directors authorized an increase to our quarterly dividend of 5.1 percent from $0.975 per share to $1.025 per share.

Our global pension plans, including our unfunded and non-qualified plans, were 111 percent funded at December 31, 2015. Our U.S. qualified plan, which represents approximately 57 percent of the worldwide pension obligation, was 119 percent funded and our U.K. plan was 123 percent funded. We expect to contribute $146 million to our U.S. and U.K. pension plans and $44 million to our German pension plans in 2016. In addition, we expect our 2016 net periodic pension cost to approximate $42 million. See Note 3, "PENSION AND OTHER POSTRETIREMENT BENEFITS," to the Condensed Consolidated Financial Statements for additional information.

In the third quarter of 2016, we recorded an additional accrual of $99 million for an existing loss contingency. For the nine months ended October 2, 2016, we accrued a total of $138 million related to this matter. See Note 10, "COMMITMENTS AND CONTINGENCIES," to the Condensed Consolidated Financial Statements for additional information.

We expect our effective tax rate for the full year of 2016 to approximate 25.5 percent, excluding any one-time tax items.

In October 2016, we completed the acquisition of the remaining interest in the final previously unconsolidated North American distributor for $97 million and will recognize a gain of $13 million in the fourth quarter on the fair value adjustment resulting from the acquisition.

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OUTLOOK

Our outlook reflects the following trends for the remainder of 2016:

• We expect demand for pick-up trucks in North America to remain strong.

• We intend to realize annualized savings from the 2015 restructuring actions of approximately $160 million.

Our outlook reflects the following challenges to our business that may reduce our revenue and earnings potential for the remainder of 2016:

• We expect industry production of heavy-duty trucks in North America to decline.

• We expect power generation markets to remain weak.

• We expect industry production of medium-duty trucks in North America to decline.

• We expect North American construction markets to weaken.

• We believe weak economic conditions in Brazil will continue to negatively impact demand across our businesses.

• Foreign currency volatility could continue to put pressure on our revenues and earnings.

• We expect market demand to remain weak in the oil and gas and commercial marine markets as the result of low crude oil prices.

• We expect demand for equipment in global mining markets to remain weak.

• We could close or restructure additional manufacturing facilities as we evaluate the appropriate size and structure of our manufacturing capacity, which could result in additional charges.

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RESULTS OF OPERATIONS

	Three months ended					Favorable/					Nine months ended						Favorable/
	October 2, 2016		September 27, 2015			(Unfavorable)					October 2, 2016			September 27, 2015			(Unfavorable)
In millions (except per share amounts)						Amount			Percent								Amount			Percent
NET SALES	$	4,187	$	4,620		$	(433	)	(9	)%	$	13,006		$	14,344		$	(1,338	)	(9	)%
Cost of sales	3,108		3,412			304			9	%	9,674			10,609			935			9	%
GROSS MARGIN	1,079		1,208			(129		)	(11	)%	3,332			3,735			(403		)	(11	)%
OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses	513		530			17			3	%	1,527			1,584			57			4	%
Research, development and engineering expenses	157		197			40			20	%	478			558			80			14	%
Equity, royalty and interest income from investees	74		78			(4		)	(5	)%	234			240			(6		)	(3	)%
Loss contingency	99		—			(99		)	NM		138			—			(138		)	NM
Other operating expense, net	—		(2		)	2			100	%	(2		)	(5		)	3			60	%
OPERATING INCOME	384		557			(173		)	(31	)%	1,421			1,828			(407		)	(22	)%
Interest income	6		9			(3		)	(33	)%	18			20			(2		)	(10	)%
Interest expense	16		16			—			—	%	51			47			(4		)	(9	)%
Other income, net	8		11			(3		)	(27	)%	34			12			22			NM
INCOME BEFORE INCOME TAXES	382		561			(179		)	(32	)%	1,422			1,813			(391		)	(22	)%
Income tax expense	82		169			87			51	%	362			521			159			31	%
CONSOLIDATED NET INCOME	300		392			(92		)	(23	)%	1,060			1,292			(232		)	(18	)%
Less: Net income attributable to noncontrolling interests	11		12			1			8	%	44			54			10			19	%
NET INCOME ATTRIBUTABLE TO CUMMINS INC.	$	289	$	380		$	(91	)	(24	)%	$	1,016		$	1,238		$	(222	)	(18	)%
Diluted Earnings Per Common Share Attributable to Cummins Inc.	$	1.72	$	2.14		$	(0.42	)	(20	)%	$	5.99		$	6.90		$	(0.91	)	(13	)%

"NM" - not meaningful information

	Three months ended				Favorable/ (Unfavorable)		Nine months ended				Favorable/ (Unfavorable)
	October 2, 2016		September 27, 2015				October 2, 2016		September 27, 2015
Percent of sales					Percentage Points						Percentage Points
Gross margin	25.8	%	26.1	%	(0.3	)	25.6	%	26.0	%	(0.4	)
Selling, general and administrative expenses	12.3	%	11.5	%	(0.8	)	11.7	%	11.0	%	(0.7	)
Research, development and engineering expenses	3.7	%	4.3	%	0.6		3.7	%	3.9	%	0.2

Net Sales

Net sales for the three months ended October 2, 2016, decreased by $433 millionversus the comparable period in 2015. The primary drivers were as follows:

• Engine segment sales decreased 12 percent primarily due to lower demand in North American on-highway markets and lower demand in most North American off-highway markets, partially offset by increased sales in the light-duty automotive market.

• Power Systems segment sales decreased 13 percent primarily due to lower demand in all reporting structures and decreased sales in most regions with the largest declines in Asia (excluding China), Middle East, North America and Africa.

• Components segment sales decreased 8 percent primarily due to lower demand in most lines of businesses, primarily in North American on-highway markets, partially offset by higher demand in China.

• Foreign currency fluctuations unfavorably impacted sales by approximately 2 percent primarily in the British pound and Chinese renminbi.

• Distribution segment sales decreased 3 percent, primarily due to a decline in organic sales in engine markets, partially offset by higher sales related to the acquisition of North American distributors since December 31, 2014.

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Net sales for the nine months ended October 2, 2016, decreased by $1.3 billionversus the comparable period in 2015. The primary drivers were as follows:

• Engine segment sales decreased 11 percent primarily due to lower demand in North American on-highway markets and lower demand in most global off-highway markets, partially offset by increased sales in the light-duty automotive market.

• Power Systems segment sales decreased 16 percent primarily due to lower demand in all reporting structures and decreased sales in most regions with the largest declines in North America, China, Asia, Middle East, Africa, Western Europe and Mexico, partially offset by increased sales in Russia.

• Components segment sales decreased 7 percent primarily due to lower demand in all lines of business, mostly in North American on-highway markets, partially offset by higher demand in China.

• Foreign currency fluctuations unfavorably impacted sales by approximately 2 percent primarily in the Chinese renminbi, British pound, Brazilian real, Indian rupee, Canadian dollar, Australian dollar and South African rand.

Sales to international markets, based on location of customers, for both the three and nine months ended October 2, 2016, were 41 percent of total net sales compared with 38 percent and 39 percent of total net sales, respectively, for the comparable periods in 2015. A more detailed discussion of sales by segment is presented in the “OPERATING SEGMENT RESULTS” section.

Gross Margin

Gross margin decreased $129 million for the three months ended October 2, 2016, versus the comparable period in 2015, and decreased0.3 points as a percentage of sales. The decrease in gross margin dollars was primarily due to lower volume and unfavorable mix, partially offset by lower material and commodity costs.

Gross margin decreased $403 million for the nine months ended October 2, 2016, versus the comparable period in 2015, and decreased 0.4 points as a percentage of sales. The decrease in gross margin dollars was primarily due to lower volumes, unfavorable mix and unfavorable foreign currency fluctuations (primarily in the Canadian dollar, Australian dollar, Brazilian real and South African rand), partially offset by lower material and commodity costs, lower warranty expense and improved Distribution segment margins related to the acquisition of North American distributors since December 31, 2014.

The provision for base warranties issued, excluding campaigns, as a percent of sales for the three and nine months ended October 2, 2016, was 1.5 percent and 1.7 percent, respectively, compared to 1.8 percent and 2.0 percent for the comparable periods in 2015. A more detailed discussion of margin by segment is presented in the “OPERATING SEGMENT RESULTS” section.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased$17 million for the three months ended October 2, 2016, versus the comparable period in 2015, primarily due to lower compensation expenses as a result of restructuring actions taken in the fourth quarter of 2015, partially offset by higher consulting expenses. Compensation and related expenses include salaries, fringe benefits and variable compensation. Overall, selling, general and administrative expenses, as a percentage of sales, increased to 12.3 percent in the three months ended October 2, 2016, from 11.5 percent in the comparable period in 2015.

Selling, general and administrative expenses decreased $57 million for the nine months ended October 2, 2016, versus the comparable period in 2015, primarily due to lower compensation expenses as a result of restructuring actions taken in the fourth quarter of 2015, and lower consulting expenses. Overall, selling, general and administrative expenses, as a percentage of sales, increased to 11.7 percent in the nine months ended October 2, 2016, from 11.0 percent in the comparable period in 2015.

Research, Development and Engineering Expenses

Research, development and engineering expenses decreased$40 million for the three months ended October 2, 2016, versus the comparable period in 2015, primarily due to lower consulting expenses, decreased compensation expenses as a result of restructuring actions taken in the fourth quarter of 2015, and increased expense recovery from customers and external parties. Compensation and related expenses include salaries, fringe benefits and variable compensation. Overall, research, development and engineering expenses, as a percentage of sales, decreased to 3.7 percent in the three months ended October 2, 2016, from 4.3 percent in the comparable period in 2015.

Research, development and engineering expenses decreased $80 million for the nine months ended October 2, 2016, versus the comparable period in 2015, primarily due to lower consulting expenses and decreased compensation expenses as a result of restructuring actions taken in the fourth quarter of 2015. Overall, research, development and engineering expenses, as a

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percentage of sales, decreased to 3.7 percent in the nine months ended October 2, 2016, from 3.9 percent in the comparable period in 2015.

Research activities continue to focus on development of new products to meet future emission standards around the world and improvements in fuel economy performance.

Equity, Royalty and Interest Income from Investees

Equity, royalty and interest income from investees decreased $4 million for the three months ended October 2, 2016, versus the comparable period in 2015, primarily due to the impact of an asset impairment incurred by one of our Power Systems joint ventures ($8 million), partially offset by increased earnings at Chongqing Engine Company, Ltd.

Equity, royalty and interest income from investees decreased $6 million for the nine months ended October 2, 2016, versus the comparable period in 2015, primarily due to lower earnings from North American distributors ($9 million), the impact of an asset impairment incurred by one of our Power Systems joint ventures ($8 million) and decreased earnings at Dongfeng Cummins Engine Company, Ltd. ($8 million). These decreases were partially offset by higher earnings at Beijing Foton Cummins Engine Co., Ltd. ($12 million).

Loss Contingency

In the third quarter of 2016, we recorded an additional accrual of $99 million for an existing loss contingency. For the nine months ended October 2, 2016, we accrued a total of $138 million related to this matter. See Note 10, "COMMITMENTS AND CONTINGENCIES," to the Condensed Consolidated Financial Statements for additional information.

Other Operating Expense, Net

Other operating expense, net was as follows:

	Three months ended						Nine months ended
In millions	October 2, 2016			September 27, 2015			October 2, 2016			September 27, 2015
Loss on write off of assets	$	(5	)	$	(3	)	$	(14	)	$	(3	)
Amortization of intangible assets	(2		)	(4		)	(7		)	(15		)
Royalty income, net	7			4			20			14
Other, net	—			1			(1		)	(1		)
Total other operating expense, net	$	—		$	(2	)	$	(2	)	$	(5	)

Interest Income

Interest income for the three and nine months ended October 2, 2016, decreased$3 million and $2 million, respectively, versus the comparable periods in 2015 primarily due to interest earned on a favorable tax settlement in Brazil in 2015.

Interest Expense

Interest expense for the three months ended October 2, 2016, remained flat versus the comparable period in 2015.

Interest expense for the nine months ended October 2, 2016, increased$4 million versus the comparable period in 2015, primarily due to an increase in total weighted average debt outstanding.

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Other Income, Net

Other income, net was as follows:

	Three months ended						Nine months ended
In millions	October 2, 2016			September 27, 2015			October 2, 2016			September 27, 2015
Change in cash surrender value of corporate owned life insurance	$	10		$	(11	)	$	33		$	(9	)
Dividend income	1			—			3			2
Gain on fair value adjustment for consolidated investees	—			17			—			17
Foreign currency (loss) gain, net	—			3			(11		)	(2		)
Bank charges	(3		)	(3		)	(7		)	(7		)
Other, net	—			5			16			11
Total other income, net	$	8		$	11		$	34		$	12

Income Tax Expense

Our effective tax rate for the year is expected to approximate 25.5 percent, excluding any one-time items that may arise. Our tax rate is generally less than the 35 percent U.S. statutory income tax rate primarily due to lower tax rates on foreign income and the research tax credit.

Our effective tax rate for the three and nine months ended October 2, 2016, was 21.5 percent and 25.5 percent, respectively.

Our effective tax rate for the three and nine months ended September 27, 2015, was 30.1 percent and 28.7 percent, respectively. The tax rate for the nine months ended September 27, 2015, included an $18 million discrete tax benefit to reflect the release of reserves for uncertain tax positions related to a favorable federal audit settlement.

The decrease in the effective tax rate for the three and nine months ended October 2, 2016, versus the comparable periods in 2015 was primarily due to favorable changes in the jurisdictional mix of pre-tax income.

It is reasonably possible that our existing liabilities for uncertain tax benefits may decrease in an amount ranging from $20 million to $26 million within the next 12 months for U.S. and non-U.S. audits that are in progress.

Noncontrolling Interests

Noncontrolling interests eliminate the income or loss attributable to non-Cummins ownership interests in our consolidated entities. Noncontrolling interests in income of consolidated subsidiaries for the three months ended October 2, 2016, remained relatively flat versus the comparable period in 2015.

Noncontrolling interests in income of consolidated subsidiaries for the nine months ended October 2, 2016, decreased $10 million primarily due to lower earnings as a result of the consolidation of North American distributors since December 31, 2014 and lower earnings at Cummins India Ltd.

Net Income Attributable to Cummins Inc. and Diluted Earnings Per Share Attributable to Cummins Inc.

Net income and diluted earnings per share attributable to Cummins Inc. for the three months ended October 2, 2016, decreased $91 million and $0.42 per share, respectively versus the comparable period in 2015, primarily due to lower gross margin and an accrual for a loss contingency, partially offset by decreased research, development and engineering expenses, a lower effective tax rate and decreased selling, general and administrative expenses.

Net income and diluted earnings per share attributable to Cummins Inc. for the nine months ended October 2, 2016, decreased $222 million and $0.91 per share, respectively versus the comparable period in 2015, primarily due to lower gross margin and an accrual for a loss contingency, partially offset by lower research, development and engineering expenses, decreased selling, general and administrative expenses and a lower effective tax rate.Diluted earnings per share for the nine months ended October 2, 2016, benefited $0.18 from fewer weighted average shares outstanding, primarily due to purchases under the stock repurchase programs.

32

Comprehensive Income - Foreign Currency Translation Adjustment

The foreign currency translation adjustment was a net loss of $29 million and $299 million, respectively, for the three and nine months ended October 2, 2016, compared to a net loss of $221 million and $252 million for the three and nine months ended September 27, 2015, respectively, and was driven by the following:

	Three months ended
	October 2, 2016				September 27, 2015
In millions	Translation adjustment			Primary currency driver vs. U.S. dollar	Translation adjustment			Primary currency driver vs. U.S. dollar
Wholly owned subsidiaries	$	(33	)	British pound, Brazilian real offset by Indian rupee	$	(189	)	British pound, Brazilian real
Equity method investments	1			Indian rupee, Japanese yen offset by Chinese renminbi	(19		)	Chinese renminbi, Indian rupee
Consolidated subsidiaries with a non-controlling interest	3			Indian rupee	(13		)	Indian rupee
Total	$	(29	)		$	(221	)

	Nine months ended
	October 2, 2016				September 27, 2015
In millions	Translation adjustment			Primary currency driver vs. U.S. dollar	Translation adjustment			Primary currency driver vs. U.S. dollar
Wholly owned subsidiaries	$	(288	)	British pound, Chinese renminbi offset by Brazilian real	$	(218	)	Brazilian real, British pound
Equity method investments	(8		)	Chinese renminbi offset by Japanese yen, Mexican peso(1)	(19		)	Chinese renminbi, Indian rupee
Consolidated subsidiaries with a non-controlling interest	(3		)	Indian rupee, Chinese renminbi	(15		)	Indian rupee
Total	$	(299	)		$	(252	)

____________________________________

⁽¹⁾ The Mexican peso adjustment related to a reclassification out of other comprehensive income at the time of the sale of an equity investment in the first quarter of 2016.

33

OPERATING SEGMENT RESULTS

Our reporting structure is organized according to the products and markets each segment serves. We use segment EBIT as the primary basis for the Chief Operating Decision Maker (CODM) to evaluate the performance of each of our operating segments.

As previously announced, beginning with the second quarter of 2016, we realigned certain of our reportable segments to be consistent with changes to our organizational structure and how the CODM monitors the performance of our segments. We reorganized our business to combine our Power Generation segment and our high-horsepower engine business to create the new Power Systems segment. Our reportable operating segments consist of Engine, Distribution, Components and Power Systems. We began to report results for our new reporting structure in the second quarter of 2016 and also reflected this change for historical periods. The formation of the Power Systems segment combined two businesses that were already strongly interdependent, which will allow us to streamline business and technical processes to accelerate innovation, grow market share and more efficiently manage our supply chain and manufacturing operations.

We allocate certain common costs and expenses, primarily corporate functions, among segments. These include certain costs and expenses of shared services, such as information technology, human resources, legal, finance and supply chain management. In addition to the reorganization noted above, we reevaluated the allocation of these costs, considering the new segment structure created in April 2016 and adjusted our allocation methodology accordingly. The revised methodology, which is based on a combination of relative segment sales and relative service usage levels, is effective for the periods beginning after January 1, 2016 and resulted in the revision of our segment operating results, including segment EBIT, for all four segments for the first quarter of 2016 with a greater share of costs allocated to the Distribution and Components segments than in previous years. Prior periods were not revised for the new allocation methodology. These changes had no impact on our consolidated results.

Following is a discussion of results for each of our operating segments.

Engine Segment Results

Financial data for the Engine segment was as follows:

	Three months ended						Favorable/					Nine months ended						Favorable/
	October 2,			September 27,			(Unfavorable)					October 2,			September 27,			(Unfavorable)
In millions	2016			2015			Amount			Percent		2016			2015			Amount			Percent
External sales (1)	$	1,357		$	1,627		$	(270	)	(17	)%	$	4,350		$	5,150		$	(800	)	(16	)%
Intersegment sales (1)	502			475			27			6	%	1,487			1,422			65			5	%
Total sales	1,859			2,102			(243		)	(12	)%	5,837			6,572			(735		)	(11	)%
Depreciation and amortization	42			47			5			11	%	121			140			19			14	%
Research, development and engineering expenses	56			73			17			23	%	166			195			29			15	%
Equity, royalty and interest income from investees	38			33			5			15	%	120			107			13			12	%
Loss contingency	99			—			(99		)	NM		138			—			(138		)	NM
Interest income	3			6			(3		)	(50	)%	8			10			(2		)	(20	)%
Segment EBIT	89			217			(128		)	(59	)%	492			695			(203		)	(29	)%
							Percentage Points											Percentage Points
Segment EBIT as a percentage of total sales	4.8		%	10.3		%				(5.5	)	8.4		%	10.6		%				(2.2	)

____________________________________

"NM" - not meaningful information

⁽¹⁾Due to the acquisitions of North American distributors, sales previously recognized as external sales are now included in intersegment sales.

In the second quarter of 2016, in conjunction with the reorganization of our segments, our Engine segment reorganized its reporting structure as follows:

• Heavy-duty truck -We manufacture diesel engines that range from 310 to 600 horsepower serving global heavy-duty truck customers worldwide, primarily in North America.

