CMI
$161.33
Cummins
($7.69)
(4.55%)
Earnings Details
4th Quarter December 2017
Tuesday, February 6, 2018 7:30:00 AM
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Summary

Cummins Beats

Cummins (CMI) reported 4th Quarter December 2017 earnings of $3.03 per share on revenue of $5.5 billion. The consensus earnings estimate was $2.65 per share on revenue of $5.2 billion. The Earnings Whisper number was $2.68 per share. Revenue grew 21.6% on a year-over-year basis.

The company said it expects 2018 revenue of $21.25 billion to $22.06 billion. The current consensus estimate is revenue of $21.47 billion for the year ending December 31, 2018.

Cummins Inc designs, manufactures, distributes and services diesel and natural gas engines, electric power generation systems and engine-related component products.

Results
Reported Earnings
$3.03
Earnings Whisper
$2.68
Consensus Estimate
$2.65
Reported Revenue
$5.48 Bil
Revenue Estimate
$5.20 Bil
Growth
Earnings Growth
Revenue Growth
Power Rating
Grade
Earnings Release

Cummins Announces Fourth Quarter and Full Year 2017 Results

GAAP(1 )Net Loss of $274 million, Diluted EPS Loss of $1.65

--Full year revenues of $20.4 billion, EBIT of 12.0 percent of sales

--GAAP Net Income of $999 million, Diluted EPS of $5.97

Fourth quarter and full year Diluted EPS negatively impacted by $4.68 and $4.65 as a result of charges related to the recently enacted U.S. Tax Cuts and Jobs Act

The company expects full year 2018 revenues to be up 4 to 8 percent, EBITDA expected to be in the range of 15.8 to 16.2 percent

Cummins Inc. (CMI) today reported results for the fourth quarter of 2017.

Fourth quarter revenues of $5.5 billion increased 22 percent from the same quarter in 2016. Strong demand for trucks, construction and mining equipment drove the majority of the revenue increase. Sales in North America and international markets both increased by 22 percent.

Earnings before interest and taxes (EBIT) in the fourth quarter were $620 million, or 11.3 percent of sales, up from $526 million or 11.7 percent of sales a year ago. EBIT was negatively impacted by $39 million as a result of charges incurred by unconsolidated joint ventures related to U.S. tax reform. Excluding the impact of tax reform, EBIT for the fourth quarter of 2017 was $659 million or 12.0 percent of sales.

Net income attributable to Cummins in the fourth quarter was a net loss of $274 million (a loss of $1.65 per diluted share), compared to net income of $378 million ($2.25 per diluted share). Fourth quarter net income included $777 million in one-time charges related to tax reform. Excluding the tax reform impact, net income attributable to Cummins in the fourth quarter was $503 million ($3.03 per diluted share), reflecting a 19.5 percent tax rate.

Revenues for the full year 2017 were $20.4 billion, 17 percent higher than 2016. Revenues in North America increased 15 percent and international sales increased 19 percent.

EBIT for the year was $2.4 billion or 12.0 percent of sales, or 12.2 percent of sales excluding charges related to tax reform. This compares to $2.0 billion or 11.4 percent of sales in 2016.

Net income attributable to Cummins for the full year was $999 million ($5.97 per diluted share), compared to $1.4 billion ($8.23 per diluted share) in 2016. Excluding charges totaling $777 million in connection with tax reform, full year net income attributable to Cummins was $1.8 billion ($10.62 per diluted share), with a full year tax rate of 24.5 percent.

"The Company delivered strong growth, solid profitability and record operating cash flow in 2017," said Chairman and CEO Tom Linebarger. "We expect demand to remain strong in many of our core markets in 2018 and profitability to improve as a result of higher sales and continued execution of our cost reduction initiatives. The Company again plans to return at least 50 percent of Operating Cash Flow to shareholders in 2018."

Based on the current forecast, Cummins expects full year 2018 revenues to be up 4 to 8 percent, and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) to be in the range of 15.8 to 16.2 percent of sales. EBITDA for the full year 2017 was 15.0 percent of sales, excluding the impact of US tax reform.