• Medium-duty truck and bus -We manufacture diesel engines ranging from 200 to 450 horsepower serving medium-duty truck and bus customers worldwide, with key markets including North America, Latin America, Europe and Mexico. We also provide diesel and natural gas engines for school buses, transit buses and shuttle buses worldwide,

34

with key markets including North America, Europe, Latin America and Asia, and diesel engines for Class A motor homes (RVs), primarily in North America.

• Light-duty automotive (Pickup and Light Commercial Vehicle (LCV)) -We manufacture 105 to 385 horsepower diesel engines, including engines for the pickup truck market for Chrysler and Nissan in North America, and LCV markets in Europe, Latin America and Asia.

• Off-highway -We provide diesel engines that range from 60 to 755 horsepower to key global markets including construction, mining, rail, defense, agriculture, marine, and oil and gas equipment and also to the power generation business for standby, mobile and distributed power generation solutions throughout the world.

Sales for our Engine segment by market were as follows:

	Three months ended				Favorable/					Nine months ended				Favorable/
	October 2,		September 27,		(Unfavorable)					October 2,		September 27,		(Unfavorable)
In millions	2016		2015		Amount			Percent		2016		2015		Amount			Percent
Heavy-duty truck	$	625	$	784	$	(159	)	(20	)%	$	1,878	$	2,416	$	(538	)	(22	)%
Medium-duty truck and bus	517		585		(68		)	(12	)%	1,666		1,867		(201		)	(11	)%
Light-duty automotive	345		339		6			2	%	1,172		1,074		98			9	%
Total on-highway	1,487		1,708		(221		)	(13	)%	4,716		5,357		(641		)	(12	)%
Off-highway	372		394		(22		)	(6	)%	1,121		1,215		(94		)	(8	)%
Total sales	$	1,859	$	2,102	$	(243	)	(12	)%	$	5,837	$	6,572	$	(735	)	(11	)%

Unit shipments by engine classification (including unit shipments to Power Systems and off-highway engine units included in their respective classification) were as follows:

	Three months ended		Favorable/				Nine months ended		Favorable/
	October 2,	September 27,	(Unfavorable)				October 2,	September 27,	(Unfavorable)
	2016	2015	Amount		Percent		2016	2015	Amount		Percent
Heavy-duty	20,100	28,600	(8,500	)	(30	)%	60,500	90,100	(29,600	)	(33	)%
Medium-duty	53,400	59,600	(6,200	)	(10	)%	171,100	187,400	(16,300	)	(9	)%
Light-duty	49,800	47,800	2,000		4	%	168,600	152,400	16,200		11	%
Total unit shipments	123,300	136,000	(12,700	)	(9	)%	400,200	429,900	(29,700	)	(7	)%

Sales

Engine segment sales for the three months ended October 2, 2016, decreased $243 million versus the comparable period in 2015. The following were the primary drivers:

• Heavy-duty truck engine sales decreased $159 million primarily due to lower demand in the North American heavy-duty truck market with decreased engine shipments of 36 percent.

• Medium-duty truck and bus sales decreased $68 million primarily due to lower demand in global medium-duty truck markets with decreased engine shipments of 18 percent, primarily in North America, Western Europe and Latin America (excluding Brazil).

• Off-highway sales decreased $22 million primarily due to decreased engine shipments to most industrial markets in North America, partially offset by increased unit shipments of 22 percent in international construction markets.

The decreases above were partially offset by an increase in light-duty automotive sales of $6 million primarily due to new sales for the Nissan pick-up truck platform launched in the second half of 2015.

Total on-highway-related sales for the three months ended October 2, 2016, were 80 percent of total engine segment sales, compared to 81 percent for the comparable period in 2015.

Engine segment sales for the nine months ended October 2, 2016, decreased $735 million versus the comparable period in 2015. The following were the primary drivers:

• Heavy-duty truck engine sales decreased $538 million primarily due to lower demand in the North American heavy-duty truck market with decreased engine shipments of 39 percent.

35

• Medium-duty truck and bus sales decreased $201 million primarily due to lower demand in most global medium-duty truck markets with decreased engine shipments of 18 percent, primarily in North America, Brazil and Mexico.

• Off-highway sales decreased $94 million primarily due to decreased engine shipments in most North American industrial markets, partially offset by increased unit shipments of 21 percent in international construction markets.

The decreases above were partially offset by an increase in light-duty automotive sales of $98 million primarily due to new sales for the Nissan pick-up truck platform launched in the second half of 2015.

Total on-highway-related sales for the nine months ended October 2, 2016, were 81 percent of total engine segment sales, compared to 82 percent for the comparable period in 2015.

Segment EBIT

Engine segment EBIT for the three months ended October 2, 2016, decreased $128 million versus the comparable period in 2015 primarily due to an additional accrual for a loss contingency and lower gross margin, partially offset by lower research, development and engineering expenses and lower selling, general and administrative expenses.

Engine segment EBIT for the nine months ended October 2, 2016, decreased $203 million versus the comparable period in 2015 primarily due to lower gross margin and an additional accrual for a loss contingency, partially offset by lower selling, general and administrative expenses, lower research, development and engineering expenses and higher equity, royalty and interest income from investees. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows:

	Three months ended							Nine months ended
	October 2, 2016 vs. September 27, 2015							October 2, 2016 vs. September 27, 2015
	Favorable/(Unfavorable) Change							Favorable/(Unfavorable) Change
In millions	Amount			Percent		Percentage point change as a percent of total sales		Amount			Percent		Percentage point change as a percent of total sales
Gross margin	$	(67	)	(16	)%	(1.1	)	$	(175	)	(14	)%	(0.6	)
Selling, general and administrative expenses	14			9	%	(0.2	)	64			13	%	0.1
Research, development and engineering expenses	17			23	%	0.5		29			15	%	0.2
Equity, royalty and interest income from investees	5			15	%	0.4		13			12	%	0.5
Loss contingency (1)	(99		)	NM		NM		(138		)	NM		NM

______________________________________

"NM" - not meaningful information

⁽¹⁾ See Note 10, "COMMITMENTS AND CONTINGENCIES," to the Condensed Consolidated Financial Statements for additional information.

The decrease in gross margin dollars for the three months ended October 2, 2016, versus the comparable period in 2015, was primarily due to lower volumes and unfavorable mix, partially offset by lower material and commodity costs and favorable product coverage. The decrease in selling, general and administrative expenses was primarily due to lower compensation expenses as the result of restructuring actions taken in the fourth quarter of 2015, and lower consulting expenses. The decrease in research, development and engineering expenses was primarily due to lower compensation expenses as the result of restructuring actions taken in the fourth quarter of 2015.

The decrease in gross margin for the nine months ended October 2, 2016, versus the comparable period in 2015, was primarily due to lower volumes and unfavorable mix, partially offset by favorable product coverage and lower material and commodity costs. The decrease in selling, general and administrative expenses was primarily due to lower compensation expenses as the result of restructuring actions taken in the fourth quarter of 2015, and lower consulting expenses. The decrease in research, development and engineering expenses was primarily due to lower compensation expenses as a result of restructuring actions taken in the fourth quarter of 2015, and higher expense recovery from customers and external parties, partially offset by increased engine testing costs. The increase in equity, royalty and interest income from investees was primarily due to increased earnings at Beijing Foton Cummins Engine Co., Ltd., partially offset by decreased earnings at Dongfeng Cummins Engine Company, Ltd. and Cummins Westport, Inc.

36

Distribution Segment Results

Financial data for the Distribution segment was as follows:

	Three months ended						Favorable/					Nine months ended						Favorable/
	October 2,			September 27,			(Unfavorable)					October 2,			September 27,			(Unfavorable)
In millions	2016			2015			Amount			Percent		2016			2015			Amount			Percent
External sales	$	1,497		$	1,543		$	(46	)	(3	)%	$	4,493		$	4,499		$	(6	)	—	%
Intersegment sales	7			8			(1		)	(13	)%	18			23			(5		)	(22	)%
Total sales	1,504			1,551			(47		)	(3	)%	4,511			4,522			(11		)	—	%
Depreciation and amortization	28			26			(2		)	(8	)%	86			78			(8		)	(10	)%
Research, development and engineering expenses	3			2			(1		)	(50	)%	10			8			(2		)	(25	)%
Equity, royalty and interest income from investees	19			19			—			—	%	56			60			(4		)	(7	)%
Interest income	1			1			—			—	%	3			3			—			—	%
Segment EBIT	96			123			(27		)	(22	)%	270			324			(54		)	(17	)%
							Percentage Points											Percentage Points
Segment EBIT as a percentage of total sales	6.4		%	7.9		%				(1.5	)	6.0		%	7.2		%				(1.2	)

Sales for our Distribution segment by region were as follows:

	Three months ended				Favorable/					Nine months ended				Favorable/
	October 2,		September 27,		(Unfavorable)					October 2,		September 27,		(Unfavorable)
In millions	2016		2015		Amount			Percent		2016		2015		Amount			Percent
North & Central America	$	988	$	992	$	(4	)	—	%	$	2,928	$	2,901	$	27		1	%
Europe, CIS and China	185		190		(5		)	(3	)%	569		543		26			5	%
Asia Pacific	175		186		(11		)	(6	)%	531		550		(19		)	(3	)%
Africa	47		64		(17		)	(27	)%	154		169		(15		)	(9	)%
India	44		42		2			5	%	131		121		10			8	%
Middle East	38		48		(10		)	(21	)%	120		145		(25		)	(17	)%
South America	27		29		(2		)	(7	)%	78		93		(15		)	(16	)%
Total sales	$	1,504	$	1,551	$	(47	)	(3	)%	$	4,511	$	4,522	$	(11	)	—	%

Sales for our Distribution segment by product line were as follows:

	Three months ended				Favorable/					Nine months ended				Favorable/
	October 2,		September 27,		(Unfavorable)					October 2,		September 27,		(Unfavorable)
In millions	2016		2015		Amount			Percent		2016		2015		Amount			Percent
Parts (1)	$	643	$	604	$	39		6	%	$	1,933	$	1,775	$	158		9	%
Service	299		301		(2		)	(1	)%	895		892		3			—	%
Power generation	291		323		(32		)	(10	)%	892		893		(1		)	—	%
Engines	271		323		(52		)	(16	)%	791		962		(171		)	(18	)%
Total sales	$	1,504	$	1,551	$	(47	)	(3	)%	$	4,511	$	4,522	$	(11	)	—	%

____________________________________

^{(1 )} In conjunction with our segment realignment, we also changed "Parts and filtration" to "Parts."

Sales

Distribution segment sales for the three months ended October 2, 2016, decreased $47 million versus the comparable period in 2015, primarily due to a decline in organic sales of $75 million (primarily engine markets) and unfavorable foreign currency fluctuations (primarily in the Canadian dollar, Chinese renminbi, South African rand and British pound), partially offset by $42 million of sales related to the acquisition of North American distributors since December 31, 2014.

Distribution segment sales for the nine months ended October 2, 2016, decreased $11 million versus the comparable period in 2015, primarily due to a decline in organic sales of $188 million (primarily engine markets) and unfavorable foreign currency fluctuations (primarily in the Canadian dollar, Australian dollar, South African rand, Indian rupee, Chinese renminbi and

37

Brazilian real), partially offset by $265 million of segment sales related to the acquisition of North American distributors since December 31, 2014.

Segment EBIT

Distribution segment EBIT for the three months ended October 2, 2016, decreased $27 million versus the comparable period in 2015, primarily due to higher selling, general and administrative expenses (mainly related to the acquisition of North American distributors since December 31, 2014) and unfavorable foreign currency fluctuations (primarily in the Canadian dollar and Australian dollar), partially offset by higher gross margin.

Distribution segment EBIT for the nine months ended October 2, 2016, decreased $54 million versus the comparable period in 2015, primarily due to higher selling, general and administrative expenses (mainly related to the acquisition of North American distributors since December 31, 2014) and unfavorable foreign currency fluctuations (primarily in the Australian dollar, Canadian dollar and Nigerian naira), partially offset by higher gross margin. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows:

	Three months ended							Nine months ended
	October 2, 2016 vs. September 27, 2015							October 2, 2016 vs. September 27, 2015
	Favorable/(Unfavorable) Change							Favorable/(Unfavorable) Change
In millions	Amount			Percent		Percentage point change as a percent of total sales		Amount			Percent		Percentage point change as a percent of total sales
Gross margin	$	4		2	%	0.8		$	25		3	%	0.6
Selling, general and administrative expenses	(9		)	(5	)%	(1.0	)	(50		)	(10	)%	(1.1	)
Equity, royalty and interest income from investees	—			—	%	0.1		(4		)	(7	)%	(0.1	)

The increase in gross margin dollars for the three months ended October 2, 2016, versus the comparable period in 2015, was primarily due to the acquisition of North American distributors since December 31, 2014 and improved pricing, partially offset by lower volumes and unfavorable foreign currency fluctuations (primarily in the Canadian dollar, Australian dollar and South African rand). The increase in selling, general and administrative expenses was primarily due to higher compensation expenses related to the acquisition of North American distributors and higher consulting expenses.

The increase in gross margin for the nine months ended October 2, 2016, versus the comparable period in 2015, was primarily due to the acquisition of North American distributors since December 31, 2014 and improved pricing, partially offset by unfavorable foreign currency fluctuations (primarily in the Canadian dollar, Australian dollar and South African rand) and lower volumes. The increase in selling, general and administrative expenses was primarily due to higher compensation expenses related to the acquisition of North American distributors and higher consulting expenses.

38

Components Segment Results

Financial data for the Components segment was as follows:

	Three months ended						Favorable/					Nine months ended						Favorable/
	October 2,			September 27,			(Unfavorable)					October 2,			September 27,			(Unfavorable)
In millions	2016			2015			Amount			Percent		2016			2015			Amount			Percent
External sales (1)	$	824		$	891		$	(67	)	(8	)%	$	2,654		$	2,839		$	(185	)	(7	)%
Intersegment sales (1)	319			349			(30		)	(9	)%	1,005			1,097			(92		)	(8	)%
Total sales	1,143			1,240			(97		)	(8	)%	3,659			3,936			(277		)	(7	)%
Depreciation and amortization	32			28			(4		)	(14	)%	95			82			(13		)	(16	)%
Research, development and engineering expenses	54			65			11			17	%	161			183			22			12	%
Equity, royalty and interest income from investees	9			9			—			—	%	29			26			3			12	%
Interest income	1			1			—			—	%	3			3			—			—	%
Segment EBIT	148			156			(8		)	(5	)%	501			574			(73		)	(13	)%
							Percentage Points											Percentage Points
Segment EBIT as a percentage of total sales	12.9		%	12.6		%				0.3		13.7		%	14.6		%				(0.9	)

____________________________________

⁽¹⁾Due to the acquisitions of North American distributors, sales previously recognized as external sales are now included in intersegment sales.

Sales for our Components segment by business were as follows:

	Three months ended				Favorable/					Nine months ended				Favorable/
	October 2,		September 27,		(Unfavorable)					October 2,		September 27,		(Unfavorable)
In millions	2016		2015		Amount			Percent		2016		2015		Amount			Percent
Emission solutions	$	540	$	607	$	(67	)	(11	)%	$	1,771	$	1,899	$	(128	)	(7	)%
Filtration	244		240		4			2	%	758		761		(3		)	—	%
Turbo technologies	241		266		(25		)	(9	)%	782		874		(92		)	(11	)%
Fuel systems	118		127		(9		)	(7	)%	348		402		(54		)	(13	)%
Total sales	$	1,143	$	1,240	$	(97	)	(8	)%	$	3,659	$	3,936	$	(277	)	(7	)%

Sales

Components segment sales for the three months ended October 2, 2016, decreased $97 million, across most lines of business, versus the comparable period in 2015. The following were the primary drivers:

• Emission solutions sales decreased $67 million primarily due to lower demand in North American on-highway markets, partially offset by higher demand in China.

• Turbo technologies sales decreased $25 million primarily due to lower demand in North American on-highway markets.

• Foreign currency fluctuations unfavorably impacted sales results primarily in the Chinese renminbi and British pound.

• Fuel systems sales decreased $9 million primarily due to lower demand in North American on-highway markets, partially offset by higher demand in China.

Components segment sales for the nine months ended October 2, 2016, decreased $277 million, across all lines of business, versus the comparable period in 2015. The following were the primary drivers:

• Emission solutions sales decreased $128 million primarily due to lower demand in North American on-highway markets, partially offset by higher demand in China and Western Europe.

• Turbo technologies sales decreased $92 million primarily due to lower demand in North American on-highway markets.

• Foreign currency fluctuations unfavorably impacted sales results primarily in the Chinese renminbi, British pound and Brazilian real.

39

• Fuel systems sales decreased $54 million primarily due to lower demand in North American on-highway markets, partially offset by higher demand in China.

Segment EBIT

Components segment EBIT for the three months ended October 2, 2016, decreased $8 million versus the comparable period in 2015, primarily due to lower gross margin and higher selling, general and administrative expenses, partially offset by lower research, development and engineering expenses.

Components segment EBIT for the nine months ended October 2, 2016, decreased $73 million versus the comparable period in 2015 primarily due to lower gross margin, higher selling, general and administrative expenses and unfavorable foreign currency fluctuations (primarily in the Brazilian real and Chinese renminbi), partially offset by lower research, development and engineering expenses. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows:

	Three months ended							Nine months ended
	October 2, 2016 vs. September 27, 2015							October 2, 2016 vs. September 27, 2015
	Favorable/(Unfavorable) Change							Favorable/(Unfavorable) Change
In millions	Amount			Percent		Percentage point change as a percent of total sales		Amount			Percent		Percentage point change as a percent of total sales
Gross margin	$	(13	)	(4	)%	0.8		$	(72	)	(8	)%	(0.1	)
Selling, general and administrative expenses	(6		)	(7	)%	(1.1	)	(21		)	(9	)%	(1.1	)
Research, development and engineering expenses	11			17	%	0.5		22			12	%	0.2
Equity, royalty and interest income from investees	—			—	%	0.1		3			12	%	0.1

The decrease in gross margin for the three months ended October 2, 2016, versus the comparable period in 2015, was primarily due to lower volumes and unfavorable pricing, partially offset by lower material costs. The increase in selling, general and administrative expenses was primarily due to higher consulting and compensation expenses as a result of absorbing a greater share of corporate costs under our new methodology, partially offset by savings from restructuring actions taken in the fourth quarter of 2015. The decrease in research, development and engineering expenses was primarily due to lower consulting expenses, higher expense recovery from customers and external parties and lower compensation expenses from restructuring actions taken in the fourth quarter of 2015.

The decrease in gross margin for the nine months ended October 2, 2016, versus the comparable period in 2015, was primarily due to lower volumes, unfavorable pricing, unfavorable mix and unfavorable foreign currency fluctuations (primarily in the Brazilian real and Chinese renminbi), partially offset by lower material costs. The increase in selling, general and administrative expenses was primarily due to higher consulting and compensation expenses as a result of absorbing a greater share of corporate costs under our new methodology, partially offset by savings from restructuring actions taken in the fourth quarter of 2015. The decrease in research, development and engineering expenses was primarily due to lower consulting expenses, higher expense recovery from customers and external parties and lower compensation expenses from restructuring actions taken in the fourth quarter of 2015.

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Power Systems Segment Results

Financial data for the Power Systems segment was as follows:

	Three months ended						Favorable/					Nine months ended						Favorable/
	October 2,			September 27,			(Unfavorable)					October 2,			September 27,			(Unfavorable)
In millions	2016			2015			Amount			Percent		2016			2015			Amount			Percent
External sales (1)	$	509		$	559		$	(50	)	(9	)%	$	1,509		$	1,856		$	(347	)	(19	)%
Intersegment sales (1)	347			423			(76		)	(18	)%	1,076			1,225			(149		)	(12	)%
Total sales	856			982			(126		)	(13	)%	2,585			3,081			(496		)	(16	)%
Depreciation and amortization	29			27			(2		)	(7	)%	87			81			(6		)	(7	)%
Research, development and engineering expenses	44			57			13			23	%	141			172			31			18	%
Equity, royalty and interest income from investees	8			17			(9		)	(53	)%	29			47			(18		)	(38	)%
Interest income	1			1			—			—	%	4			4			—			—	%
Segment EBIT	59			74			(15		)	(20	)%	195			302			(107		)	(35	)%
							Percentage Points											Percentage Points
Segment EBIT as a percentage of total sales	6.9		%	7.5		%				(0.6	)	7.5		%	9.8		%				(2.3	)

____________________________________

⁽¹⁾ Due to the acquisitions of North American distributors, sales previously recognized as external sales are now included in intersegment sales.