2017 Highlights:

The Company returned $1.2 billion or 51 percent of Operating Cash Flow to shareholders in the form of dividends and share repurchases

Cummins and Eaton (ETN) partnered to form the Eaton Cummins Automated Transmission Technologies joint venture which will capitalize on the secular shift to more automated transmissions in commercial vehicle markets

The company announced a new electrified power partnership with GILLIG LLC to integrate and optimize new battery electric technology offered by Cummins that will soon power GILLIG zero-emissions transit buses

Cummins was named to Ethisphere’s 2017 list of World’s Most Ethical Companies for a 10th consecutive year by the Ethisphere Institute

DiversityInc named Cummins one of the Top 50 Companies for Diversity for the eleventh consecutive year. Cummins ranked No. 21 on the 2017 annual list, which included more than 1,000 participating companies

Cummins was one of a select number of companies named to the North American Index of the Dow Jones Sustainability Indices, a leading independent organization measuring corporate sustainability in the world

(1) Generally Accepted Accounting Principles

Fourth quarter 2017 detail

Engine Segment

-- Sales - $2.3 billion, up 16 percent

Segment EBIT - $224 million, or 9.8 percent of sales, compared to $194 million or 9.9 percent of sales

Segment EBIT was negatively impacted by $23 million as a result of charges recorded by unconsolidated joint ventures related to recent U.S. tax reform

On-highway revenues increased 14 percent, and off-highway revenues increased 27 percent primarily due to increased global demand in truck and constructions markets

Distribution Segment

-- Sales - $1.9 billion, up 16 percent

Segment EBIT - $97 million, or 5.0 percent of sales, compared to $122 million or 7.3 percent of sales

Segment EBIT was negatively impacted by $4 million as a result of charges recorded by unconsolidated joint ventures related to recent U.S. tax reform

Revenues in North America increased by 21 percent and in international markets by 7 percent

Components Segment

-- Sales - $1.6 billion, up 32 percent

Segment EBIT - $168 million, or 10.8 percent of sales, compared to $140 million or 11.9 percent of sales

Segment EBIT was negatively impacted by $12 million as result of charges recorded by unconsolidated joint ventures related to recent U.S. tax reform

The Eaton Cummins Automated Transmission joint venture recorded sales of $95 million and an EBIT loss of $14 million in the fourth quarter

Revenues in North America increased by 35 percent, and international sales grew by 30 percent due to higher commercial truck production in North America and China as well as additional content in India with the introduction of Bharat Stage IV in 2017

Power Systems Segment

-- Sales - $1.1 billion, up 18 percent

Segment EBIT - $95 million, or 8.6 percent of sales, compared to $68 million, or 7.3 percent of sales

Increased demand in mining, oil and gas and power generation markets drove the growth in sales

About Cummins

Cummins Inc., a global power leader, is a corporation of complementary business units that design, manufacture, distribute and service diesel and natural gas engines and related technologies, including fuel systems, controls, air handling, filtration, emission solutions and electrical power generation systems. Headquartered in Columbus, Indiana, (USA) Cummins currently employs approximately 58,600 people worldwide and serves customers in approximately 190 countries and territories through a network of approximately 500 company-owned and independent distributor locations and approximately 7,500 dealer locations. Press releases can be found on the Web at www.cummins.com. Follow Cummins on Twitter at www.twittter.com/cummins and on YouTube at www.youtube.com/cumminsinc.

Forward-looking disclosure statement

Information provided in this release that is not purely historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our forecasts, guidance, preliminary results, expectations, hopes, beliefs and intentions on strategies regarding the future. These forward looking statements include, without limitation, statements relating to our plans and expectations for our revenues for the full year of 2018. Our actual future results could differ materially from those projected in such forward-looking statements because of a number of factors, including, but not limited to: the adoption and implementation of global emission standards; the price and availability of energy; the pace of infrastructure development; increasing global competition among our customers; general economic, business and financing conditions; governmental action; changes in our customers’ business strategies; competitor pricing activity; expense volatility; labor relations; and other risks detailed from time to time in our Securities and Exchange Commission filings, including particularly in the Risk Factors section of our 2016 Annual Report on Form 10-K. 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 press release and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. More detailed information about factors that may affect our performance may be found in our filings with the Securities and Exchange Commission, which are available at http://www.sec.gov or at http://www.cummins.com in the Investor Relations section of our website.

Presentation of Non-GAAP Financial Information

EBIT and EBITDA are non-GAAP measures used in this release, and are defined and reconciled to what management believes to be the most comparable GAAP measures in a schedule attached to this release. Cummins presents this information as it believes it is useful to understanding the Company’s operating performance, and because EBIT and EBITDA are measures used internally to assess the performance of the operating units.

Webcast information

Cummins management will host a teleconference to discuss these results today at 10 a.m. EST. This teleconference will be webcast and available on the Investor Relations section of the Cummins website at www.cummins.com. Participants wishing to view the visuals available with the audio are encouraged to sign-in a few minutes prior to the start of the teleconference.

CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (a)
Three months ended
In millions, except per share amounts
December 31,
December 31,
2017
2016
NET SALES
$
5,476
$
4,503
Cost of sales
4,102
3,383
GROSS MARGIN
1,374
1,120
OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses
633
519
Research, development and engineering expenses
207
158
Equity, royalty and interest income from investees
56
67
Loss contingency
5
--
Other operating income (expense), net
10
(3 )
OPERATING INCOME
595
507
Interest income
7
5
Interest expense
24
18
Other income, net
18
14
INCOME BEFORE INCOME TAXES
596
508
Income tax expense
905
112
CONSOLIDATED NET (LOSS) INCOME
(309 )
396
Less: Net (loss) income attributable to noncontrolling interests
(35 )
18
NET (LOSS) INCOME ATTRIBUTABLE TO CUMMINS INC.
$
(274 )
$
378
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
Basic
$
(1.66 )
$
2.26
Diluted
$
(1.65 )
$
2.25
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic
165.4
167.6
Diluted
166.2
168.1
CASH DIVIDENDS DECLARED PER COMMON SHARE
$
1.08
$
1.025
(a)
Prepared on an unaudited basis in accordance with accounting
principles generally accepted in the United States of America.
Years ended December 31,
In millions, except per share amounts
2017
2016
NET SALES
$ 20,428
$ 17,509
Cost of sales
15,338
13,057
GROSS MARGIN
5,090
4,452
OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses
2,390
2,046
Research, development and engineering expenses
752
636
Equity, royalty and interest income from investees
357
301
Loss contingency
5
138
Other operating income (expense), net
65
(5 )
OPERATING INCOME
2,365
1,928
Interest income
18
23
Interest expense
81
69
Other income, net
63
48
INCOME BEFORE INCOME TAXES
2,365
1,930
Income tax expense
1,371
474
CONSOLIDATED NET INCOME
994
1,456
Less: Net (loss) income attributable to noncontrolling interests
(5 )
62
NET INCOME ATTRIBUTABLE TO CUMMINS INC.
$
999
$
1,394
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
Basic
$
5.99
$
8.25
Diluted
$
5.97
$
8.23
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic
166.6
169.0
Diluted
167.3
169.3
CASH DIVIDENDS DECLARED PER COMMON SHARE
$
4.21
$
4.00
(a)
Prepared on an unaudited basis in accordance with accounting
principles generally accepted in the United States of America.
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (a)
In millions, except par value
December 31,
December 31,
2017
2016
ASSETS
Current assets
Cash and cash equivalents
$
1,369
$
1,120
Marketable securities
198
260
Total cash, cash equivalents and marketable securities
1,567
1,380
Accounts and notes receivable, net
3,618
3,025
Inventories
3,166
2,675
Prepaid expenses and other current assets
577
627
Total current assets
8,928
7,707
Long-term assets
Property, plant and equipment, net
3,927
3,800
Investments and advances related to equity method investees
1,156
946
Goodwill
1,082
480
Other intangible assets, net
973
332
Pension assets
1,043
731
Other assets
966
1,015
Total assets
$ 18,075
$ 15,011
LIABILITIES
Current liabilities
Accounts payable (principally trade)
$
2,579
$
1,854
Loans payable
57
41
Commercial paper
298
212