In the second quarter of 2016, in conjunction with the reorganization of our segments, our Power Systems segment reorganized its reporting structure into the following product lines:

• Power generation - We design, manufacture, sell and support generators ranging from 2 kilowatts to 3.5 megawatts, as well as paralleling systems and transfer switches, for applications such as residential, commercial, industrial, data centers, health care, telecommunications and waste water treatment plants. We also provide turnkey solutions for distributed generation and energy management applications using natural gas or biogas as a fuel. We also serves global rental accounts for diesel and gas generator sets.

• Industrial -We design, manufacture, sell and support diesel and natural gas high-horsepower engines up to 5,500 horsepower for a wide variety of equipment in the mining, rail, defense, oil and gas, and commercial marine applications throughout the world. Across these markets, we have major customers in North America, Europe, Middle East, Africa, China, Korea, Japan, Latin America, India, Russia, Southeast Asia, South Pacific and Mexico.

• Generator technologies - We design, manufacture, sell and support A/C generator/alternator products for internal consumption and for external generator set assemblers. Our products are sold under the Stamford, AVK and Markon brands and range in output from 3 kilovolt-amperes (kVA) to 12,000 kVA.

Sales for our Power Systems segment by product line were as follows:

	Three months ended				Favorable/					Nine months ended				Favorable/
	October 2,		September 27,		(Unfavorable)					October 2,		September 27,		(Unfavorable)
In millions	2016		2015		Amount			Percent		2016		2015		Amount			Percent
Power generation	$	545	$	621	$	(76	)	(12	)%	$	1,662	$	1,955	$	(293	)	(15	)%
Industrial	233		275		(42		)	(15	)%	688		850		(162		)	(19	)%
Generator technologies	78		86		(8		)	(9	)%	235		276		(41		)	(15	)%
Total sales	$	856	$	982	$	(126	)	(13	)%	$	2,585	$	3,081	$	(496	)	(16	)%

High-horsepower unit shipments by engine classification were as follows:

	Three months ended		Favorable/				Nine months ended		Favorable/
	October 2,	September 27,	(Unfavorable)				October 2,	September 27,	(Unfavorable)
Units	2016	2015	Amount		Percent		2016	2015	Amount		Percent
Power generation	2,000	2,000	—		—	%	6,000	6,700	(700	)	(10	)%
Industrial	1,000	1,200	(200	)	(17	)%	3,100	3,700	(600	)	(16	)%
Total engine shipments	3,000	3,200	(200	)	(6	)%	9,100	10,400	(1,300	)	(13	)%

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Sales

Power Systems segment sales for the three months ended October 2, 2016, decreased $126 million, across all product lines, versus the comparable period in 2015. The following were the primary drivers:

• Power generation sales decreased $76 million, in most regions, with the largest declines in demand primarily in Middle East, Asia and North America.

• Industrial sales decreased $42 million primarily due to lower demand in North America (mainly oil and gas markets, partially offset by rail markets), Asia (mainly mining markets) and China (mainly marine markets).

• Foreign currency fluctuations unfavorably impacted sales results primarily in the British pound and Indian rupee.

Power Systems segment sales for the nine months ended October 2, 2016, decreased $496 million, across all product lines, versus the comparable period in 2015. The following were the primary drivers:

• Power generation sales decreased $293 million, in most regions, with the largest declines in demand primarily in China, Middle East, Asia, Western Europe, Africa, Mexico and Brazil.

• Industrial sales decreased $162 million primarily due to lower demand in North America (mainly oil and gas markets, partially offset by rail markets), China (mainly marine and mining markets), Asia (mainly marine and mining markets) and Western Europe (mostly mining markets).

• Foreign currency fluctuations unfavorably impacted sales results primarily in the Indian rupee, British pound, Brazilian real and Chinese renminbi.

Segment EBIT

Power Systems segment EBIT for the three months ended October 2, 2016, decreased $15 million versus the comparable period in 2015, primarily due to lower gross margin, partially offset by lower selling, general and administrative expenses and favorable foreign currency fluctuations (primarily in the British pound).

Power Systems segment EBIT for the nine months ended October 2, 2016, decreased $107 million versus the comparable period in 2015 primarily due to lower gross margin, partially offset by lower selling, general and administrative expenses, lower research, development and engineering expenses and favorable foreign currency fluctuations (primarily in the British pound). Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows:

	Three months ended							Nine months ended
	October 2, 2016 vs. September 27, 2015							October 2, 2016 vs. September 27, 2015
	Favorable/(Unfavorable) Change							Favorable/(Unfavorable) Change
In millions	Amount			Percent		Percentage point change as a percent of total sales		Amount			Percent		Percentage point change as a percent of total sales
Gross margin	$	(32	)	(14	)%	(0.3	)	$	(189	)	(24	)%	(2.4	)
Selling, general and administrative expenses	18			15	%	0.3		64			18	%	0.3
Research, development and engineering expenses	13			23	%	0.7		31			18	%	0.1
Equity, royalty and interest income from investees	(9		)	(53	)%	(0.8	)	(18		)	(38	)%	(0.4	)

The decrease in gross margin for the three months ended October 2, 2016, versus the comparable period in 2015, was primarily due to lower volumes, partially offset by favorable foreign currency fluctuations (primarily in the British pound). The decrease in selling, general and administrative expenses was primarily due to lower compensation expenses as the result of restructuring actions taken in the fourth quarter of 2015, and lower consulting expenses. The decrease in research, development and engineering expenses was primarily due to lower consulting expenses and lower compensation expenses as the result of restructuring actions taken in the fourth quarter of 2015. The decrease in equity, royalty and interest income from investees was primarily due to the impact of an $8 million asset impairment incurred by one of our joint ventures.

The decrease in gross margin for the nine months ended October 2, 2016, versus the comparable period in 2015, was primarily due to lower volumes, partially offset by favorable foreign currency fluctuations (primarily in the British pound). The decrease in selling, general and administrative expenses was primarily due to lower compensation expenses as the result of restructuring actions taken in the fourth quarter of 2015, and lower consulting expenses. The decrease in research, development and engineering expenses was primarily due to lower consulting expenses and lower compensation expenses as the result of restructuring actions taken in the fourth quarter of 2015. The decrease in equity, royalty and interest income from investees was primarily due to the impact of an $8 million asset impairment incurred by one of our joint ventures.

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Reconciliation of Segment EBIT to Income Before Income Taxes

The table below reconciles the segment information to the corresponding amounts in the Condensed Consolidated Statements of Income:

	Three months ended				Nine months ended
In millions	October 2, 2016		September 27, 2015		October 2, 2016		September 27, 2015
Total EBIT	$	392	$	570	$	1,458	$	1,895
Non-segment EBIT (1)	6		7		15		(35		)
Total segment EBIT	398		577		1,473		1,860
Less: Interest expense	16		16		51		47
Income before income taxes	$	382	$	561	$	1,422	$	1,813

____________________________________

⁽¹⁾ Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three and nine months ended October 2, 2016 and September 27, 2015.

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LIQUIDITY AND CAPITAL RESOURCES

Key Working Capital and Balance Sheet Data

We fund our working capital with cash from operations and short-term borrowings, including commercial paper, when necessary. Various assets and liabilities, including short-term debt, can fluctuate significantly from month to month depending on short-term liquidity needs. As a result, working capital is a prime focus of management attention. Working capital and balance sheet measures are provided in the following table:

Dollars in millions	October 2, 2016			December 31, 2015
Working capital (1)	$	3,486		$	4,144
Current ratio	1.81			2.09
Accounts and notes receivable, net	$	2,873		$	2,820
Days’ sales in receivables	60			55
Inventories	$	2,820		$	2,707
Inventory turnover	4.5			4.9
Accounts payable (principally trade)	$	1,781		$	1,706
Days' payable outstanding	50			48
Total debt	$	1,949		$	1,639
Total debt as a percent of total capital (2)	21.2		%	17.5		%

____________________________________

⁽¹⁾Working capital includes cash and cash equivalents.

⁽²⁾The increase in our debt to capital ratio was due to the repurchases of common stock and higher total debt, primarily due to the commercial paper program.

Cash Flows

Cash and cash equivalents were impacted as follows:

	Nine months ended
In millions	October 2, 2016			September 27, 2015			Change
Net cash provided by operating activities	$	1,310		$	1,131		$	179
Net cash used in investing activities	(590		)	(477		)	(113		)
Net cash used in financing activities	(1,041		)	(1,215		)	174
Effect of exchange rate changes on cash and cash equivalents	(139		)	(52		)	(87		)
Net decrease in cash and cash equivalents	$	(460	)	$	(613	)	$	153

Net cash provided by operating activities increased $179 million for the nine months ended October 2, 2016, versus the comparable period in 2015, primarily due to lower working capital levels and an increase in deferred income taxes, partially offset by lower consolidated net income, decreases from translation and hedging activities and restructuring payments. During the first nine months of 2016, the lower working capital requirements resulted in a cash outflow of $306 million compared to a cash outflow of $414 million in the comparable period in 2015. 

Net cash used in investing activities increased $113 million for the nine months ended October 2, 2016, versus the comparable period in 2015, primarily due to higher net investments in marketable securities of $209 million and decreased cash flows from derivatives not designated as hedges of $81 million, partially offset by lower acquisitions of businesses, net of cash acquired of $101 million and lower capital expenditures of $81 million.

Net cash used in financing activities decreased $174 million for the nine months ended October 2, 2016, versus the comparable period in 2015, primarily due to higher net borrowings of commercial paper of $273 million, increased proceeds from borrowings of $87 million and higher net borrowings under short term credit agreements of $63 million, partially offset by higher common stock repurchases of $95 million, higher payments on borrowings and capital lease obligations of $92 million and higher dividend payments of $53 million.

The effect of exchange rate changes on cash and cash equivalents for the nine months ended October 2, 2016, versus the comparable period in 2015, decreased $87 million primarily due to the British pound, which decreased cash and cash equivalents by $91 million.

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Sources of Liquidity 

We generate significant ongoing cash flow. Cash provided by operations is our principal source of liquidity with $1.3 billion provided in the nine months ended October 2, 2016.

At October 2, 2016, our other sources of liquidity included:

	October 2, 2016
In millions	Total		U.S.		International		Primary location of international balances
Cash and cash equivalents	$	1,251	$	318	$	933	U.K., China, Singapore
Marketable securities (1)	250		39		211		China, India
Total	$	1,501	$	357	$	1,144
Available credit capacity
Revolving credit facility (2)	$	1,750
International and other uncommitted domestic credit facilities (3)	153

____________________________________

⁽¹⁾ The majority of marketable securities could be liquidated into cash within a few days.

⁽²⁾ The revolving credit facility is maintained primarily to provide backup liquidity for our commercial paper borrowings and general corporate purposes. At October 2, 2016, we had $273 million of commercial paper outstanding, which effectively reduced the available capacity under our revolving credit facility to $1.48 billion.

⁽³⁾ The available capacity is net of letters of credit.

Cash, Cash Equivalents and Marketable Securities

A significant portion of our cash flows is generated outside the U.S. The geographic location of our cash and marketable securities aligns well with our ongoing investments. We manage our worldwide cash requirements considering available funds among the many subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. As a result, we do not anticipate any local liquidity restrictions to preclude us from funding our operating needs with local resources.

If we distribute our foreign cash balances to the U.S. or to other foreign subsidiaries, we could be required to accrue and pay U.S. taxes, for example, if we repatriated cash from certain foreign subsidiaries whose earnings we have asserted are permanently reinvested outside of the U.S. Foreign earnings for which we assert permanent reinvestment outside the U.S. consist primarily of earnings of our China and U.K. domiciled subsidiaries. At present, we do not foresee a need to repatriate any earnings from these subsidiaries for which we have asserted permanent reinvestment. However, to help fund cash needs of the U.S. or other international subsidiaries as they arise, we repatriate available cash from certain foreign subsidiaries whose earnings are not permanently reinvested when it is cost effective to do so. Earnings generated after 2011 from our China operations are considered permanently reinvested, while earnings generated prior to 2012, for which U.S. deferred tax liabilities have been recorded, are expected to be repatriated in future years.

Debt Facilities and Other Sources of Liquidity

In February 2016, the Board of Directors authorized the issuance of up to $1.75 billion of unsecured short-term promissory notes ("commercial paper") pursuant to a commercial paper program. The program will facilitate the private placement of unsecured short-term debt through third party brokers. We intend to use the net proceeds from the commercial paper program for general corporate purposes.

We have a $1.75 billion revolving credit facility, the proceeds of which can be used for general corporate purposes. This facility expires on November 13, 2020. The revolving credit facility is maintained primarily to provide backup liquidity for our commercial paper borrowings, letters of credit and general corporate purposes. The total combined borrowing capacity under the revolving credit facility and commercial paper program should not exceed $1.75 billion.

As a well-known seasoned issuer, we filed an automatic shelf registration for an undetermined amount of debt and equity securities with the Securities and Exchange Commission on February 16, 2016. Under this shelf registration we may offer, from time to time, debt securities, common stock, preferred and preference stock, depositary shares, warrants, stock purchase contracts and stock purchase units.

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Uses of Cash

Share Repurchases

In November 2015, our Board of Directors authorized the acquisition of up to $1 billion of additional common stock upon the completion of the 2014 repurchase plan. In the first nine months of 2016, we made the following purchases under the respective stock repurchase programs:

In millions (except per share amounts) For each quarter ended	Shares Purchased	Average Cost Per Share		Total Cost of Repurchases		Cash Paid for Shares Not Received			Remaining Authorized Capacity (1)
July 2014, $1 billion repurchase program
April 3 (2)	2.7	$	100.12	$	274	$	—		$	—
November 2015, $1 billion repurchase program
April 3 (2)	2.2	$	105.50	$	229	$	100		$	671
July 3	1.8	109.79		192		(100		)	579
October 2	0.4	126.13		50		—			529
Subtotal	4.4	109.13		471		—
Total	7.1	$	105.63	$	745	$	—

____________________________________

⁽¹⁾The remaining authorized capacities under the 2014 and 2015 Plans were calculated based on the cost to purchase the shares but exclude commission expenses in accordance with the authorized Plans.

⁽²⁾ Upon completion of the ASR in the second quarter of 2016, the shares purchased and average cost per share were updated based on the final valuation.

In 2016, we entered into an accelerated share repurchase agreement with a third party financial institution to repurchase $500 million of our common stock under our previously announced share repurchase plans and received4.7 million shares at an average purchase price of $105.50 per share.

We may continue to repurchase outstanding shares from time to time during 2016 to enhance shareholder value and to offset the dilutive impact of employee stock based compensation plans.

Dividends

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. We paid dividends of $505 million during the nine months ended October 2, 2016.

Capital Expenditures

Capital expenditures and spending on internal use software for the nine months ended October 2, 2016, were $354 million compared to $431 million in the comparable period in 2015. Despite the challenging conditions in many of our markets, we continue to invest in new product lines and targeted capacity expansions. We plan to spend between $550 million and $600 million in 2016 as we continue with product launches and facility improvements. Approximately 40 percent of our capital expenditures are expected to be invested outside of the U.S. in 2016.

Pensions

Our global pension plans, including our unfunded and non-qualified plans, were 111 percent funded at December 31, 2015. Our U.S. qualified plan, which represents approximately 57 percent of the worldwide pension obligation, was 119 percent funded and our U.K. plan was 123 percent funded.The funded status of our pension plans is dependent upon a variety of variables and assumptions including return on invested assets, market interest rates and levels of voluntary contributions to the plans. In the first nine months of 2016, the investment return on our U.S. pension trust was 11.7 percent while our U.K. pension trust return was 22.0 percent.Approximately 79 percent of our pension plan assets are held in highly liquid investments such as fixed income and equity securities. The remaining 21 percent of our plan assets are held in less liquid, but market valued investments, including real estate, private equity and insurance contracts. We anticipate making additional defined benefit pension contributions during the remainder of 2016 of $22 million for our U.S. and U.K pension plans and $44 million ($27 million of which will be cash) for our German pension plans. The estimated $146 million of U.S. and U.K. pension contributions for the full year include voluntary contributions of approximately $103 million. The $44 million contribution to the German plans is voluntary. These contributions may be made from trusts or company funds either to increase pension assets

46

or to make direct benefit payments to plan participants. We expect our 2016 net periodic pension cost to approximate $42 million.

Current Maturities of Short and Long-Term Debt

We had $273 million of commercial paper outstanding at October 2, 2016, 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 $7 million to $31 million over the next five years (including the remainder of 2016).

Restructuring Actions

We executed restructuring actions primarily in the form of professional voluntary and involuntary employee separation programs in the fourth quarter of 2015. We reduced our worldwide workforce by approximately 1,900 employees. We incurred a fourth quarter charge of $90 million ($61 million after tax) for these headcount reductions, with $86 million expected to be settled in cash, of which $60 million remained outstanding at December 31, 2015. In 2016, we paid $53 million (with approximately $7 million remaining) of restructuring payments and as of October 2, 2016 substantially all terminations were complete. See Note 12, "RESTRUCTURING ACTIONS AND OTHER CHARGES," to the Condensed Consolidated Financial Statements for additional information.

Credit Ratings

Our ratings and outlook from each of the credit rating agencies as of the date of filing are shown in the table below.

	Long-Term	Short-Term
Credit Rating Agency (1)	Senior Debt Rating	Debt Rating	Outlook
Standard & Poor’s Rating Services	A+	A1	Stable
Fitch Ratings	A	F1	Stable
Moody’s Investors Service, Inc.	A2	P1	Stable

____________________________________

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

Management's Assessment of Liquidity

Our financial condition and liquidity remain strong. Our solid balance sheet and credit ratings enable ready access to credit and the capital markets. We assess our liquidity in terms of our ability to generate adequate cash to fund our operating, investing and financing activities. We believe our operating cash flow and liquidity provides us with the financial flexibility needed to fund working capital, common stock repurchases, capital expenditures, dividend payments, projected pension obligations and debt service obligations. We continue to generate cash from operations in the U.S. and maintain access to our revolving credit facility.

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APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

A summary of our significant accounting policies is included in Note 1, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,” of the Notes to the Consolidated Financial Statements of our 2015 Form 10-K, which discusses accounting policies that we have selected from acceptable alternatives.

Our Condensed Consolidated Financial Statements are prepared in accordance with generally accepted accounting principles that often require management to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts presented and disclosed in the financial statements. Management reviews these estimates and assumptions based on historical experience, changes in business conditions and other relevant factors they believe to be reasonable under the circumstances. In any given reporting period, our actual results may differ from the estimates and assumptions used in preparing our Condensed Consolidated Financial Statements.

Critical accounting estimates are defined as follows: the estimate requires management to make assumptions about matters that were highly uncertain at the time the estimate was made; different estimates reasonably could have been used; or if changes in the estimate are reasonably likely to occur from period to period and the change would have a material impact on our financial condition or results of operations. Our senior management has discussed the development and selection of our accounting policies, related accounting estimates and the disclosures set forth below with the Audit Committee of our Board of Directors. Our critical accounting estimates disclosed in the Form 10-K address the estimation of liabilities for warranty programs, accounting for income taxes and pension benefits.

A discussion of our critical accounting estimates may be found in the “Management’s Discussion and Analysis” section of our 2015 Form 10-K under the caption “APPLICATION OF CRITICAL ACCOUNTING ESTIMATES.” Within the context of these critical accounting estimates, we are not currently aware of any reasonably likely events or circumstances that would result in different policies or estimates being reported in the first nine months of 2016.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

See Note 14, "RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS," in the Notes to Condensed Consolidated Financial Statementsfor additional information.