Accrued compensation, benefits and retirement costs
811
412
Current portion of accrued product warranty
454
333
Current portion of deferred revenue
500
468
Other accrued expenses
915
970
Current maturities of long-term debt
63
35
Total current liabilities
5,677
4,325
Long-term liabilities
Long-term debt
1,588
1,568
Postretirement benefits other than pensions
289
329
Pensions
330
326
Other liabilities and deferred revenue
2,027
1,289
Total liabilities
$
9,911
$
7,837
EQUITY
Cummins Inc. shareholders’ equity
Common stock, $2.50 par value, 500 shares authorized, 222.4 and
$
2,210
$
2,153
222.4 shares issued
Retained earnings
11,464
11,040
Treasury stock, at cost, 56.7 and 54.2 shares
(4,905 )
(4,489 )
Common stock held by employee benefits trust, at cost, 0.5 and 0.7
(7 )
(8 )
shares
Accumulated other comprehensive loss
(1,503 )
(1,821 )
Total Cummins Inc. shareholders’ equity
7,259
6,875
Noncontrolling interests
905
299
Total equity
$
8,164
$
7,174
Total liabilities and equity
$ 18,075
$ 15,011
(a)
Prepared on an unaudited basis in accordance with accounting
principles generally accepted in the United States of America.
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (a)
Years ended December 31,
In millions
2017
2016
NET CASH PROVIDED BY OPERATING ACTIVITIES
$
2,277
$
1,939
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures
(506 )
(531 )
Investments in internal use software
(81 )
(63 )
Proceeds from disposals of property, plant and equipment
110
14
Investments in and advances to equity investees
(66 )
(41 )
Acquisitions of businesses, net of cash acquired
(662 )
(94 )
Investments in marketable securities--acquisitions
(194 )
(478 )
Investments in marketable securities--liquidations
266
306
Proceeds from sale of equity investees
--
60
Cash flows from derivatives not designated as hedges
76
(102 )
Other, net
5
12
Net cash used in investing activities
(1,052 )
(917 )
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings
6
111
Net borrowings of commercial paper
86
212
Payments on borrowings and capital lease obligations
(60 )
(163 )
Net borrowings under short-term credit agreements
12
19
Distributions to noncontrolling interests
(29 )
(65 )
Dividend payments on common stock
(701 )
(676 )
Repurchases of common stock
(451 )
(778 )
Acquisitions of noncontrolling interests
--
(98 )
Other, net
63
25
Net cash used in financing activities
(1,074 )
(1,413 )
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
98
(200 )
Net increase (decrease) in cash and cash equivalents
249
(591 )
Cash and cash equivalents at beginning of year
1,120
1,711
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
1,369
$
1,120
(a)
Prepared on an unaudited basis in accordance with accounting
principles generally accepted in the United States of America.
CUMMINS INC. AND SUBSIDIARIES
SEGMENT INFORMATION
(Unaudited)
In millions
Engine
Distribution
Components (1)
Power
Total
Intersegment
Total
Systems
Segment
Eliminations (2)
Three months ended December 31, 2017
External sales
$
1,710
$
1,928
$
1,180
$
658
$
5,476
$ --
$
5,476
Intersegment sales
577
10
378
445
1,410
(1,410 )
--
-
Total sales
2,287
1,938
1,558
1,103
6,886
(1,410 )
5,476
Depreciation and amortization (3)
47
26
46
30
149
--
149
Research, development and engineering expenses
79
5
70
53
207
--
207
Equity, royalty and interest income from investees (4)
33
9
--
14
56
--
56
Interest income
2
2
2
1
7
--
7
EBIT
224
97
168
95
584
36
620
EBIT as a percentage of total sales
9.8
%
5.0 %
10.8 %
8.6 %
8.5 %
11.3 %
Three months ended December 31, 2016
External sales
$
1,424
$
1,664
$
860
$
555
$
4,503
$ --
$
4,503
Intersegment sales
543
6
317
377
1,243
(1,243 )
--
Total sales
1,967
1,670
1,177
932
5,746
(1,243 )
4,503
Depreciation and amortization (3)
41
31
38
28
138
--
138
Research, development and engineering expenses
60
3
47
48
158
--
158
Equity, royalty and interest income from investees
28
14
12
13
67
--
67
Interest income
2
1
1
1
5
--
5
EBIT
194
122
(5)
140
68
(6)
524
2
526