ITEM 3.Quantitative and Qualitative Disclosures About Market Risk

A discussion of quantitative and qualitative disclosures about market risk may be found in Item 7A of our 2015 Form 10-K. There have been no material changes in this information since the filing of our 2015 Form 10-K. 

ITEM 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the quarter ended October 2, 2016, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 

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PART II.  OTHER INFORMATION

ITEM 1.Legal Proceedings

We are subject to numerous lawsuits and claims arising out of the ordinary course of our business, including actions related to product liability; personal injury; the use and performance of our products; warranty matters; patent, trademark or other intellectual property infringement; contractual liability; the conduct of our business; tax reporting in foreign jurisdictions; distributor termination; workplace safety; and environmental matters. We also have been identified as a potentially responsible party at multiple waste disposal sites under U.S. federal and related state environmental statutes and regulations and may have joint and several liability for any investigation and remediation costs incurred with respect to such sites. We have denied liability with respect to many of these lawsuits, claims and proceedings and are vigorously defending such lawsuits, claims and proceedings. We carry various forms of commercial, property and casualty, product liability and other forms of insurance; however, such insurance may not be applicable or adequate to cover the costs associated with a judgment against us with respect to these lawsuits, claims and proceedings. We do not believe that these lawsuits are material individually or in the aggregate. While we believe we have also established adequate accruals for our expected future liability with respect to pending lawsuits, claims and proceedings, where the nature and extent of any such liability can be reasonably estimated based upon then presently available information, there can be no assurance that the final resolution of any existing or future lawsuits, claims or proceedings will not have a material adverse effect on our business, results of operations, financial condition or cash flows.

The disclosure set forth under "Loss Contingency" in Note 10, "COMMITMENTS AND CONTINGENCIES," to the Condensed Consolidated Financial Statements is incorporated herein by reference.

We conduct significant business operations in Brazil that are subject to the Brazilian federal, state and local labor, social security, tax and customs laws. While we believe we comply with such laws, they are complex, subject to varying interpretations and we are often engaged in litigation regarding the application of these laws to particular circumstances.

ITEM 1A.Risk Factors

In addition to other information set forth in this report, you should consider other risk factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2015, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K or the "CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION" in this Quarterly report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently judge to be immaterial also may materially adversely affect our business, financial condition or operating results.

ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds

The following information is provided pursuant to Item 703 of Regulation S-K:

	Issuer Purchases of Equity Securities
Period	(a) Total Number of Shares Purchased(1)	(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(2)
July 4 - August 7	6,408	$	123.57	—	107,089
August 8 - September 4	403,392	126.16		396,139	97,063
September 5 - October 2	6,391	125.20		—	91,672
Total	416,191	126.10		396,139

____________________________________

⁽¹⁾Shares purchased represent shares under our Key Employee Stock Investment Plan established in 1969 (there is no maximum repurchase limitation in this plan) and our Board of Directors authorized share repurchase programs.

⁽²⁾These values reflect the sum of shares held in loan status under our Key Employee Stock Investment Plan. The repurchase programs authorized by the Board of Directors do not limit the number of shares that may be purchased and were excluded from this column. The dollar value remaining available for future purchases under such programs as of October 2, 2016, was $529 million.

In November 2015, our Board of Directors authorized the acquisition of up to $1 billion of additional common stock upon the completion of the 2014 repurchase plan. During the three months ended October 2, 2016, we repurchased $50 million of common stock under the 2015 Board of Directors authorized plan.

49

During the three months ended October 2, 2016, we repurchased 20,052shares from employees in connection with the Key Employee Stock Investment Plan which allows certain employees, other than officers, to purchase shares of common stock on an installment basis up to an established credit limit. Loans are issued for five-year terms at a fixed interest rate established at the date of purchase and may be refinanced after its initial five-year period for an additional five-year period. Participants must hold shares for a minimum of six months from date of purchase. If the shares are sold before the loan is paid off, the employee must wait six months before another share purchase may be made. We hold participants’ shares as security for the loans and would, in effect repurchase shares if the participant defaulted in repayment of the loan. There is no maximum amount of shares that we may purchase under this plan.

ITEM 3.Defaults Upon Senior Securities

Not applicable. 

ITEM 4.Mine Safety Disclosures

Not applicable. 

ITEM 5.Other Information

Not applicable. 

ITEM 6.Exhibits

See Exhibit Index at the end of this Quarterly Report on Form 10-Q.

50

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Cummins Inc.
Date:	November 1, 2016
	By:	/s/ PATRICK J. WARD	By:	/s/ MARSHA L. HUNT
		Patrick J. Ward		Marsha L. Hunt
		Vice President and Chief Financial Officer		Vice President-Corporate Controller
		(Principal Financial Officer)		(Principal Accounting Officer)

51

CUMMINS INC.

EXHIBIT INDEX

Exhibit No.	Description of Exhibit
3	Bylaws, as amended and restated effective as of October 11, 2016 (filed as Exhibit 3.1 to the Company's Current Report on Form 8-K filed with the Commission on October 17, 2016).
12	Calculation of Ratio of Earnings to Fixed Charges.
31(a)	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31(b)	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance 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.

52

EX-12

EXHIBIT 12

CUMMINS INC. AND SUBSIDIARIES

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

	Nine months ended
In millions	October 2, 2016		September 27, 2015
Earnings
Income before income taxes	$	1,422	$	1,813
Add
Fixed charges	110		105
Amortization of capitalized interest	1		1
Distributed income of equity investees	109		213
Less
Equity in earnings of investees	205		212
Capitalized interest	4		5
Noncontrolling interest in pre-tax income of subsidiaries that have not incurred fixed charges	—		2
Earnings before fixed charges	$	1,433	$	1,913
Fixed charges
Interest expense(1)	$	51	$	47
Capitalized interest	4		5
Amortization of debt discount and deferred costs	2		2
Interest portion of rental expense(2)	53		51
Total fixed charges	$	110	$	105
Ratio of earnings to fixed charges(3)	13.0		18.2

___________________________________________________

⁽¹⁾The interest amount in the table above does not include interest expense associated with uncertain tax positions.

⁽²⁾Amounts represent those portions of rent expense that are reasonable approximations of interest costs.

⁽³⁾We have not issued preferred stock. Therefore, the ratio of earnings to combined fixed charges and preferred stock dividends are the same as the ratios presented above.

EX-31.A

EXHIBIT 31(a)

Certification

I, N. Thomas Linebarger, certify that:

1. I have reviewed this report on Form 10-Q 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 the statements 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 the financial 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 in Exchange 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 ensure that 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 our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (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; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date:	November 1, 2016	/s/ N. THOMAS LINEBARGER
		N. Thomas Linebarger
		Chairman and Chief Executive Officer

EX-31.B

EXHIBIT 31(b)

Certification

I, Patrick J. Ward, certify that:

1. I have reviewed this report on Form 10-Q 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 the statements 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 the financial 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 in Exchange 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 ensure that 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 our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (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; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date:	November 1, 2016	/s/ PATRICK J. WARD
		Patrick J. Ward
		Vice President and Chief Financial Officer

EX-32

EXHIBIT 32

Cummins Inc.

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Cummins Inc. (the “Company”) on Form 10-Q for the period ended October 2, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, N. Thomas Linebarger, Chairman and Chief Executive Officer of the Company, and Patrick J. Ward, Vice President and Chief Financial Officer, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to the best of my 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.

November 1, 2016	/s/ N. THOMAS LINEBARGER
	N. Thomas Linebarger
	Chairman and Chief Executive Officer
November 1, 2016	/s/ PATRICK J. WARD
	Patrick J. Ward
	Vice President and Chief Financial Officer

XML

Document and Entity Information	9 Months Ended
	Oct. 02, 2016 shares
Document and Entity Information
Entity Registrant Name	CUMMINS INC
Entity Central Index Key	0000026172
Current Fiscal Year End Date	--12-31
Entity Filer Category	Large Accelerated Filer
Document Type	10-Q
Document Period End Date	Oct. 02, 2016
Document Fiscal Year Focus	2016
Document Fiscal Period Focus	Q3
Amendment Flag	false
Entity Common Stock, Shares Outstanding	168,275,116
Entity Current Reporting Status	Yes

XML

CONDENSED CONSOLIDATED STATEMENTS OF INCOME - USD ($) shares in Millions, $ in Millions		3 Months Ended		9 Months Ended
		Oct. 02, 2016	Sep. 27, 2015	Oct. 02, 2016	Sep. 27, 2015
Income Statement [Abstract]
NET SALES	[1]	$ 4,187	$ 4,620	$ 13,006	$ 14,344
Cost of sales		3,108	3,412	9,674	10,609
GROSS MARGIN		1,079	1,208	3,332	3,735
OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses		513	530	1,527	1,584
Research, development and engineering expenses		157	197	478	558
Equity, royalty and interest income from investees (Note 4)		74	78	234	240
Loss contingency (Note 10)		99	0	138	0
Other operating expense, net		0	(2)	(2)	(5)
OPERATING INCOME		384	557	1,421	1,828
Interest income		6	9	18	20
Interest expense (Note 8)		16	16	51	47
Other income, net		8	11	34	12
INCOME BEFORE INCOME TAXES		382	561	1,422	1,813
Income tax expense (Note 5)		82	169	362	521
CONSOLIDATED NET INCOME		300	392	1,060	1,292
Less: Net income attributable to noncontrolling interests		11	12	44	54
NET INCOME ATTRIBUTABLE TO CUMMINS INC.		$ 289	$ 380	$ 1,016	$ 1,238
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
Basic (in dollars per share)		$ 1.72	$ 2.15	$ 5.99	$ 6.92
Diluted (in dollars per share)		$ 1.72	$ 2.14	$ 5.99	$ 6.90
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic (in shares)		167.8	177.0	169.5	178.9
Dilutive effect of stock compensation awards (in shares)		0.4	0.4	0.2	0.4
Diluted (in shares)		168.2	177.4	169.7	179.3
CASH DIVIDENDS DECLARED PER COMMON SHARE (in dollars per share)		$ 1.025	$ 0.975	$ 2.975	$ 2.535
Sales to nonconsolidated equity investees		$ 275	$ 274	$ 793	$ 956

[1] Includes sales to nonconsolidated equity investees of $275 million and $793 million and $274 million and $956 million for the three and nine months ended October 2, 2016 and September 27, 2015, respectively.

XML

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Oct. 02, 2016	Sep. 27, 2015	Oct. 02, 2016	Sep. 27, 2015
Statement of Comprehensive Income [Abstract]
CONSOLIDATED NET INCOME	$ 300	$ 392	$ 1,060	$ 1,292
Other comprehensive (loss) income, net of tax (Note 11)
Foreign currency translation adjustments	(29)	(221)	(299)	(252)
Unrealized gain (loss) on derivatives	7	7	(20)	15
Change in pension and other postretirement defined benefit plans	13	15	31	43
Unrealized gain (loss) on marketable securities	0	(1)	1	(1)
Total other comprehensive loss, net of tax	(9)	(200)	(287)	(195)
COMPREHENSIVE INCOME	291	192	773	1,097
Less: Comprehensive income (loss) attributable to noncontrolling interests	14	(1)	41	39
COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC.	$ 277	$ 193	$ 732	$ 1,058

XML

CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($) $ in Millions	Oct. 02, 2016	Dec. 31, 2015
Current assets
Cash and cash equivalents	$ 1,251	$ 1,711
Marketable securities (Note 6)	250	100
Total cash, cash equivalents and marketable securities	1,501	1,811
Accounts and notes receivable, net
Trade and other	2,680	2,640
Nonconsolidated equity investees	193	180
Inventories (Note 7)	2,820	2,707
Prepaid expenses and other current assets	600	609
Total current assets	7,794	7,947
Long-term assets
Property, plant and equipment	7,460	7,322
Accumulated depreciation	(3,783)	(3,577)
Property, plant and equipment, net	3,677	3,745
Investments and advances related to equity method investees	1,077	975
Goodwill	482	482
Other intangible assets, net	319	328
Pension assets	773	735
Other assets	1,014	922
Total assets	15,136	15,134
Current liabilities
Accounts payable (principally trade)	1,781	1,706
Loans payable (Note 8)	48	24
Commercial paper (Note 8)	273	0
Accrued compensation, benefits and retirement costs	393	409
Current portion of accrued product warranty (Note 9)	333	359
Current portion of deferred revenue	460	403
Other accrued expenses	985	863
Current maturities of long-term debt (Note 8)	35	39
Total current liabilities	4,308	3,803
Long-term liabilities
Long-term debt (Note 8)	1,593	1,576
Postretirement benefits other than pensions	326	349
Pensions	301	298
Other liabilities and deferred revenue	1,344	1,358
Total liabilities	7,872	7,384
Commitments and contingencies (Note 10)
Cummins Inc. shareholders' equity
Common stock, $2.50 par value, 500 shares authorized, 222.4 and 222.4 shares issued	2,209	2,178
Retained earnings	10,833	10,322
Treasury stock, at cost, 54.1 and 47.2 shares	(4,468)	(3,735)
Common stock held by employee benefits trust, at cost, 0.7 and 0.9 shares	(8)	(11)
Accumulated other comprehensive loss
Accumulated other comprehensive loss (Note 11)	(1,632)	(1,348)
Total Cummins Inc. shareholders' equity	6,934	7,406
Noncontrolling interests	330	344
Total equity	7,264	7,750
Total liabilities and equity	$ 15,136	$ 15,134

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares shares in Millions	Oct. 02, 2016	Dec. 31, 2015
Statement of Financial Position [Abstract]
Common stock, par value (in dollars per share)	$ 2.50	$ 2.50
Common stock, shares authorized	500.0	500.0
Common stock, shares issued	222.4	222.4
Treasury stock, shares	54.1	47.2
Common stock held by employee benefits trust, shares	0.7	0.9

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Millions	9 Months Ended
	Oct. 02, 2016	Sep. 27, 2015
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income	$ 1,060	$ 1,292
Adjustments to reconcile consolidated net income to net cash provided by operating activities
Restructuring payments (Note 12)	(53)	0
Loss contingency (Note 10)	138	0
Depreciation and amortization	391	383
Gain on fair value adjustment for consolidated investees	0	17
Deferred income taxes	60	(120)
Equity in income of investees, net of dividends	(94)	(68)
Pension contributions in excess of expense (Note 3)	(92)	(119)
Other post-retirement benefits payments in excess of expense (Note 3)	(16)	(18)
Stock-based compensation expense	28	24
Translation and hedging activities	(39)	22
Changes in current assets and liabilities, net of acquisitions
Accounts and notes receivable	(112)	(163)
Inventories	(150)	(179)
Other current assets	138	133
Accounts payable	97	(52)
Accrued expenses	(279)	(153)
Changes in other liabilities and deferred revenue	188	219
Other, net	45	(53)
Net cash provided by operating activities	1,310	1,131
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures	(312)	(393)
Investments in internal use software	(42)	(38)
Investments in and advances to equity investees	(29)	(9)
Acquisitions of businesses, net of cash acquired	(1)	(102)
Investments in marketable securities—acquisitions (Note 6)	(447)	(175)
Investments in marketable securities—liquidations (Note 6)	291	228
Cash flows from derivatives not designated as hedges	(64)	17
Other, net	14	(5)
Net cash used in investing activities	(590)	(477)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings	111	24
Net borrowings of commercial paper (Note 8)	273	0
Payments on borrowings and capital lease obligations	(156)	(64)
Net borrowings (payments) under short-term credit agreements	25	(38)
Distributions to noncontrolling interests	(42)	(35)
Dividend payments on common stock	(505)	(452)
Repurchases of common stock	(745)	(650)
Other, net	(2)
Net cash used in financing activities	(1,041)	(1,215)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	(139)	(52)
Net decrease in cash and cash equivalents	(460)	(613)
Cash and cash equivalents at beginning of year	1,711	2,301
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$ 1,251	$ 1,688

XML

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY - USD ($) $ in Millions	Total	Common Stock	Additional Paid-in Capital	Retained Earnings	Treasury Stock	Common Stock Held in Trust	Accumulated Other Comprehensive Loss	Total Cummins Inc. Shareholders' Equity	Noncontrolling Interests
BALANCE at Dec. 31, 2014	$ 8,093	$ 556	$ 1,583	$ 9,545	$ (2,844)	$ (13)	$ (1,078)	$ 7,749	$ 344
Increase (Decrease) in Shareholders' Equity
Net income	1,292			1,238				1,238	54
Other comprehensive (loss) income, net of tax (Note 11)	(195)						(180)	(180)	(15)
Issuance of shares	7		7					7
Employee benefits trust activity	23		21			2		23
Acquisition of shares (Note 2)	(650)				(650)			(650)
Cash dividends on common stock	(452)			(452)				(452)
Distributions to noncontrolling interests	(46)								(46)
Stock based awards	4		(4)		8			4
Other shareholder transactions	5		10					10	(5)
BALANCE at Sep. 27, 2015	8,081	556	1,617	10,331	(3,486)	(11)	(1,258)	7,749	332
BALANCE at Dec. 31, 2015	7,750	556	1,622	10,322	(3,735)	(11)	(1,348)	7,406	344
Increase (Decrease) in Shareholders' Equity
Net income	1,060			1,016				1,016	44
Other comprehensive (loss) income, net of tax (Note 11)	(287)						(284)	(284)	(3)
Issuance of shares	5		5					5
Employee benefits trust activity	22		19			3		22
Acquisition of shares (Note 2)	(745)				(745)			(745)
Cash dividends on common stock	(505)			(505)				(505)
Distributions to noncontrolling interests	(49)								(49)
Stock based awards	5		(7)		12			5
Other shareholder transactions	8		14					14	(6)
BALANCE at Oct. 02, 2016	$ 7,264	$ 556	$ 1,653	$ 10,833	$ (4,468)	$ (8)	$ (1,632)	$ 6,934	$ 330

XML

NATURE OF OPERATIONS

9 Months Ended

Oct. 02, 2016

Organization, Consolidation and Presentation of Financial Statements [Abstract]

NATURE OF OPERATIONS

NOTE 1. NATURE OF OPERATIONS

Cummins Inc. (“Cummins,” “we,” “our” or “us”) was founded in 1919 as a corporation in Columbus, Indiana, as one of the first diesel engine manufacturers. We are a global power leader that designs, manufactures, distributes and services diesel and natural gas engines and engine-related component products, including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems and electric power generation systems. We sell our products to original equipment manufacturers (OEMs), distributors and other customers worldwide.We serve our customers through a network of approximately600 company-owned and independent distributor locations and over7,200dealer locations in more than 190 countries and territories.

XML

BASIS OF PRESENTATION

9 Months Ended

Oct. 02, 2016

Organization, Consolidation and Presentation of Financial Statements [Abstract]

BASIS OF PRESENTATION

NOTE 2. BASIS OF PRESENTATION

The unaudited Condensed Consolidated Financial Statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of operations, financial position and cash flows. All such adjustments are of a normal recurring nature. The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial information. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted as permitted by such rules and regulations. Certain reclassifications have been made to prior period amounts to conform to the presentation of the current period condensed financial statements.

These interim condensed financial statements should be read in conjunction with the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2015. Our interim period financial results for the three and nine month periods presented are not necessarily indicative of results to be expected for any other interim period or for the entire year. The year-end Condensed Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.

Preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts presented and disclosed in our Condensed Consolidated Financial Statements. Significant estimates and assumptions in these Condensed Consolidated Financial Statementsrequire the exercise of judgment and are used for, but not limited to, allowance for doubtful accounts, useful lives for depreciation and amortization, estimates of future cash flows and other assumptions associated with goodwill and long-lived asset impairment tests, determination of discount rates and other assumptions for pension and other postretirement benefit costs, warranty programs, income taxes and deferred tax valuation allowances, lease classification, contingencies and restructuring costs. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be different from these estimates.

Our reporting period usually ends on the Sunday closest to the last day of the quarterly calendar period. The third quarters of 2016 and 2015 ended on October 2 and September 27, respectively. Our fiscal year ends on December 31, regardless of the day of the week on which December 31 falls.

The weighted-average diluted common shares outstanding excludes the anti-dilutive effect of certain stock options since such options had an exercise price in excess of the monthly average market value of our common stock. The options excluded from diluted earnings per share for the three and nine months ended October 2, 2016 and September 27, 2015, were as follows:

	Three months ended		Nine months ended
	October 2, 2016	September 27, 2015	October 2, 2016	September 27, 2015
Options excluded	936,857	950,345	1,295,664	593,436

In 2016, we entered into an accelerated share repurchase agreement with a third party financial institution to repurchase $500 million of our common stock under our previously announced share repurchase plans and received4.7 million shares at an average purchase price of $105.50 per share.

XML

PENSION AND OTHER POSTRETIREMENT BENEFITS

9 Months Ended

Oct. 02, 2016

Compensation and Retirement Disclosure [Abstract]

PENSION AND OTHER POSTRETIREMENT BENEFITS

NOTE 3. PENSION AND OTHER POSTRETIREMENT BENEFITS

We sponsor funded and unfunded domestic and foreign defined benefit pension and other postretirement plans. Contributions to these plans were as follows:

	Three months ended				Nine months ended
In millions	October 2, 2016		September 27, 2015		October 2, 2016		September 27, 2015
Defined benefit pension plans
Voluntary contribution	$	16	$	7	$	101	$	79
Mandatory contribution	5		5		23		87
Defined benefit pension contributions	$	21	$	12	$	124	$	166
Other postretirement plans	$	4	$	8	$	32	$	33
Defined contribution pension plans	$	17	$	14	$	53	$	56

We anticipate making $22 million of additional defined benefit pension contributions during the remainder of 2016. The estimated $146 million of pension contributions for the full year include voluntary contributions of approximately $103 million. These contributions may be made from trusts or company funds either to increase pension assets or to make direct benefit payments to plan participants. We expect our 2016 net periodic pension cost to approximate $42 million.

The components of net periodic pension and other postretirement benefit costs under our plans were as follows:

	Pension
	U.S. Plans						U.K. Plans						Other Postretirement Benefits
	Three months ended
In millions	October 2, 2016			September 27, 2015			October 2, 2016			September 27, 2015			October 2, 2016		September 27, 2015
Service cost	$	22		$	20		$	5		$	7		$	—	$	—
Interest cost	26			25			13			14			4		4
Expected return on plan assets	(50		)	(47		)	(17		)	(23		)	—		—
Recognized net actuarial loss	9			11			3			8			1		1
Net periodic benefit cost	$	7		$	9		$	4		$	6		$	5	$	5

	Pension
	U.S. Plans						U.K. Plans						Other Postretirement Benefits
	Nine months ended
In millions	October 2, 2016			September 27, 2015			October 2, 2016			September 27, 2015			October 2, 2016		September 27, 2015
Service cost	$	68		$	60		$	16		$	20		$	—	$	—
Interest cost	82			76			39			42			12		12
Expected return on plan assets	(152		)	(142		)	(55		)	(68		)	—		—
Recognized net actuarial loss	23			34			11			25			4		3
Net periodic benefit cost	$	21		$	28		$	11		$	19		$	16	$	15

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EQUITY, ROYALTY AND INTEREST INCOME FROM INVESTEES

9 Months Ended

Oct. 02, 2016

Equity Method Investments and Joint Ventures [Abstract]

EQUITY, ROYALTY AND INTEREST INCOME FROM INVESTEES

NOTE 4. EQUITY, ROYALTY AND INTEREST INCOME FROM INVESTEES

Equity, royalty and interest income from investees included in our Condensed Consolidated Statements of Income for the reporting periods was as follows: 

	Three months ended				Nine months ended
In millions	October 2, 2016		September 27, 2015		October 2, 2016		September 27, 2015
Distribution entities
Komatsu Cummins Chile, Ltda.	$	8	$	8	$	26	$	23
North American distributors	7		9		18		27
All other distributors	1		1		2		2
Manufacturing entities
Beijing Foton Cummins Engine Co., Ltd.	19		18		59		47
Chongqing Cummins Engine Company, Ltd.	11		9		28		32
Dongfeng Cummins Engine Company, Ltd.	10		11		32		40
All other manufacturers	8		13		40		41
Cummins share of net income	64		69		205		212
Royalty and interest income	10		9		29		28
Equity, royalty and interest income from investees	$	74	$	78	$	234	$	240

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INCOME TAXES

9 Months Ended

Oct. 02, 2016

Income Tax Disclosure [Abstract]

INCOME TAXES

NOTE 5. INCOME TAXES

Our effective tax rate for the year is expected to approximate 25.5 percent, excluding any one-time items that may arise. Our tax rate is generally less than the 35 percent U.S. statutory income tax rate primarily due to lower tax rates on foreign income and the research tax credit.

Our effective tax rate for the three and nine months ended October 2, 2016, was 21.5 percent and 25.5 percent, respectively.

Our effective tax rate for the three and nine months ended September 27, 2015, was 30.1 percent and 28.7 percent, respectively. The tax rate for the nine months ended September 27, 2015, included an $18 million discrete tax benefit to reflect the release of reserves for uncertain tax positions related to a favorable federal audit settlement.

The decrease in the effective tax rate for the three and nine months ended October 2, 2016, versus the comparable periods in 2015 was primarily due to favorable changes in the jurisdictional mix of pre-tax income.

It is reasonably possible that our existing liabilities for uncertain tax benefits may decrease in an amount ranging from $20 million to $26 million within the next 12 months for U.S. and non-U.S. audits that are in progress.

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MARKETABLE SECURITIES

9 Months Ended

Oct. 02, 2016

Investments, Debt and Equity Securities [Abstract]

MARKETABLE SECURITIES

NOTE 6. MARKETABLE SECURITIES

A summary of marketable securities, all of which are classified as current, was as follows:

	October 2, 2016						December 31, 2015
In millions	Cost		Gross unrealized gains/(losses)		Estimated fair value		Cost		Gross unrealized gains/(losses)			Estimated fair value
Available-for-sale
Level 2(1)
Bank debentures	$	118	$	—	$	118	$	—	$	—		$	—
Debt mutual funds	118		—		118		88		—			88
Equity mutual funds	12		—		12		11		(1		)	10
Government debt securities	2		—		2		2		—			2
Total marketable securities	$	250	$	—	$	250	$	101	$	(1	)	$	100

____________________________________

⁽¹⁾The fair value of Level 2 securities is estimated using actively quoted prices for similar instruments from brokers and observable inputs where available, including market transactions and third-party pricing services, or net asset values provided to investors. We do not currently have any Level 3 securities and there were no transfers between Level 2 or 3 during the first nine months of 2016 or for the year ended December 31, 2015.

A description of the valuation techniques and inputs used for our Level 2 fair value measures was as follows:

• Bank debentures— These investments provide us with a contractual rate of return and generally range in maturity fromthree months to one year. The counter-parties to these investments are reputable financial institutions with investment grade credit ratings. Since these instruments are not tradable and must be settled directly by us with the respective financial institution, our fair value measure is the financial institutions’ month-end statement.

• Debt mutual funds— The fair value measure for these investments is the daily net asset value published on a regulated governmental website. Daily quoted prices are available from the issuing brokerage and are used on a test basis to corroborate this Level 2 input.

• Equity mutual funds— The fair value measure for these investments is the net asset value published by the issuing brokerage. Daily quoted prices are available from reputable third party pricing services and are used on a test basis to corroborate this Level 2 input measure.

• Government debt securities-non-U.S.— The fair value measure for these securities is broker quotes received from reputable firms. These securities are infrequently traded on a national stock exchange and these values are used on a test basis to corroborate our Level 2 input measure.

The proceeds from sales and maturities of marketable securities and gross realized gains and losses from the sale of available-for-sale securities were as follows:

	Three months ended				Nine months ended
In millions	October 2, 2016		September 27, 2015		October 2, 2016		September 27, 2015
Proceeds from sales and maturities of marketable securities	$	54	$	73	$	291	$	228
Gross realized gains from the sale of marketable securities(1)	—		—		—		1

____________________________________

⁽¹⁾ Gross realized losses from the sale of available-for-sale securities were immaterial.

At October 2, 2016, the fair value of available-for-sale investments in debt securities that utilize a Level 2 fair value measure is shown by contractual maturity below:

Contractual Maturity	(In millions)
1 year or less	$	237
5 - 10 years	1
Total	$	238

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INVENTORIES

9 Months Ended

Oct. 02, 2016

Inventory Disclosure [Abstract]

INVENTORIES

NOTE 7. INVENTORIES

Inventories are stated at the lower of cost or market. Inventories included the following:

In millions	October 2, 2016			December 31, 2015
Finished products	$	1,779		$	1,796
Work-in-process and raw materials	1,146			1,022
Inventories at FIFO cost	2,925			2,818
Excess of FIFO over LIFO	(105		)	(111		)
Total inventories	$	2,820		$	2,707

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DEBT

9 Months Ended

Oct. 02, 2016

Debt Disclosure [Abstract]

DEBT

NOTE 8. DEBT

Loans Payable and Commercial Paper

Loans payable, commercial paper and the related weighted-average interest rates were as follows:

	October 2, 2016					December 31, 2015
Dollars in millions	Amount		Weighted Average Interest Rate			Amount		Weighted Average Interest Rate
Loans payable (1)	$	48				$	24
Commercial paper (2)	273		0.47	%	(3)	—		—

____________________________________

⁽¹⁾Loans payable consist primarily of notes payable to various domestic and international financial institutions. It is not practical to aggregate these notes and calculate a quarterly weighted-average interest rate.

⁽²⁾In February 2016, the Board of Directors authorized the issuance of up to $1.75 billion of unsecured short-term promissory notes ("commercial paper") pursuant to a commercial paper program. The program will facilitate the private placement of unsecured short-term debt through third party brokers. We intend to use the net proceeds from the commercial paper program for general corporate purposes.

⁽³⁾The weighted average interest rate is inclusive of all brokerage fees.

Long-term Debt

A summary of long-term debt was as follows:

In millions	October 2, 2016			December 31, 2015
Long-term debt
Senior notes, 3.65%, due 2023	$	500		$	500
Debentures, 6.75%, due 2027	58			58
Debentures, 7.125%, due 2028	250			250
Senior notes, 4.875%, due 2043	500			500
Debentures, 5.65%, due 2098 (effective interest rate 7.48%)	165			165
Other debt	49			55
Unamortized discount	(56		)	(57		)
Fair value adjustments due to hedge on indebtedness	77			63
Capital leases	85			81
Total long-term debt	1,628			1,615
Less: Current maturities of long-term debt	35			39
Long-term debt	$	1,593		$	1,576

Principal payments required on long-term debt during the next five years are as follows:

	Required Principal Payments
In millions	2016		2017		2018		2019		2020
Principal payments	$	9	$	28	$	31	$	24	$	7

Fair Value of Debt

Based on borrowing rates currently available to us for bank loans with similar terms and average maturities, considering our risk premium, the fair value and carrying value of total debt, including current maturities, was as follows:

In millions	October 2, 2016		December 31, 2015
Fair value of total debt(1)	$	2,292	$	1,821
Carrying value of total debt	1,949		1,639

_________________________________________________

⁽¹⁾The fair value of debt is derived from Level 2 inputs.

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PRODUCT WARRANTY LIABILITY

9 Months Ended

Oct. 02, 2016

Product Warranties Disclosures [Abstract]

PRODUCT WARRANTY LIABILITY

NOTE 9. PRODUCT WARRANTY LIABILITY

A tabular reconciliation of the product warranty liability, including the deferred revenue related to our extended warranty coverage and accrued recall programs was as follows:

In millions	October 2, 2016			September 27, 2015
Balance, beginning of year	$	1,404		$	1,283
Provision for warranties issued	256			326
Deferred revenue on extended warranty contracts sold	179			217
Payments	(291		)	(282		)
Amortization of deferred revenue on extended warranty contracts	(148		)	(132		)
Changes in estimates for pre-existing warranties	22			18
Foreign currency translation	(6		)	(10		)
Balance, end of period	$	1,416		$	1,420

Warranty related deferred revenue and the long-term portion of the warranty liability on our October 2, 2016, balance sheet were as follows:

In millions	October 2, 2016		Balance Sheet Location
Deferred revenue related to extended coverage programs
Current portion	$	210	Current portion of deferred revenue
Long-term portion	537		Other liabilities and deferred revenue
Total	$	747
Long-term portion of warranty liability	$	336	Other liabilities and deferred revenue

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COMMITMENTS AND CONTINGENCIES

9 Months Ended

Oct. 02, 2016

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

NOTE 10. COMMITMENTS AND CONTINGENCIES

We are subject to numerous lawsuits and claims arising out of the ordinary course of our business, including actions related to product liability; personal injury; the use and performance of our products; warranty matters; patent, trademark or other intellectual property infringement; contractual liability; the conduct of our business; tax reporting in foreign jurisdictions; distributor termination; workplace safety; and environmental matters. We also have been identified as a potentially responsible party at multiple waste disposal sites under U.S. federal and related state environmental statutes and regulations and may have joint and several liability for any investigation and remediation costs incurred with respect to such sites. We have denied liability with respect to many of these lawsuits, claims and proceedings and are vigorously defending such lawsuits, claims and proceedings. We carry various forms of commercial, property and casualty, product liability and other forms of insurance; however, such insurance may not be applicable or adequate to cover the costs associated with a judgment against us with respect to these lawsuits, claims and proceedings. We do not believe that these lawsuits are material individually or in the aggregate. While we believe we have also established adequate accruals for our expected future liability with respect to pending lawsuits, claims and proceedings, where the nature and extent of any such liability can be reasonably estimated based upon then presently available information, there can be no assurance that the final resolution of any existing or future lawsuits, claims or proceedings will not have a material adverse effect on our business, results of operations, financial condition or cash flows.

We conduct significant business operations in Brazil that are subject to the Brazilian federal, state and local labor, social security, tax and customs laws. While we believe we comply with such laws, they are complex, subject to varying interpretations and we are often engaged in litigation regarding the application of these laws to particular circumstances.

Loss Contingency

Engine systems sold in the U.S. must be certified to comply with the Environmental Protection Agency (EPA) and California Air Resources Board (CARB) emission standards. EPA and CARB regulations require that in-use testing be performed on vehicles by the emission certificate holder and reported to the EPA and CARB in order to ensure ongoing compliance with these emission standards. We are the holder of this emission certificate for our engines, including engines installed in certain vehicles with one customer on which we did not also manufacture or sell the emission aftertreatment system. During 2015, a quality issue in certain of these third party aftertreatment systems caused some of our inter-related engines to fail in-use emission testing. In the fourth quarter of 2015, the vehicle manufacturer made a request that we assist in the design and bear the financial cost of a field campaign (Campaign) to address the technical issue purportedly causing some vehicles to fail the in-use testing.

While we are not responsible for the warranty issues related to a component that we did not manufacture or sell, as the emission compliance certificate holder, we are responsible for proposing a remedy to the EPA and CARB. As a result, we have proposed actions to the agencies that we believe will address the emission failures. As the certificate holder, we expect to participate in the cost of the proposed voluntary Campaign and recorded a charge of$60 million in 2015. The Campaign design was finalized with our OEM customer, reviewed with the EPA and submitted for final approval in the second quarter of 2016, and we recorded an additional accrual of $39 million. We have concluded based upon additional in-use emission testing performed in the third quarter of 2016, that the Campaign should be expanded to include a larger population of vehicles manufactured by this one OEM. As a result, we recorded an additional accrual of $99 million in the third quarter to reflect the estimated cost of our participation in the expanded Campaign. We continue to work with our OEM customer to resolve the allocation of costs for the Campaign, including pending litigation between the parties. The Campaign is not expected to be completed for some time and our final cost could differ from the amount we have recorded.

We do not currently expect any fines or penalties from the EPA or CARB related to this matter.

The accrual related to the Campaign is included in "Other accrued expenses" in our Condensed Consolidated Balance Sheets.

Guarantees and Commitments

From time to time we enter into guarantee arrangements, including guarantees of non-U.S. distributor financings, residual value guarantees on equipment under operating leases and other miscellaneous guarantees of joint ventures or third-party obligations. At October 2, 2016, the maximum potential loss related to these guarantees was $24 million.

We have arrangements with certain suppliers that require us to purchase minimum volumes or be subject to monetary penalties. At October 2, 2016, if we were to stop purchasing from each of these suppliers, the aggregate amount of the penalty would be approximately $108 million, of which$55 millionrelates to a contract with a components supplier that extends to 2018. Most of these arrangements enable us to secure critical components. We do not currently anticipate paying any penalties under these contracts.

We enter into physical forward contracts with suppliers of platinum, palladium and copper to purchase minimum volumes of the commodities at contractually stated prices for various periods, not to exceedtwo years. At October 2, 2016, the total commitments under these contracts were $27 million. These arrangements enable us to fix the prices of these commodities, which otherwise are subject to market volatility.

We have guarantees with certain customers that require us to satisfactorily honor contractual or regulatory obligations, or compensate for monetary losses related to nonperformance. These performance bonds and other performance-related guarantees were$79 million at October 2, 2016.

Indemnifications

Periodically, we enter into various contractual arrangements where we agree to indemnify a third-party against certain types of losses. Common types of indemnities include:

• product liability and license, patent or trademark indemnifications;

• asset sale agreements where we agree to indemnify the purchaser against future environmental exposures related to the asset sold; and

• any contractual agreement where we agree to indemnify the counter-party for losses suffered as a result of a misrepresentation in the contract.

We regularly evaluate the probability of having to incur costs associated with these indemnities and accrue for expected losses that are probable. Because the indemnifications are not related to specified known liabilities and due to their uncertain nature, we are unable to estimate the maximum amount of the potential loss associated with these indemnifications.

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ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

9 Months Ended

Oct. 02, 2016

Equity [Abstract]

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

NOTE 11. ACCUMULATED OTHER COMPREHENSIVE LOSS

Following are the changes in accumulated other comprehensive (loss) income by component for the three and nine months ended:

	Three months ended
In millions	Change in pensions and other postretirement defined benefit plans			Foreign currency translation adjustment			Unrealized gain (loss) on marketable securities			Unrealized gain (loss) on derivatives			Total attributable to Cummins Inc.			Noncontrolling interests			Total other comprehensive income (loss)
Balance at June 28, 2015	$	(641	)	$	(435	)	$	(1	)	$	6		$	(1,071	)
Other comprehensive income before reclassifications
Before tax amount	—			(239		)	(1		)	13			(227		)	$	(13	)	$	(240	)
Tax benefit (expense)	—			31			—			(1		)	30			—			30
After tax amount	—			(208		)	(1		)	12			(197		)	(13		)	(210		)
Amounts reclassified from accumulated other comprehensive income(1)(2)	15			—			—			(5		)	10			—			10
Net current period other comprehensive income (loss)	15			(208		)	(1		)	7			(187		)	$	(13	)	$	(200	)
Balance at September 27, 2015	$	(626	)	$	(643	)	$	(2	)	$	13		$	(1,258	)
Balance at July 3, 2016	$	(636	)	$	(960	)	$	(1	)	$	(23	)	$	(1,620	)
Other comprehensive income before reclassifications
Before tax amount	5			(51		)	—			(4		)	(50		)	$	3		$	(47	)
Tax (expense) benefit	(1		)	19			—			1			19			—			19
After tax amount	4			(32		)	—			(3		)	(31		)	3			(28		)
Amounts reclassified from accumulated other comprehensive income(1)(2)	9			—			—			10			19			—			19
Net current period other comprehensive income (loss)	13			(32		)	—			7			(12		)	$	3		$	(9	)
Balance at October 2, 2016	$	(623	)	$	(992	)	$	(1	)	$	(16	)	$	(1,632	)

____________________________________

⁽¹⁾Amounts are net of tax.

⁽²⁾See reclassifications out of accumulated other comprehensive (loss) income disclosure below for further details.