EBIT as a percentage of total sales
9.9
%
7.3 %
11.9 %
7.3 %
9.1 %
11.7 %
(1)
The 2017 disclosures include Eaton Cummins Automated Transmission
Technologies joint venture results consolidated during the third
quarter of 2017.
(2)
Includes intersegment sales, intersegment profit in inventory
eliminations and unallocated corporate expenses. There were no
significant unallocated corporate expenses for the three months
ended December 31, 2017 and 2016.
(3)
Depreciation and amortization as shown on a segment basis excludes
the amortization of debt discount and deferred costs included in the Condensed
Consolidated Statements of Income as "Interest expense."
(4)
U.S. tax legislation passed in December 2017 decreased our equity
earnings at certain equity investees, negatively impacting our
equity, royalty and interest income from investees by $23 million,
$4 million and $12 million for the Engine, Distribution and
Components segments, respectively.
(5)
Distribution segment EBIT included a gain of $15 million on the fair
value adjustment resulting from the acquisition of the controlling
interest in a North American distributor in the fourth quarter of
2016.
(6)
In the fourth quarter of 2016, we sold our remaining 49 percent
interest in Cummins Olayan Energy for $61 million and recognized a
gain of $17 million.
In millions
Engine
Distribution
Components (1)
Power
Total
Intersegment
Total
Systems
Segment
Eliminations (2)
Year ended December 31, 2017
External sales
$
6,661
$
7,029
$
4,363
$
2,375
$
20,428
$ --
$
20,428
Intersegment sales
2,292
29
1,526
1,683
5,530
(5,530 )
--
Total sales
8,953
7,058
5,889
4,058
25,958
(5,530 )
20,428
Depreciation and amortization (3)
184
116
163
117
580
--
580
Research, development and engineering expenses
279
19
240
214
752
--
752
Equity, royalty and interest income from investees (4)
219
44
40
54
357
--
357
Interest income
6
6
3
3
18
--
18
EBIT
959
384
754
294
2,391
55
2,446
EBIT as a percentage of total sales
10.7
%
5.4 %
12.8 %
7.2 %
9.2
%
12.0
Year ended December 31, 2016
External sales
$
5,774
$
6,157
$
3,514
$
2,064
$
17,509
$ --
$
17,509
Intersegment sales
2,030
24
1,322
1,453
4,829
(4,829 )
--
Total sales
7,804
6,181
4,836
3,517
22,338
(4,829 )
17,509
Depreciation and amortization (3)
163
116
133
115
527
--
527
Research, development and engineering expenses
226
13
208
189
636
--
636
Equity, royalty and interest income from investees
148
70
41
42
301
--
301
Loss contingency
138
--
--
--
138
--
138
Interest income
10
4
4
5
23
--
23
EBIT
686
392
(5)
641
263
(6)
1,982
17
1,999
EBIT as a percentage of total sales
8.8
%
6.3 %
13.3 %
7.5 %
8.9
%
11.4
(1)
The 2017 disclosures include Eaton Cummins Automated Transmission
Technologies joint venture results consolidated during the third
quarter of 2017.
(2)
Includes intersegment sales, intersegment profit in inventory
eliminations and unallocated corporate expenses. There were no
significant unallocated corporate expenses for the years ended
December 31, 2017 and 2016.
(3)
Depreciation and amortization as shown on a segment basis excludes
the amortization of debt discount and deferred costs included in the Condensed
Consolidated Statements of Income as "Interest expense." The
amortization of debt discount and deferred costs was $3 million for
both years ended December 31, 2017 and December 31, 2016.
(4)
U.S. tax legislation passed in December 2017 decreased our equity
earnings at certain equity investees, negatively impacting our
equity, royalty and interest income from investees by $23 million,
$4 million and $12 million for the Engine, Distribution and
Component segments, respectively.
(5)
Distribution segment EBIT included a gain of $15 million on the fair
value adjustment resulting from the acquisition of the controlling
interests in a North American distributor in the fourth quarter of
2016.
(6)
In the fourth quarter of 2016, we sold our remaining 49 percent
interest in Cummins Olayan Energy for $61 million and recognized a
gain of $17 million.