	Nine months ended
In millions	Change in pensions and other postretirement defined benefit plans			Foreign currency translation adjustment			Unrealized gain (loss) on marketable securities			Unrealized gain (loss) on derivatives			Total attributable to Cummins Inc.			Noncontrolling interests			Total other comprehensive income (loss)
Balance at December 31, 2014	$	(669	)	$	(406	)	$	(1	)	$	(2	)	$	(1,078	)
Other comprehensive income before reclassifications
Before tax amount	(3		)	(290		)	—			23			(270		)	$	(15	)	$	(285	)
Tax benefit (expense)	1			53			—			(3		)	51			—			51
After tax amount	(2		)	(237		)	—			20			(219		)	(15		)	(234		)
Amounts reclassified from accumulated other comprehensive income(1)(2)	45			—			(1		)	(5		)	39			—			39
Net current period other comprehensive income (loss)	43			(237		)	(1		)	15			(180		)	$	(15	)	$	(195	)
Balance at September 27, 2015	$	(626	)	$	(643	)	$	(2	)	$	13		$	(1,258	)
Balance at December 31, 2015	$	(654	)	$	(696	)	$	(2	)	$	4		$	(1,348	)
Other comprehensive income before reclassifications
Before tax amount	5			(316		)	1			(40		)	(350		)	$	(3	)	$	(353	)
Tax (expense) benefit	(1		)	20			—			7			26			—			26
After tax amount	4			(296		)	1			(33		)	(324		)	(3		)	(327		)
Amounts reclassified from accumulated other comprehensive income(1)(2)	27			—			—			13			40			—			40
Net current period other comprehensive income (loss)	31			(296		)	1			(20		)	(284		)	$	(3	)	$	(287	)
Balance at October 2, 2016	$	(623	)	$	(992	)	$	(1	)	$	(16	)	$	(1,632	)

____________________________________

⁽¹⁾Amounts are net of tax.

⁽²⁾See reclassifications out of accumulated other comprehensive (loss) income disclosure below for further details.

Following are the items reclassified out of accumulated other comprehensive (loss) income and the related tax effects:

In millions	Three months ended						Nine months ended
(Gain)/Loss Components	October 2, 2016			September 27, 2015			October 2, 2016			September 27, 2015			Statement of Income Location
Change in pensions and other postretirement defined benefit plans
Recognized actuarial loss	$	14		$	22		$	40		$	65		(1)
Tax effect	(5		)	(7		)	(13		)	(20		)	Income tax expense
Net change in pensions and other postretirement defined benefit plans	9			15			27			45
Realized (gain) on marketable securities	—			—			—			(1		)	Other income, net
Tax effect	—			—			—			—			Income tax expense
Net realized (gain) on marketable securities	—			—			—			(1		)
Realized loss (gain) on derivatives
Foreign currency forward contracts	12			(6		)	17			(6		)	Net sales
Tax effect	(2		)	1			(4		)	1			Income tax expense
Net realized loss (gain) on derivatives	10			(5		)	13			(5		)
Total reclassifications for the period	$	19		$	10		$	40		$	39

____________________________________

⁽¹⁾ These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 3, ''PENSION AND OTHER POSTRETIREMENT BENEFITS'').

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RESTRUCTURING ACTIONS AND OTHER CHARGES RESTRUCTURING ACTIONS AND OTHER CHARGES

9 Months Ended

Oct. 02, 2016

Restructuring and Related Activities [Abstract]

Restructuring and Related Activities Disclosure [Text Block]

NOTE 12. RESTRUCTURING ACTIONS AND OTHER CHARGES

We executed restructuring actions primarily in the form of professional voluntary and involuntary employee separation programs in the fourth quarter of 2015. These actions were in response to the continued deterioration in our global markets in the second half of 2015, as well as expected reductions in orders in most U.S. and global markets in 2016. We reduced our worldwide workforce by approximately 1,900employees, including approximately 370 employees accepting voluntary retirement packages with the remainder of the reductions being involuntary. We incurred a charge of $90 million in the fourth quarter of 2015, of which $86 million related to severance costs for both voluntary and involuntary terminations and $4 million for asset impairments and other charges.

Employee termination and severance costs were recorded based on approved plans developed by the businesses and corporate management which specified positions to be eliminated, benefits to be paid under existing severance plans or statutory requirements and the expected timetable for completion of the plan. Estimates of restructuring costs and benefits were made based on information available at the time charges were recorded. Due to the inherent uncertainty involved, actual amounts paid for such activities may differ from amounts initially recorded and we may need to revise previous estimates.

Restructuring actions and other charges were included in each segment in our operating results as follows:

In millions	Year ended December 31, 2015 (1)
Power Systems	26
Distribution	23
Engine	17
Components	13
Non-segment	11
Restructuring actions and other charges	$	90

____________________________________________________

⁽¹⁾ Restructuring actions and other charges by segment were re-allocated in conjunction with our segment realignment. See Note 13, "OPERATING SEGMENTS," for additional information.

At October 2, 2016, substantially all terminations have been completed.

The table below summarizes the activity and balance of accrued workforce reductions, which is included in "Other accrued expenses" in our Condensed Consolidated Balance Sheets:

In millions	October 2, 2016
Balance, beginning of year	$	60
Cash payments for 2015 actions	(53		)
Balance, end of period	$	7

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OPERATING SEGMENTS

9 Months Ended

Oct. 02, 2016

Segment Reporting [Abstract]

OPERATING SEGMENTS

NOTE 13. OPERATING SEGMENTS

Operating segments under GAAP are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (CODM), or decision-making group, in deciding how to allocate resources and in assessing performance. Our CODM is the Chief Operating Officer.

We use segment EBIT (defined as earnings before interest expense, income taxes and noncontrolling interests) as a primary basis for the CODM to evaluate the performance of each of our operating segments. Segment amounts exclude certain expenses not specifically identifiable to segments.

As previously announced, beginning with the second quarter of 2016, we realigned certain of our reportable segments to be consistent with changes to our organizational structure and how the CODM monitors the performance of our segments. We reorganized our business to combine our Power Generation segment and our high-horsepower engine business to create the new Power Systems segment. Our reportable operating segments consist of Engine, Distribution, Components and Power Systems. We began to report results for our new reporting structure in the second quarter of 2016 and also reflected this change for historical periods.

We allocate certain common costs and expenses, primarily corporate functions, among segments. These include certain costs and expenses of shared services, such as information technology, human resources, legal, finance and supply chain management. In addition to the reorganization noted above, we reevaluated the allocation of these costs, considering the new segment structure created in April 2016 and adjusted our allocation methodology accordingly. The revised methodology, which is based on a combination of relative segment sales and relative service usage levels, is effective for the periods beginning after January 1, 2016 and resulted in the revision of our segment operating results, including segment EBIT, for all four segments for the first quarter of 2016 with a greater share of costs allocated to the Distribution and Components segments than in previous years. Prior periods were not revised for the new allocation methodology. These changes had no impact on our consolidated results.

Our new reporting structure is organized according to the products and markets each segment serves. The Engine segment produces engines (15 liters and less in size) and associated parts for sale to customers in on-highway and various off-highway markets. Our engines are used in trucks of all sizes, buses and recreational vehicles, as well as in various industrial applications, including construction, agriculture, power generation systems and other off-highway applications. The Distribution segment includes wholly-owned and partially-owned distributorships engaged in wholesaling engines, generator sets and service parts, as well as performing service and repair activities on our products and maintaining relationships with various OEMs throughout the world. The Components segment sells filtration products, aftertreatment systems, turbochargers and fuel systems. The Power Systems segment is an integrated power provider, which designs, manufactures and sells engines (16 liters and larger) for industrial applications (including mining, oil and gas and marine), standby and prime power generator sets, alternators and other power components.

The accounting policies of our operating segments are the same as those applied in our Condensed Consolidated Financial Statements. We prepared the financial results of our operating segments on a basis that is consistent with the manner in which we internally disaggregate financial information to assist in making internal operating decisions. As noted above, we allocate certain common costs and expenses, primarily corporate functions, among segments. We do not allocate debt-related items, actuarial gains or losses, prior service costs or credits, changes in cash surrender value of corporate owned life insurance or income taxes to individual segments. Segment EBIT may not be consistent with measures used by other companies.

Summarized financial information regarding our reportable operating segments for the three and nine month periods is shown in the table below:

In millions	Engine			Distribution		Components		Power Systems		Non-segment Items (1)			Total
Three months ended October 2, 2016
External sales	$	1,357		$	1,497	$	824	$	509	$	—		$	4,187
Intersegment sales	502			7		319		347		(1,175		)	—
Total sales	1,859			1,504		1,143		856		(1,175		)	4,187
Depreciation and amortization(2)	42			28		32		29		—			131
Research, development and engineering expenses	56			3		54		44		—			157
Equity, royalty and interest income from investees	38			19		9		8		—			74
Loss contingency	99		(3)	—		—		—		—			99
Interest income	3			1		1		1		—			6
Segment EBIT	89			96		148		59		6			398
Three months ended September 27, 2015
External sales	$	1,627		$	1,543	$	891	$	559	$	—		$	4,620
Intersegment sales	475			8		349		423		(1,255		)	—
Total sales	2,102			1,551		1,240		982		(1,255		)	4,620
Depreciation and amortization(2)	47			26		28		27		—			128
Research, development and engineering expenses	73			2		65		57		—			197
Equity, royalty and interest income from investees	33			19		9		17		—			78
Interest income	6			1		1		1		—			9
Segment EBIT	217			123		156		74		7			577
Nine months ended October 2, 2016
External sales	$	4,350		$	4,493	$	2,654	$	1,509	$	—		$	13,006
Intersegment sales	1,487			18		1,005		1,076		(3,586		)	—
Total sales	5,837			4,511		3,659		2,585		(3,586		)	13,006
Depreciation and amortization(2)	121			86		95		87		—			389
Research, development and engineering expenses	166			10		161		141		—			478
Equity, royalty and interest income from investees	120			56		29		29		—			234
Loss contingency	138		(3)	—		—		—		—			138
Interest income	8			3		3		4		—			18
Segment EBIT	492			270		501		195		15			1,473
Nine months ended September 27, 2015
External sales	$	5,150		$	4,499	$	2,839	$	1,856	$	—		$	14,344
Intersegment sales	1,422			23		1,097		1,225		(3,767		)	—
Total sales	6,572			4,522		3,936		3,081		(3,767		)	14,344
Depreciation and amortization(2)	140			78		82		81		—			381
Research, development and engineering expenses	195			8		183		172		—			558
Equity, royalty and interest income from investees	107			60		26		47		—			240
Interest income	10			3		3		4		—			20
Segment EBIT	695			324		574		302		(35		)	1,860

____________________________________

⁽¹⁾ Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three and nine months ended October 2, 2016 and September 27, 2015.

⁽²⁾ Depreciation and amortization as shown on a segment basis excludes the amortization of debt discount and deferred costs included in theCondensed Consolidated Statements of Income as "Interest expense."The amortization of debt discount and deferred costs was $2 million for the nine months ended October 2, 2016 and September 27, 2015.

⁽³⁾ See Note 10, "COMMITMENTS AND CONTINGENCIES," for additional information.

A reconciliation of our segment information to the corresponding amounts in the Condensed Consolidated Statements of Income is shown in the table below:

	Three months ended				Nine months ended
In millions	October 2, 2016		September 27, 2015		October 2, 2016		September 27, 2015
Total segment EBIT	$	398	$	577	$	1,473	$	1,860
Less: Interest expense	16		16		51		47
Income before income taxes	$	382	$	561	$	1,422	$	1,813

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RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

9 Months Ended

Oct. 02, 2016

New Accounting Pronouncements and Changes in Accounting Principles [Abstract]

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

NOTE 14. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In August 2016, the Financial Accounting Standards Board (FASB) amended its standards related to the classification of certain cash receipts and cash payments. The new standard will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case it would be required to apply the amendments prospectively as of the earliest date practicable. We are in the process of evaluating the impact this standard will have on our Consolidated Statements of Cash Flows.

In June 2016, the FASB amended its standards related to the accounting for credit losses on financial instruments. This amendment introduces new guidance for accounting for credit losses on instruments including trade receivables and held-to-maturity debt securities. The new rules are effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are in the process of evaluating the impact the amendment will have on our Consolidated Financial Statements.

In March 2016, the FASB amended its standards related to the accounting for stock compensation. This amendment addresses several aspects of the accounting for share-based payment transactions that could impact us including, but not limited to, recognition of excess tax benefits or deficiencies in the income statement each period and classification of the excess tax benefits or deficiencies as operating activities in the cash flow statement. The new standard is effective for annual periods beginning after December 15, 2016, with early adoption permitted. We are in the process of evaluating the impact the amendment will have on our Consolidated Financial Statements.

In February 2016, the FASB amended its standards related to the accounting for leases. Under the new standard, lessees will now be required to recognize substantially all leases on the balance sheet as both a right-of-use-asset and a liability. The standard will continue to have two types of leases for income statement recognition purposes: operating leases and finance leases. Operating leases will result in the recognition of a single lease expense on a straight-line basis over the lease term similar to the treatment for operating leases under today's standards. Finance leases will result in an accelerated expense similar to the accounting for capital leases under today's standards. The determination of a lease classification as operating or finance will be done in a manner very similar to today's standard. The new standard also contains amended guidance regarding the identification of embedded leases in service contracts and the identification of lease and non-lease components in an arrangement. The new standard is effective for us on January 1, 2019, with early adoption permitted. We are still evaluating the impact the standard could have on our Consolidated Financial Statements; however, while we have not yet quantified the amount, we do expect the standard will have a material impact on our Consolidated Balance Sheets due to the recognition of additional assets and liabilities for operating leases.

In January 2016, the FASB amended its standards related to the accounting for certain financial instruments. This amendment addresses certain aspects of recognition, measurement, presentation and disclosure. The new rules will become effective for annual and interim periods beginning after December 15, 2017. Early adoption is not permitted. We are in the process of evaluating the impact the amendment will have on our Consolidated Financial Statements.

In May 2014, the FASB amended its standards related to revenue recognition. This amendment replaces all existing revenue recognition guidance and provides a single, comprehensive revenue recognition model for all contracts with customers. The standard contains principles that we will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that we will recognize revenue in a manner that depicts the transfer of goods or services to customers at an amount that we expect to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of the time value of money in the transaction price and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The amendment also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in those judgments and assets recognized from costs incurred to fulfill a contract. The standard allows either full or modified retrospective adoption effective for annual and interim periods beginning January 1, 2018. We are in the process of evaluating the impact the amendment will have on our Consolidated Financial Statements.We expect to adopt the standard using the modified retrospective approach. While we have not yet completed our evaluation process, we have identified transactions where revenue recognition is currently limited to the amount of billings not contingent on our future performance. With the allocation provisions of the new model, we expect to accelerate the timing of revenue recognition for amounts related to satisfied performance obligations that would have been delayed under the current guidance. We do not expect the impact of this change to be material, but we are still quantifying the impact.

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SUBSEQUENT EVENT SUBSEQUENT EVENTS

9 Months Ended

Oct. 02, 2016

Subsequent Events [Abstract]

Subsequent Events

NOTE 15. SUBSEQUENT EVENT

Acquisition of Cummins Pacific, LLC

In October 2016, we acquired the remaining 50 percent interest in Cummins Pacific, LLC from the former distributor principal. The purchase consideration was $97 million, which included $17 million in cash and an additional $66 million paid to eliminate outstanding debt. The remaining $14 million will be paid in future periods, subject to customary purchase price adjustments. We will recognize a gain of $13 million on the fair value adjustment in the fourth quarter of 2016, resulting from this acquisition.

This is the final acquisition of the plan we announced on September 17, 2013, to acquire the equity that we did not already own in most of our partially-owned U.S. and Canadian distributors.

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BASIS OF PRESENTATION (Tables)

9 Months Ended

Oct. 02, 2016

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Options excluded from diluted earnings per share

The options excluded from diluted earnings per share for the three and nine months ended October 2, 2016 and September 27, 2015, were as follows:

	Three months ended		Nine months ended
	October 2, 2016	September 27, 2015	October 2, 2016	September 27, 2015
Options excluded	936,857	950,345	1,295,664	593,436

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PENSION AND OTHER POSTRETIREMENT BENEFITS (Tables)

9 Months Ended

Oct. 02, 2016

Compensation and Retirement Disclosure [Abstract]

Schedule of Defined Benefit Plans Disclosures Cash Contributions [Text Block]

Contributions to these plans were as follows:

	Three months ended				Nine months ended
In millions	October 2, 2016		September 27, 2015		October 2, 2016		September 27, 2015
Defined benefit pension plans
Voluntary contribution	$	16	$	7	$	101	$	79
Mandatory contribution	5		5		23		87
Defined benefit pension contributions	$	21	$	12	$	124	$	166
Other postretirement plans	$	4	$	8	$	32	$	33
Defined contribution pension plans	$	17	$	14	$	53	$	56

Components of net periodic pension and other postretirement benefit cost

The components of net periodic pension and other postretirement benefit costs under our plans were as follows:

	Pension
	U.S. Plans						U.K. Plans						Other Postretirement Benefits
	Three months ended
In millions	October 2, 2016			September 27, 2015			October 2, 2016			September 27, 2015			October 2, 2016		September 27, 2015
Service cost	$	22		$	20		$	5		$	7		$	—	$	—
Interest cost	26			25			13			14			4		4
Expected return on plan assets	(50		)	(47		)	(17		)	(23		)	—		—
Recognized net actuarial loss	9			11			3			8			1		1
Net periodic benefit cost	$	7		$	9		$	4		$	6		$	5	$	5

	Pension
	U.S. Plans						U.K. Plans						Other Postretirement Benefits
	Nine months ended
In millions	October 2, 2016			September 27, 2015			October 2, 2016			September 27, 2015			October 2, 2016		September 27, 2015
Service cost	$	68		$	60		$	16		$	20		$	—	$	—
Interest cost	82			76			39			42			12		12
Expected return on plan assets	(152		)	(142		)	(55		)	(68		)	—		—
Recognized net actuarial loss	23			34			11			25			4		3
Net periodic benefit cost	$	21		$	28		$	11		$	19		$	16	$	15

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EQUITY, ROYALTY AND INTEREST INCOME FROM INVESTEES (Tables)

9 Months Ended

Oct. 02, 2016

Equity Method Investments and Joint Ventures [Abstract]

Equity, royalty and interest income from investees

Equity, royalty and interest income from investees included in our Condensed Consolidated Statements of Income for the reporting periods was as follows: 

	Three months ended				Nine months ended
In millions	October 2, 2016		September 27, 2015		October 2, 2016		September 27, 2015
Distribution entities
Komatsu Cummins Chile, Ltda.	$	8	$	8	$	26	$	23
North American distributors	7		9		18		27
All other distributors	1		1		2		2
Manufacturing entities
Beijing Foton Cummins Engine Co., Ltd.	19		18		59		47
Chongqing Cummins Engine Company, Ltd.	11		9		28		32
Dongfeng Cummins Engine Company, Ltd.	10		11		32		40
All other manufacturers	8		13		40		41
Cummins share of net income	64		69		205		212
Royalty and interest income	10		9		29		28
Equity, royalty and interest income from investees	$	74	$	78	$	234	$	240

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MARKETABLE SECURITIES (Tables)

9 Months Ended

Oct. 02, 2016

Investments, Debt and Equity Securities [Abstract]

Summary of marketable securities

A summary of marketable securities, all of which are classified as current, was as follows:

	October 2, 2016						December 31, 2015
In millions	Cost		Gross unrealized gains/(losses)		Estimated fair value		Cost		Gross unrealized gains/(losses)			Estimated fair value
Available-for-sale
Level 2(1)
Bank debentures	$	118	$	—	$	118	$	—	$	—		$	—
Debt mutual funds	118		—		118		88		—			88
Equity mutual funds	12		—		12		11		(1		)	10
Government debt securities	2		—		2		2		—			2
Total marketable securities	$	250	$	—	$	250	$	101	$	(1	)	$	100

____________________________________

⁽¹⁾The fair value of Level 2 securities is estimated using actively quoted prices for similar instruments from brokers and observable inputs where available, including market transactions and third-party pricing services, or net asset values provided to investors. We do not currently have any Level 3 securities and there were no transfers between Level 2 or 3 during the first nine months of 2016 or for the year ended December 31, 2015.