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

Three months ended
Years ended
In millions
December 31,
December 31,
December 31,
December 31,
2017
2016
2017
2016
Total EBIT
$
620
$
526
$ 2,446
$
1,999
Less: Interest expense
24
18
81
69
Income before income taxes
$
596
$
508
$ 2,365
$
1,930

CUMMINS INC. AND SUBSIDIARIES SELECT FOOTNOTE DATA (Unaudited)

BASIS OF PRESENTATION

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

EQUITY, ROYALTY AND INTEREST INCOME FROM INVESTEES

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

Three months ended
Years ended
In millions
December 31,
December 31,
December 31,
December 31,
2017
2016
2017
2016
Distribution entities
Komatsu Cummins Chile, Ltda.
$
7
$
8
$
30
$
34
North American distributors
--
3
--
21
All other distributors
--
(2 )
(1 )
--
Manufacturing entities
Dongfeng Cummins Engine Company, Ltd.
17
14
73
46
Beijing Foton Cummins Engine Co., Ltd.
15
(7 )
94
52
Chongqing Cummins Engine Company, Ltd.
11
10
41
38
Dongfeng Cummins Emission Solutions Co., Ltd.
3
4
13
9
Shanghai Fleetguard Filter Co., Ltd.
2
3
12
10
Cummins Westport, Inc.
--
(1)
6
9
(1)
11
All other manufacturers
(12 )
(1)
16
37
(1)
39
Cummins share of net income
43
55
308
260
Royalty and interest income
13
12
49
41
Equity, royalty and interest income from investees
$
56
$
67
$
357
$
301
____________________________________
(1)
U.S. tax legislation passed in December 2017 decreased our equity
earnings at certain equity investees, including a $7 million
unfavorable impact to Cummins Westport, Inc. due to the
remeasurement of deferred taxes and a $32 million unfavorable impact
to "All other manufacturers" due to withholding tax adjustments on
foreign earnings.

INCOME TAXES

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (Tax Legislation). Among other things, the Tax Legislation changed the U.S. statutory rate to 21 percent effective January 1, 2018. The impact of the Tax Legislation resulted in a net incremental charge to our Condensed Consolidated Statements of Income of $777 million. The components of the 2017 charge were as follows:

In millions
Impact of Tax
Legislation
Increase in income tax expense
$
781
Decrease in equity, royalty and other income from investees
39
Increase in income attributable to noncontrolling interests
(43 )
Net impact of Tax Legislation
$
777

The $781 million increase in tax expense is composed of three elements - the remeasurement of deferred taxes, a one-time transitional tax on unrepatriated earnings and withholding taxes on foreign earnings.

We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21 percent. We are still analyzing certain aspects of the Tax Legislation and refining our calculations, which could potentially affect the measurement of these balances. The provisional amount related to the remeasurement of our deferred tax balance is an incremental tax expense of $152 million.

The one-time transition tax is based on our total post-1986 unrepatriated earnings and profits not previously subject to U.S. income tax. The recorded provisional amount for our one-time transition tax is a tax expense of $298 million.

Withholding tax is an additional cost associated with the distribution of earnings from some jurisdictions. As a result of the Tax Legislation, we reconsidered previous assertions regarding earnings that were considered permanently reinvested, which requires us to record withholding taxes on earnings likely to be distributed in the foreseeable future. The assertion as to which earnings are permanently reinvested for purposes of calculating withholding tax is provisional as we refine the underlying calculations of the amount of earnings subject to the tax and the rate at which it will be taxed. The recorded provisional amount for the withholding tax resulted in an incremental tax expense of $331 million.

Our unconsolidated equity investees were also unfavorably impacted by the new tax legislation by $39 million, due to $32 million of withholding taxes on foreign earnings and $7 million due to the remeasurement of deferred taxes. In addition, our noncontrolling interests included a $43 million credit related to the withholding taxes on foreign earnings.