Schedule of proceeds from sales and maturities and gross realized gains and losses

The proceeds from sales and maturities of marketable securities and gross realized gains and losses from the sale of available-for-sale securities were as follows:

	Three months ended				Nine months ended
In millions	October 2, 2016		September 27, 2015		October 2, 2016		September 27, 2015
Proceeds from sales and maturities of marketable securities	$	54	$	73	$	291	$	228
Gross realized gains from the sale of marketable securities(1)	—		—		—		1

____________________________________

⁽¹⁾ Gross realized losses from the sale of available-for-sale securities were immaterial

Summary of fair value of available-for-sale investments with contractual maturities

At October 2, 2016, the fair value of available-for-sale investments in debt securities that utilize a Level 2 fair value measure is shown by contractual maturity below:

Contractual Maturity	(In millions)
1 year or less	$	237
5 - 10 years	1
Total	$	238

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INVENTORIES (Tables)

9 Months Ended

Oct. 02, 2016

Inventory Disclosure [Abstract]

Inventories

Inventories are stated at the lower of cost or market. Inventories included the following:

In millions	October 2, 2016			December 31, 2015
Finished products	$	1,779		$	1,796
Work-in-process and raw materials	1,146			1,022
Inventories at FIFO cost	2,925			2,818
Excess of FIFO over LIFO	(105		)	(111		)
Total inventories	$	2,820		$	2,707

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DEBT (Tables)

9 Months Ended

Oct. 02, 2016

Debt Disclosure [Abstract]

Schedule of Short-term Debt

Loans payable, commercial paper and the related weighted-average interest rates were as follows:

	October 2, 2016					December 31, 2015
Dollars in millions	Amount		Weighted Average Interest Rate			Amount		Weighted Average Interest Rate
Loans payable (1)	$	48				$	24
Commercial paper (2)	273		0.47	%	(3)	—		—

____________________________________

⁽¹⁾Loans payable consist primarily of notes payable to various domestic and international financial institutions. It is not practical to aggregate these notes and calculate a quarterly weighted-average interest rate.

⁽²⁾In February 2016, the Board of Directors authorized the issuance of up to $1.75 billion of unsecured short-term promissory notes ("commercial paper") pursuant to a commercial paper program. The program will facilitate the private placement of unsecured short-term debt through third party brokers. We intend to use the net proceeds from the commercial paper program for general corporate purposes.

⁽³⁾The weighted average interest rate is inclusive of all brokerage fees.

Summary of long-term debt

A summary of long-term debt was as follows:

In millions	October 2, 2016			December 31, 2015
Long-term debt
Senior notes, 3.65%, due 2023	$	500		$	500
Debentures, 6.75%, due 2027	58			58
Debentures, 7.125%, due 2028	250			250
Senior notes, 4.875%, due 2043	500			500
Debentures, 5.65%, due 2098 (effective interest rate 7.48%)	165			165
Other debt	49			55
Unamortized discount	(56		)	(57		)
Fair value adjustments due to hedge on indebtedness	77			63
Capital leases	85			81
Total long-term debt	1,628			1,615
Less: Current maturities of long-term debt	35			39
Long-term debt	$	1,593		$	1,576

Principal repayments on long-term debt

Principal payments required on long-term debt during the next five years are as follows:

	Required Principal Payments
In millions	2016		2017		2018		2019		2020
Principal payments	$	9	$	28	$	31	$	24	$	7

Fair value and carrying value of total debt

Based on borrowing rates currently available to us for bank loans with similar terms and average maturities, considering our risk premium, the fair value and carrying value of total debt, including current maturities, was as follows:

In millions	October 2, 2016		December 31, 2015
Fair value of total debt(1)	$	2,292	$	1,821
Carrying value of total debt	1,949		1,639

_________________________________________________

⁽¹⁾The fair value of debt is derived from Level 2 inputs.

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PRODUCT WARRANTY LIABILITY (Tables)

9 Months Ended

Oct. 02, 2016

Product Warranties Disclosures [Abstract]

Summary of activity in the product warranty account

A tabular reconciliation of the product warranty liability, including the deferred revenue related to our extended warranty coverage and accrued recall programs was as follows:

In millions	October 2, 2016			September 27, 2015
Balance, beginning of year	$	1,404		$	1,283
Provision for warranties issued	256			326
Deferred revenue on extended warranty contracts sold	179			217
Payments	(291		)	(282		)
Amortization of deferred revenue on extended warranty contracts	(148		)	(132		)
Changes in estimates for pre-existing warranties	22			18
Foreign currency translation	(6		)	(10		)
Balance, end of period	$	1,416		$	1,420

Warranty related deferred revenue and the long-term portion of the warranty liability

Warranty related deferred revenue and the long-term portion of the warranty liability on our October 2, 2016, balance sheet were as follows:

In millions	October 2, 2016		Balance Sheet Location
Deferred revenue related to extended coverage programs
Current portion	$	210	Current portion of deferred revenue
Long-term portion	537		Other liabilities and deferred revenue
Total	$	747
Long-term portion of warranty liability	$	336	Other liabilities and deferred revenue

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ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (Tables)

9 Months Ended

Oct. 02, 2016

Equity [Abstract]

Changes in accumulated other comprehensive income (loss) by component

Following are the changes in accumulated other comprehensive (loss) income by component for the three and nine months ended:

	Three months ended
In millions	Change in pensions and other postretirement defined benefit plans			Foreign currency translation adjustment			Unrealized gain (loss) on marketable securities			Unrealized gain (loss) on derivatives			Total attributable to Cummins Inc.			Noncontrolling interests			Total other comprehensive income (loss)
Balance at June 28, 2015	$	(641	)	$	(435	)	$	(1	)	$	6		$	(1,071	)
Other comprehensive income before reclassifications
Before tax amount	—			(239		)	(1		)	13			(227		)	$	(13	)	$	(240	)
Tax benefit (expense)	—			31			—			(1		)	30			—			30
After tax amount	—			(208		)	(1		)	12			(197		)	(13		)	(210		)
Amounts reclassified from accumulated other comprehensive income(1)(2)	15			—			—			(5		)	10			—			10
Net current period other comprehensive income (loss)	15			(208		)	(1		)	7			(187		)	$	(13	)	$	(200	)
Balance at September 27, 2015	$	(626	)	$	(643	)	$	(2	)	$	13		$	(1,258	)
Balance at July 3, 2016	$	(636	)	$	(960	)	$	(1	)	$	(23	)	$	(1,620	)
Other comprehensive income before reclassifications
Before tax amount	5			(51		)	—			(4		)	(50		)	$	3		$	(47	)
Tax (expense) benefit	(1		)	19			—			1			19			—			19
After tax amount	4			(32		)	—			(3		)	(31		)	3			(28		)
Amounts reclassified from accumulated other comprehensive income(1)(2)	9			—			—			10			19			—			19
Net current period other comprehensive income (loss)	13			(32		)	—			7			(12		)	$	3		$	(9	)
Balance at October 2, 2016	$	(623	)	$	(992	)	$	(1	)	$	(16	)	$	(1,632	)

____________________________________

⁽¹⁾Amounts are net of tax.

⁽²⁾See reclassifications out of accumulated other comprehensive (loss) income disclosure below for further details.

	Nine months ended
In millions	Change in pensions and other postretirement defined benefit plans			Foreign currency translation adjustment			Unrealized gain (loss) on marketable securities			Unrealized gain (loss) on derivatives			Total attributable to Cummins Inc.			Noncontrolling interests			Total other comprehensive income (loss)
Balance at December 31, 2014	$	(669	)	$	(406	)	$	(1	)	$	(2	)	$	(1,078	)
Other comprehensive income before reclassifications
Before tax amount	(3		)	(290		)	—			23			(270		)	$	(15	)	$	(285	)
Tax benefit (expense)	1			53			—			(3		)	51			—			51
After tax amount	(2		)	(237		)	—			20			(219		)	(15		)	(234		)
Amounts reclassified from accumulated other comprehensive income(1)(2)	45			—			(1		)	(5		)	39			—			39
Net current period other comprehensive income (loss)	43			(237		)	(1		)	15			(180		)	$	(15	)	$	(195	)
Balance at September 27, 2015	$	(626	)	$	(643	)	$	(2	)	$	13		$	(1,258	)
Balance at December 31, 2015	$	(654	)	$	(696	)	$	(2	)	$	4		$	(1,348	)
Other comprehensive income before reclassifications
Before tax amount	5			(316		)	1			(40		)	(350		)	$	(3	)	$	(353	)
Tax (expense) benefit	(1		)	20			—			7			26			—			26
After tax amount	4			(296		)	1			(33		)	(324		)	(3		)	(327		)
Amounts reclassified from accumulated other comprehensive income(1)(2)	27			—			—			13			40			—			40
Net current period other comprehensive income (loss)	31			(296		)	1			(20		)	(284		)	$	(3	)	$	(287	)
Balance at October 2, 2016	$	(623	)	$	(992	)	$	(1	)	$	(16	)	$	(1,632	)

____________________________________

⁽¹⁾Amounts are net of tax.

⁽²⁾See reclassifications out of accumulated other comprehensive (loss) income disclosure below for further details.

Schedule of reclassification out of accumulated other comprehensive income (loss) and related tax effects

Following are the items reclassified out of accumulated other comprehensive (loss) income and the related tax effects:

In millions	Three months ended						Nine months ended
(Gain)/Loss Components	October 2, 2016			September 27, 2015			October 2, 2016			September 27, 2015			Statement of Income Location
Change in pensions and other postretirement defined benefit plans
Recognized actuarial loss	$	14		$	22		$	40		$	65		(1)
Tax effect	(5		)	(7		)	(13		)	(20		)	Income tax expense
Net change in pensions and other postretirement defined benefit plans	9			15			27			45
Realized (gain) on marketable securities	—			—			—			(1		)	Other income, net
Tax effect	—			—			—			—			Income tax expense
Net realized (gain) on marketable securities	—			—			—			(1		)
Realized loss (gain) on derivatives
Foreign currency forward contracts	12			(6		)	17			(6		)	Net sales
Tax effect	(2		)	1			(4		)	1			Income tax expense
Net realized loss (gain) on derivatives	10			(5		)	13			(5		)
Total reclassifications for the period	$	19		$	10		$	40		$	39

____________________________________

⁽¹⁾ These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 3, ''PENSION AND OTHER POSTRETIREMENT BENEFITS'').

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RESTRUCTURING ACTIONS AND OTHER CHARGES RESTRUCTURING ACTIONS AND OTHER CHARGES (Tables)

9 Months Ended

Oct. 02, 2016

Restructuring and Related Activities [Abstract]

Restructuring and Related Costs [Table Text Block]

Restructuring actions and other charges were included in each segment in our operating results as follows:

In millions	Year ended December 31, 2015 (1)
Power Systems	26
Distribution	23
Engine	17
Components	13
Non-segment	11
Restructuring actions and other charges	$	90

____________________________________________________

⁽¹⁾ Restructuring actions and other charges by segment were re-allocated in conjunction with our segment realignment. See Note 13, "OPERATING SEGMENTS," for additional information.

Schedule of Restructuring and Related Costs Accrual Rollforward [Table Text Block]

The table below summarizes the activity and balance of accrued workforce reductions, which is included in "Other accrued expenses" in our Condensed Consolidated Balance Sheets:

In millions	October 2, 2016
Balance, beginning of year	$	60
Cash payments for 2015 actions	(53		)
Balance, end of period	$	7

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OPERATING SEGMENTS (Tables)

9 Months Ended

Oct. 02, 2016

Segment Reporting [Abstract]

Financial information regarding reportable operating segments

Summarized financial information regarding our reportable operating segments for the three and nine month periods is shown in the table below:

In millions	Engine			Distribution		Components		Power Systems		Non-segment Items (1)			Total
Three months ended October 2, 2016
External sales	$	1,357		$	1,497	$	824	$	509	$	—		$	4,187
Intersegment sales	502			7		319		347		(1,175		)	—
Total sales	1,859			1,504		1,143		856		(1,175		)	4,187
Depreciation and amortization(2)	42			28		32		29		—			131
Research, development and engineering expenses	56			3		54		44		—			157
Equity, royalty and interest income from investees	38			19		9		8		—			74
Loss contingency	99		(3)	—		—		—		—			99
Interest income	3			1		1		1		—			6
Segment EBIT	89			96		148		59		6			398
Three months ended September 27, 2015
External sales	$	1,627		$	1,543	$	891	$	559	$	—		$	4,620
Intersegment sales	475			8		349		423		(1,255		)	—
Total sales	2,102			1,551		1,240		982		(1,255		)	4,620
Depreciation and amortization(2)	47			26		28		27		—			128
Research, development and engineering expenses	73			2		65		57		—			197
Equity, royalty and interest income from investees	33			19		9		17		—			78
Interest income	6			1		1		1		—			9
Segment EBIT	217			123		156		74		7			577
Nine months ended October 2, 2016
External sales	$	4,350		$	4,493	$	2,654	$	1,509	$	—		$	13,006
Intersegment sales	1,487			18		1,005		1,076		(3,586		)	—
Total sales	5,837			4,511		3,659		2,585		(3,586		)	13,006
Depreciation and amortization(2)	121			86		95		87		—			389
Research, development and engineering expenses	166			10		161		141		—			478
Equity, royalty and interest income from investees	120			56		29		29		—			234
Loss contingency	138		(3)	—		—		—		—			138
Interest income	8			3		3		4		—			18
Segment EBIT	492			270		501		195		15			1,473
Nine months ended September 27, 2015
External sales	$	5,150		$	4,499	$	2,839	$	1,856	$	—		$	14,344
Intersegment sales	1,422			23		1,097		1,225		(3,767		)	—
Total sales	6,572			4,522		3,936		3,081		(3,767		)	14,344
Depreciation and amortization(2)	140			78		82		81		—			381
Research, development and engineering expenses	195			8		183		172		—			558
Equity, royalty and interest income from investees	107			60		26		47		—			240
Interest income	10			3		3		4		—			20
Segment EBIT	695			324		574		302		(35		)	1,860

____________________________________

⁽¹⁾ Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three and nine months ended October 2, 2016 and September 27, 2015.

⁽²⁾ Depreciation and amortization as shown on a segment basis excludes the amortization of debt discount and deferred costs included in theCondensed Consolidated Statements of Income as "Interest expense."The amortization of debt discount and deferred costs was $2 million for the nine months ended October 2, 2016 and September 27, 2015.

⁽³⁾ See Note 10, "COMMITMENTS AND CONTINGENCIES," for additional information.

Reconciliation of segment information

A reconciliation of our segment information to the corresponding amounts in the Condensed Consolidated Statements of Income is shown in the table below:

	Three months ended				Nine months ended
In millions	October 2, 2016		September 27, 2015		October 2, 2016		September 27, 2015
Total segment EBIT	$	398	$	577	$	1,473	$	1,860
Less: Interest expense	16		16		51		47
Income before income taxes	$	382	$	561	$	1,422	$	1,813

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NATURE OF OPERATIONS (Details)	9 Months Ended
	Oct. 02, 2016 country location
Nature of Operations
Company Owned and Independent Distributor Locations Number	600
Dealer Locations Number	7,200
Countries and Territories Number | country	190

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BASIS OF PRESENTATION (Details) - USD ($) $ / shares in Units, $ in Millions	3 Months Ended		6 Months Ended	9 Months Ended
	Oct. 02, 2016	Sep. 27, 2015	Jul. 03, 2016	Oct. 02, 2016	Sep. 27, 2015	Feb. 09, 2016
Organization, Consolidation and Presentation of Financial Statements [Abstract]
Options excluded (in shares)	936,857	950,345		1,295,664	593,436
Accelerated Share Repurchases, Settlement (Payment) or Receipt						$ 500
Treasury Stock, Shares, Acquired			4,700,000
Accelerated Share Repurchases, Final Price Paid Per Share			$ 105.50

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PENSION AND OTHER POSTRETIREMENT BENEFITS (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Oct. 02, 2016	Sep. 27, 2015	Oct. 02, 2016	Sep. 27, 2015
Pension and other postretirement benefits
Defined Benefit Plan, Contributions by Employer	$ 21	$ 12	$ 124	$ 166
Defined Contribution Plan, Cost Recognized	17	14	53	56
Defined Benefit Plans, Estimated Future Employer Contributions in Current Fiscal Year			22
Voluntary contributions
Pension and other postretirement benefits
Defined Benefit Plan, Contributions by Employer	16	7	101	79
Defined Benefit Plan, Expected Contributions in Current Fiscal Year			103
Mandatory contribution
Pension and other postretirement benefits
Defined Benefit Plan, Contributions by Employer	5	5	23	87
Total contribution
Pension and other postretirement benefits
Defined Benefit Plan, Expected Contributions in Current Fiscal Year			146
Pension Plan
Pension and other postretirement benefits
Defined Benefit Plan, Future Amortization of Gain (Loss)			42
Pension - U.S. Plans
Components of Net Periodic Benefit Cost
Service cost	22	20	68	60
Interest cost	26	25	82	76
Expected return on plan assets	(50)	(47)	(152)	(142)
Recognized net actuarial loss	9	11	23	34
Net periodic benefit cost	7	9	21	28
Pension - U.K. Plans
Components of Net Periodic Benefit Cost
Service cost	5	7	16	20
Interest cost	13	14	39	42
Expected return on plan assets	(17)	(23)	(55)	(68)
Recognized net actuarial loss	3	8	11	25
Net periodic benefit cost	4	6	11	19
Other Postretirement Benefits
Pension and other postretirement benefits
Defined Benefit Plan, Contributions by Employer	4	8	32	33
Components of Net Periodic Benefit Cost
Service cost	0	0	0	0
Interest cost	4	4	12	12
Expected return on plan assets	0	0	0	0
Recognized net actuarial loss	1	1	4	3
Net periodic benefit cost	$ 5	$ 5	$ 16	$ 15

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EQUITY, ROYALTY AND INTEREST INCOME FROM INVESTEES (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Oct. 02, 2016	Sep. 27, 2015	Oct. 02, 2016	Sep. 27, 2015
Equity, royalty and interest income from investees
Cummins share of net income	$ 64	$ 69	$ 205	$ 212
Royalty and interest income	10	9	29	28
Equity, royalty and interest income from investees	74	78	234	240
Distribution - Komatsu Cummins Chile, Ltda.
Equity, royalty and interest income from investees
Cummins share of net income	8	8	26	23
Distribution - North American distributors
Equity, royalty and interest income from investees
Cummins share of net income	7	9	18	27
Distribution - All other distributors
Equity, royalty and interest income from investees
Cummins share of net income	1	1	2	2
Manufacturing - Beijing Foton Cummins Engine Company
Equity, royalty and interest income from investees
Cummins share of net income	19	18	59	47
Manufacturing - Chongqing Cummins Engine Company, Ltd.
Equity, royalty and interest income from investees
Cummins share of net income	11	9	28	32
Dongfeng Cummins Engine Company Ltd [Member]
Equity, royalty and interest income from investees
Cummins share of net income	10	11	32	40
Manufacturing - All other manufacturers
Equity, royalty and interest income from investees
Cummins share of net income	$ 8	$ 13	$ 40	$ 41

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INCOME TAXES (Details) - USD ($) $ in Millions		3 Months Ended		9 Months Ended
	Oct. 03, 2016	Oct. 02, 2016	Sep. 27, 2015	Oct. 02, 2016	Sep. 27, 2015
Income Tax [Line Items]
Effective tax rate (as a percent)		21.50%	30.10%	25.50%	28.70%
U.S. statutory rate, (as a percent)				35.00%
Income Tax Expense (Benefit), Continuing Operations, Adjustment of Deferred Tax (Asset) Liability					$ 18
Estimate
Income Tax [Line Items]
Effective tax rate (as a percent)	25.50%
Minimum | Estimate
Income Tax [Line Items]
Decrease in Unrecognized Tax Benefits is Reasonably Possible	$ 20
Maximum | Estimate
Income Tax [Line Items]
Decrease in Unrecognized Tax Benefits is Reasonably Possible	$ 26

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MARKETABLE SECURITIES (Details) - USD ($) $ in Millions		3 Months Ended		9 Months Ended
		Oct. 02, 2016	Sep. 27, 2015	Oct. 02, 2016	Sep. 27, 2015	Dec. 31, 2015
Schedule of Available-for-sale Securities
Cost		$ 250		$ 250		$ 101
Gross unrealized gains/(losses)		0		0		(1)
Estimated fair value		250		250		100
Proceeds from sale and maturity of marketable securities		54	$ 73	291	$ 228
Gross realized gains from the sale of marketable securities(1)	[1]	0	$ 0	0	$ 1
Fair value of available-for-sale investments by contractual maturity
1 year or less		237		237
5-10 years		1		1
Total		238		238
Significant other observable inputs (Level 2) | Bank debentures
Schedule of Available-for-sale Securities
Cost		118		118		0
Gross unrealized gains/(losses)		0		0		0
Estimated fair value	[2]	118		118		0
Significant other observable inputs (Level 2) | Debt mutual funds
Schedule of Available-for-sale Securities
Cost		118		118		88
Gross unrealized gains/(losses)		0		0		0
Estimated fair value	[2]	118		118		88
Significant other observable inputs (Level 2) | Equity mutual funds
Schedule of Available-for-sale Securities
Cost		12		12		11
Gross unrealized gains/(losses)		0		0		(1)
Estimated fair value	[2]	12		12		10
Significant other observable inputs (Level 2) | Government debt securities
Schedule of Available-for-sale Securities
Cost		2		2		2
Gross unrealized gains/(losses)		0		0		0
Estimated fair value	[2]	$ 2		$ 2		$ 2
Minimum | Bank debentures
Schedule of Available-for-sale Securities
Maturities of Time Deposits, Description				P3M
Maximum | Bank debentures
Schedule of Available-for-sale Securities
Maturities of Time Deposits, Description				P1Y

[1] Gross realized losses from the sale of available-for-sale securities were immaterial

[2] The fair value of Level 2 securities is estimated using actively quoted prices for similar instruments from brokers and observable inputs where available, including market transactions and third-party pricing services, or net asset values provided to investors. We do not currently have any Level 3 securities and there were no transfers between Level 2 or 3 during the first nine months of 2016 or for the year ended December 31, 2015.

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INVENTORIES (Details) - USD ($) $ in Millions	Oct. 02, 2016	Dec. 31, 2015
Inventory Disclosure [Abstract]
Finished products	$ 1,779	$ 1,796
Work-in-process and raw materials	1,146	1,022
Inventories at FIFO cost	2,925	2,818
Excess of FIFO over LIFO	(105)	(111)
Total inventories	$ 2,820	$ 2,707

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DEBT (Details) - USD ($) $ in Millions		Oct. 02, 2016		Dec. 31, 2015
Short-term Debt [Line Items]
Loans payable		$ 48		$ 24
Commercial paper		273		0
Long-term debt
Unamortized discount		(56)		(57)
Fair value adjustment due to hedge on indebtedness		77		63
Capital leases		85		81
Total long-term debt		1,628		1,615
Current maturities of long-term debt		35		39
Long-term debt		1,593		1,576
Principal payments required on long-term debt
2016		9
2017		28
2018		31
2019		24
2020		7
Fair value
Fair value of total debt	[1]	2,292		1,821
Carrying value of total debt		1,949		1,639
Loans Payable
Short-term Debt [Line Items]
Loans payable	[2]	48		24
Commercial paper
Short-term Debt [Line Items]
Commercial paper	[3]	$ 273		$ 0
Short-term Debt, Weighted Average Interest Rate	[3]	0.4747%	[4]	0.00%
Line of Credit Facility, Maximum Borrowing Capacity		$ 1,750
Senior notes, 3.65%, due 2023
Long-term debt
Unsecured Debt		$ 500		$ 500
Debt instrument interest rate (as a percent)		3.65%
Debentures, 6.75%, due 2027
Long-term debt
Unsecured Debt		$ 58		58
Debt instrument interest rate (as a percent)		6.75%
Debentures, 7.125%, due 2028
Long-term debt
Unsecured Debt		$ 250		250
Debt instrument interest rate (as a percent)		7.125%
Senior notes, 4.875%, due 2043
Long-term debt
Unsecured Debt		$ 500		500
Debt instrument interest rate (as a percent)		4.875%
Debentures, 5.65%, due 2098 (effective interest rate 7.48%)
Long-term debt
Unsecured Debt		$ 165		165
Debt instrument interest rate (as a percent)		5.65%
Effective interest rate (as a percent)		7.48%
Other long-term debt
Long-term debt
Other Long-term Debt		$ 49		$ 55

[1] The fair value of debt is derived from Level 2 inputs.

[2] Loans payable consist primarily of notes payable to various domestic and international financial institutions. It is not practical to aggregate these notes and calculate a quarterly weighted-average interest rate.

[3] In February 2016, the Board of Directors authorized the issuance of up to $1.75 billion of unsecured short-term promissory notes ("commercial paper") pursuant to a commercial paper program. The program will facilitate the private placement of unsecured short-term debt through third party brokers. We intend to use the net proceeds from the commercial paper program for general corporate purposes.

[4] The weighted average interest rate is inclusive of all brokerage fees.

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PRODUCT WARRANTY LIABILITY (Details) - USD ($) $ in Millions	9 Months Ended
	Oct. 02, 2016	Sep. 27, 2015	Dec. 31, 2015
Product Warranty Liability:
Balance, beginning of year	$ 1,404	$ 1,283
Provision for warranties issued	256	326
Deferred revenue on extended warranty contracts sold	179	217
Payments	(291)	(282)
Amortization of deferred revenue on extended warranty contracts	(148)	(132)
Changes in estimates for pre-existing warranties	22	18
Foreign currency translation	(6)	(10)
Balance, end of period	1,416	$ 1,420
Product Warranty Liability
Current portion of deferred revenue	460		$ 403
Total deferred revenue related to extended coverage programs	747
Current portion of deferred revenue
Product Warranty Liability
Current portion of deferred revenue	210
Other liabilities and deferred revenue
Product Warranty Liability
Deferred revenue related to extended coverage programs, Noncurrent portion	537
Long-term portion of warranty liability	$ 336

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COMMITMENTS AND CONTINGENCIES (Details) - USD ($) $ in Millions	3 Months Ended					9 Months Ended
	Oct. 02, 2016		Jul. 03, 2016	Dec. 31, 2015	Sep. 27, 2015	Oct. 02, 2016		Sep. 27, 2015
Guarantee Obligations
Loss Contingency, Loss in Period	$ 99				$ 0	$ 138		$ 0
Maximum
Guarantee Obligations
Forward Contract, Term						2 years
Other Guarantees and Commitments
Guarantee Obligations
Guarantor obligations, maximum potential loss	24					$ 24
Long-term purchase commitment, penalty exposure	108					108
Total commitments under commodity contracts	27					27
Components Supplier
Guarantee Obligations
Long-term purchase commitment, penalty exposure	55					55
Performance bonds and other performance-related guarantees
Guarantee Obligations
Guarantor obligations, maximum potential loss	79					79
Engine
Guarantee Obligations
Loss Contingency, Loss in Period	$ 99	[1]	$ 39	$ 60		$ 138	[1]

[1] See Note 10, "COMMITMENTS AND CONTINGENCIES," for additional information.

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ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (Details) - USD ($) $ in Millions		3 Months Ended				9 Months Ended
		Oct. 02, 2016		Sep. 27, 2015		Oct. 02, 2016	Sep. 27, 2015
Changes in accumulated other comprehensive income (loss) by component:
Balance at the beginning of the period						$ (1,348)
Before tax amount		$ (47)		$ (240)		(353)	$ (285)
Tax benefit (expense)		19		30		26	51
After tax amount		(28)		(210)		(327)	(234)
Net current period other comprehensive income (loss)		(9)		(200)		(287)	(195)
Balance at the end of the period		(1,632)				(1,632)
Reclassified out of accumulated other comprehensive income (loss)
Changes in accumulated other comprehensive income (loss) by component:
Amounts reclassified from accumulated other comprehensive income	[1],[2]	19		10		40	39
Change in pensions and other postretirement defined benefit plans
Changes in accumulated other comprehensive income (loss) by component:
Balance at the beginning of the period		(636)		(641)		(654)	(669)
Before tax amount		5		0		5	(3)
Tax benefit (expense)		(1)		0		(1)	1
After tax amount		4		0		4	(2)
Net current period other comprehensive income (loss)		13		15		31	43
Balance at the end of the period		(623)		(626)		(623)	(626)
Change in pensions and other postretirement defined benefit plans | Reclassified out of accumulated other comprehensive income (loss)
Changes in accumulated other comprehensive income (loss) by component:
Amounts reclassified from accumulated other comprehensive income	[1],[2]	9		15		27	45
Foreign currency translation adjustment
Changes in accumulated other comprehensive income (loss) by component:
Balance at the beginning of the period		(960)		(435)		(696)	(406)
Before tax amount		(51)		(239)		(316)	(290)
Tax benefit (expense)		19		31		20	53
After tax amount		(32)		(208)		(296)	(237)
Net current period other comprehensive income (loss)		(32)		(208)		(296)	(237)
Balance at the end of the period		(992)		(643)		(992)	(643)
Foreign currency translation adjustment | Reclassified out of accumulated other comprehensive income (loss)
Changes in accumulated other comprehensive income (loss) by component:
Amounts reclassified from accumulated other comprehensive income	[1],[2]	0		0
Unrealized gain (loss) on marketable securities
Changes in accumulated other comprehensive income (loss) by component:
Balance at the beginning of the period		(1)		(1)		(2)	(1)
Before tax amount		0		(1)		1
Tax benefit (expense)		0		0		0
After tax amount		0		(1)		1	0
Net current period other comprehensive income (loss)		0		(1)		1	(1)
Balance at the end of the period		(1)		(2)		(1)	(2)
Unrealized gain (loss) on marketable securities | Reclassified out of accumulated other comprehensive income (loss)
Changes in accumulated other comprehensive income (loss) by component:
Amounts reclassified from accumulated other comprehensive income		0	[1],[2]	0	[1],[2]	0	(1)	[1],[2]
Unrealized gain (loss) on derivatives
Changes in accumulated other comprehensive income (loss) by component:
Balance at the beginning of the period		(23)		6		4	(2)
Before tax amount		(4)		13		(40)	23
Tax benefit (expense)		1		(1)		7	(3)
After tax amount		(3)		12		(33)	20
Net current period other comprehensive income (loss)		7		7		(20)	15
Balance at the end of the period		(16)		13		(16)	13
Unrealized gain (loss) on derivatives | Reclassified out of accumulated other comprehensive income (loss)
Changes in accumulated other comprehensive income (loss) by component:
Amounts reclassified from accumulated other comprehensive income	[1],[2]	10		(5)		13	(5)
Total attributable to Cummins Inc.
Changes in accumulated other comprehensive income (loss) by component:
Balance at the beginning of the period		(1,620)		(1,071)		(1,348)	(1,078)
Before tax amount		(50)		(227)		(350)	(270)
Tax benefit (expense)		19		30		26	51
After tax amount		(31)		(197)		(324)	(219)
Net current period other comprehensive income (loss)		(12)		(187)		(284)	(180)
Balance at the end of the period		(1,632)		(1,258)		(1,632)	(1,258)
Total attributable to Cummins Inc. | Reclassified out of accumulated other comprehensive income (loss)
Changes in accumulated other comprehensive income (loss) by component:
Amounts reclassified from accumulated other comprehensive income	[1],[2]	19		10		40	39
Noncontrolling interests
Changes in accumulated other comprehensive income (loss) by component:
Before tax amount		3		(13)		(3)	(15)
After tax amount		3		(13)		(3)	(15)
Net current period other comprehensive income (loss)		$ 3		(13)		(3)	$ (15)
Noncontrolling interests | Reclassified out of accumulated other comprehensive income (loss)
Changes in accumulated other comprehensive income (loss) by component:
Amounts reclassified from accumulated other comprehensive income	[1],[2]			$ 0		$ 0

[1] Amounts are net of tax.

[2] See reclassifications out of accumulated other comprehensive (loss) income disclosure below for further details.

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ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (Details 2) - USD ($) $ in Millions		3 Months Ended				9 Months Ended
		Oct. 02, 2016		Sep. 27, 2015		Oct. 02, 2016	Sep. 27, 2015
Reclassified out of accumulated other comprehensive income (loss) and related tax effects
Tax effect		$ 82		$ 169		$ 362	$ 521
NET SALES	[1]	4,187		4,620		13,006	14,344
Other income, net		8		11		34	12
Total Reclassifications for the Period		(300)		(392)		(1,060)	(1,292)
Reclassified out of accumulated other comprehensive income (loss)
Reclassified out of accumulated other comprehensive income (loss) and related tax effects
Reclassification from Accumulated Other Comprehensive Income, Current Period, Net of Tax	[2],[3]	(19)		(10)		(40)	(39)
Total Reclassifications for the Period		19		10		40	39
Change in pensions and other postretirement defined benefit plans | Reclassified out of accumulated other comprehensive income (loss)
Reclassified out of accumulated other comprehensive income (loss) and related tax effects
Recognized actuarial loss	[4]	14		22		40	65
Tax effect		(5)		(7)		(13)	(20)
Reclassification from Accumulated Other Comprehensive Income, Current Period, Net of Tax	[2],[3]	(9)		(15)		(27)	(45)
Realized (gain) on marketable securities | Reclassified out of accumulated other comprehensive income (loss)
Reclassified out of accumulated other comprehensive income (loss) and related tax effects
Tax effect		0		0
Reclassification from Accumulated Other Comprehensive Income, Current Period, Net of Tax		0	[2],[3]	0	[2],[3]	0	1	[2],[3]
Other income, net		0		0		0	1
Realized loss (gain) on derivatives | Reclassified out of accumulated other comprehensive income (loss)
Reclassified out of accumulated other comprehensive income (loss) and related tax effects
Tax effect		(2)		1		(4)	1
Reclassification from Accumulated Other Comprehensive Income, Current Period, Net of Tax	[2],[3]	(10)		5		(13)	5
Realized loss (gain) on derivatives | Foreign currency forward contracts | Reclassified out of accumulated other comprehensive income (loss)
Reclassified out of accumulated other comprehensive income (loss) and related tax effects
NET SALES		$ (12)		$ 6		$ (17)	$ 6

[1] Includes sales to nonconsolidated equity investees of $275 million and $793 million and $274 million and $956 million for the three and nine months ended October 2, 2016 and September 27, 2015, respectively.

[2] Amounts are net of tax.

[3] See reclassifications out of accumulated other comprehensive (loss) income disclosure below for further details.

[4] These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 3, ''PENSION AND OTHER POSTRETIREMENT BENEFITS'').

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RESTRUCTURING ACTIONS AND OTHER CHARGES RESTRUCTURING ACTIONS AND OTHER CHARGES (Details) $ in Millions		3 Months Ended	9 Months Ended		12 Months Ended
		Dec. 31, 2015 USD ($) employee	Oct. 02, 2016 USD ($)	Sep. 27, 2015 USD ($)	Dec. 31, 2015 USD ($)
Restructuring Charges [Abstract]
Restructuring and Related Cost, Expected Number of Positions Eliminated | employee		1,900
Restructuring Charges		$ 90			$ 90	[1]
Severance Costs		86
Other Restructuring Costs		4
Restructuring Reserve [Roll Forward]
Restructuring Reserve, beginning of period			$ 60
Payments for Restructuring			53	$ 0
Restructuring Reserve, end of period		$ 60	$ 7		60
Voluntary Retirement, Number of employees
Restructuring Charges [Abstract]
Restructuring and Related Cost, Number of Positions Eliminated | employee		370
Power Systems
Restructuring Charges [Abstract]
Restructuring Charges	[1]				26
Distribution
Restructuring Charges [Abstract]
Restructuring Charges	[1]				23
Engine
Restructuring Charges [Abstract]
Restructuring Charges	[1]				17
Components
Restructuring Charges [Abstract]
Restructuring Charges	[1]				13
Non-segment items
Restructuring Charges [Abstract]
Restructuring Charges	[1]				$ 11

[1] Restructuring actions and other charges by segment were re-allocated in conjunction with our segment realignment. See Note 13, "OPERATING SEGMENTS," for additional information.

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OPERATING SEGMENTS (Details) - USD ($) $ in Millions		3 Months Ended					9 Months Ended
		Oct. 02, 2016		Jul. 03, 2016	Dec. 31, 2015	Sep. 27, 2015	Oct. 02, 2016		Sep. 27, 2015
Operating results:
Total sales	[1]	$ 4,187				$ 4,620	$ 13,006		$ 14,344
Depreciation and amortization	[2]	131				128	389		381
Research, development and engineering expenses		157				197	478		558
Equity, royalty and interest income from investees		74				78	234		240
Loss Contingency, Loss in Period		99				0	138		0
Interest income		6				9	18		20
Segment EBIT		398				577	1,473		1,860
Less: Interest expense		16				16	51		47
INCOME BEFORE INCOME TAXES		382				561	1,422		1,813
Amortization of Debt Discount (Premium)							2		2
Engine
Operating results:
Total sales		1,859				2,102	5,837		6,572
Depreciation and amortization	[2]	42				47	121		140
Research, development and engineering expenses		56				73	166		195
Equity, royalty and interest income from investees		38				33	120		107
Loss Contingency, Loss in Period		99	[3]	$ 39	$ 60		138	[3]
Interest income		3				6	8		10
Segment EBIT		89				217	492		695
Distribution
Operating results:
Total sales		1,504				1,551	4,511		4,522
Depreciation and amortization	[2]	28				26	86		78
Research, development and engineering expenses		3				2	10		8
Equity, royalty and interest income from investees		19				19	56		60
Interest income		1				1	3		3
Segment EBIT		96				123	270		324
Components
Operating results:
Total sales		1,143				1,240	3,659		3,936
Depreciation and amortization	[2]	32				28	95		82
Research, development and engineering expenses		54				65	161		183
Equity, royalty and interest income from investees		9				9	29		26
Interest income		1				1	3		3
Segment EBIT		148				156	501		574
Power Systems
Operating results:
Total sales		856				982	2,585		3,081
Depreciation and amortization	[2]	29				27	87		81
Research, development and engineering expenses		44				57	141		172
Equity, royalty and interest income from investees		8				17	29		47
Interest income		1				1	4		4
Segment EBIT		59				74	195		302
Non-segment items
Operating results:
Total sales	[4]	(1,175)				(1,255)	(3,586)		(3,767)
Segment EBIT	[4]	6				7	15		(35)
External Sales
Operating results:
Total sales		4,187				4,620	13,006		14,344
External Sales | Engine
Operating results:
Total sales		1,357				1,627	4,350		5,150
External Sales | Distribution
Operating results:
Total sales		1,497				1,543	4,493		4,499
External Sales | Components
Operating results:
Total sales		824				891	2,654		2,839
External Sales | Power Systems
Operating results:
Total sales		509				559	1,509		1,856
Intersegment sales | Engine
Operating results:
Total sales		502				475	1,487		1,422
Intersegment sales | Distribution
Operating results:
Total sales		7				8	18		23
Intersegment sales | Components
Operating results:
Total sales		319				349	1,005		1,097
Intersegment sales | Power Systems
Operating results:
Total sales		347				423	1,076		1,225
Intersegment sales | Non-segment items
Operating results:
Total sales	[4]	$ (1,175)				$ (1,255)	$ (3,586)		$ (3,767)

[1] Includes sales to nonconsolidated equity investees of $275 million and $793 million and $274 million and $956 million for the three and nine months ended October 2, 2016 and September 27, 2015, respectively.

[2] 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."

[3] See Note 10, "COMMITMENTS AND CONTINGENCIES," for additional information.

[4] Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three and nine months ended October 2, 2016 and September 27, 2015.

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SUBSEQUENT EVENT SUBSEQUENT EVENTS (Details) - USD ($) $ in Millions		9 Months Ended
	Oct. 03, 2016	Oct. 02, 2016	Sep. 27, 2015
Subsequent Event [Line Items]
Business Combination, Step Acquisition, Equity Interest in Acquiree, Remeasurement Gain		$ 0	$ 17
Cummins Pacific LLC
Subsequent Event [Line Items]
Business Acquisition, Percentage of Voting Interests Acquired	50.00%
Business Combination, Consideration Transferred	$ 97
Payments to Acquire Businesses, Gross	17
Payments to Acquire Businesses Liabilities Paid	66
Business Combination Purchase Price Distributed in Future Quarters	14
Business Combination, Step Acquisition, Equity Interest in Acquiree, Remeasurement Gain	$ 13