Our income tax rates are generally less than the 35 percent U.S. statutory income tax rate, primarily because of lower taxes on foreign earnings and research tax credits. Our effective tax rate for 2017 was 151.8 percent and 58.0 percent for the fourth quarter and full year, respectively, compared to 22.0 percent and 24.6 percent for the fourth quarter and full year in 2016. Our 2017 effective tax rate excluding the Tax Legislation was 19.5 percent and 24.5 percent for the fourth quarter and full year, respectively.

We expect our 2018 effective tax rate to be 23 percent, excluding any discrete items (including adjustments to provisional estimates) that may arise.

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

Condensed Consolidated Statements of Income excluding impacts of Tax Legislation

Cummins Inc. and Subsidiaries
Condensed Consolidated Statements of Income
Three months ended
December 31, 2017
In millions, except per share amounts
As
Excluding
Adjusted
Reported
Tax
Excluding
Under
Legislation
Tax Impact
GAAP
Impact
NET SALES
$
5,476
$
--
$
5,476
Cost of sales
4,102
--
4,102
GROSS MARGIN
1,374
--
1,374
OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses
633
--
633
Research, development and engineering expenses
207
--
207
Equity, royalty and interest income from investees
56
39
95
Loss contingency
5
--
5
Other operating income (expense), net
10
--
10
OPERATING INCOME
595
39
634
Interest income
7
--
7
Interest expense
24
--
24
Other income, net
18
--
18
INCOME BEFORE INCOME TAXES
596
39
635
Income tax expense
905
(781 )
124
CONSOLIDATED NET (LOSS) INCOME
(309 )
820
511
Less: Net (loss) income attributable to noncontrolling interests
(35 )
43
8
NET (LOSS) INCOME ATTRIBUTABLE TO CUMMINS INC.
$
(274 )
$
777
$
503
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
Basic
$
(1.66 )
$
4.70
$
3.04
Diluted
$
(1.65 )
$
4.68
$
3.03
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic
165.4
--
165.4
Diluted
166.2
--
166.2
CASH DIVIDENDS DECLARED PER COMMON SHARE
$
1.08
$
--
$
1.08
Cummins Inc. and Subsidiaries
Condensed Consolidated Statements of Income
Year ended December 31,
2017
In millions, except per share amounts
As
Excluding
Adjusted
Reported
Tax
Excluding
Under
Legislation
Tax Impact
GAAP
Impact
NET SALES
$
20,428
$
--
$
20,428
Cost of sales
15,338
--
15,338
GROSS MARGIN
5,090
--
5,090
OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses
2,390
--
2,390
Research, development and engineering expenses
752
--
752
Equity, royalty and interest income from investees
357
39
396
Loss contingency
5
--
5
Other operating income (expense), net
65
--
65
OPERATING INCOME
2,365
39
2,404
Interest income
18
--
18
Interest expense
81
--
81
Other income, net
63
--
63
INCOME BEFORE INCOME TAXES
2,365
39
2,404
Income tax expense
1,371
(781 )
590
CONSOLIDATED NET INCOME
994
820
1,814
Less: Net (loss) income attributable to noncontrolling interests
(5 )
43
38
NET INCOME ATTRIBUTABLE TO CUMMINS INC.
$
999
$
777
$
1,776
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
Basic
$
5.99
$
4.66
$
10.65
Diluted
$
5.97
$
4.65
$
10.62
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic
166.6
--
166.6
Diluted
167.3
--
167.3
CASH DIVIDENDS DECLARED PER COMMON SHARE
$
4.21
$
--
$
4.21

Reconciliation of Non GAAP measures - Earnings before interest, income taxes and noncontrolling interests

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

Three months ended
Years ended
In millions
December 31,
December 31,
December 31,
December 31,
2017
2016
2017
2016
Net (loss) income attributable to Cummins Inc.
$ (274 )
$
378
$
999
$
1,394
Net (loss) income attributable to Cummins Inc. as a percentage of
(5.0 )%
8.4 %
4.9 %
8.0 %
net sales
Add
Net (loss) income attributable to noncontrolling interests
(35 )
18
(5 )
62
Consolidated net (loss) income
(309 )
396
994
1,456
Add
Interest expense
24
18
81
69
Income tax expense
905
112
1,371
474
EBIT
620
526
2,446
1,999
EBIT as a percentage of net sales
11.3 %
11.7 %
12.0 %
11.4 %
Impact of tax legislation on equity investees
39
--
39
--
EBIT, excluding impact of tax legislation on equity investees
$
659
$
526
$ 2,485
$
1,999
EBIT, excluding impact of tax legislation on equity investees, as
12.0 %
11.7 %
12.2 %
11.4 %
a percentage of net sales

Reconciliation of Non GAAP measures - Earnings before interest, income taxes, noncontrolling interests, depreciation and amortization

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

Three months ended
Years ended
In millions
December 31,
December 31,
December 31,
December 31,
2017
2016
2017
2016
Net (loss) income attributable to Cummins Inc.
$ (274 )
$
378
$
999
$
1,394
Net (loss) income attributable to Cummins Inc. as a percentage of
(5.0 )%
8.4 %
4.9 %
8.0 %
net sales
Add
Net (loss) income attributable to noncontrolling interests
(35 )
18
(5 )
62
Consolidated net (loss) income
(309 )
396
994
1,456
Add
Interest expense
24
18
81
69
Income tax expense
905
112
1,371
474
EBIT
620
526
2,446
1,999
Add
Depreciation and amortization
149
138
580
527
EBITDA
769
664
3,026
2,526
EBITDA as a percentage of net sales
14.0 %
14.7 %
14.8 %
14.4 %
Impact of tax legislation on equity investees
39
--
39
--
EBITDA, excluding impact of tax legislation on equity investees
$
730
$
664
$ 3,065
$
2,526
EBITDA, excluding tax legislation impact on equity investees, as
13.3 %
14.7 %
15.0 %
14.4 %
a percentage of net sales

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

Engine Segment Sales by Market and Unit Shipments by Engine Classification

Sales for our Engine segment by market were as follows:

2017
In millions
Q1
Q2
Q3
Q4
YTD
Heavy-duty truck
$
620
$
714
$
776
$
730
$
2,840
Medium-duty truck and bus
544
701
625
643
2,513
Light-duty automotive
423
429
452
423
1,727
Off-highway
436
463
483
491
1,873
Total sales
$ 2,023
$ 2,307
$ 2,336
$ 2,287
$
8,953
2016
In millions
Q1
Q2
Q3
Q4
YTD
Heavy-duty truck
$
631
$
622
$
625
$
565
$
2,443
Medium-duty truck and bus
549
600
517
606
2,272
Light-duty automotive
433
394
345
409
1,581
Off-highway
363
386
372
387
1,508
Total sales
$ 1,976
$ 2,002
$ 1,859
$ 1,967
$
7,804

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

2017
Units
Q1
Q2
Q3
Q4
YTD
Heavy-duty
19,200
24,100
28,100
24,500
95,900
Medium-duty
60,300
71,600
68,500
67,700
268,100
Light-duty
63,100
65,600
66,300
62,500
257,500
Total units
142,600
161,300
162,900
154,700
621,500
2016
Units
Q1
Q2
Q3
Q4
YTD
Heavy-duty
19,700
20,700
20,100
18,500
79,000
Medium-duty
55,400
62,300
53,400
58,000
229,100
Light-duty
61,700
57,100
49,800
60,000
228,600
Total units
136,800
140,100
123,300
136,500
536,700

Distribution Segment Sales by Product Line

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

2017
In millions
Q1
Q2
Q3
Q4
YTD
Parts
$
745
$
759
$
768
$
768
$
3,040
Service
319
320
326
347
1,312
Power generation
306
329
317
385
1,337
Engines
275
314
342
438
1,369
Total sales
$ 1,645
$ 1,722
$ 1,753
$ 1,938
$
7,058
2016
In millions
Q1
Q2
Q3
Q4
YTD
Parts
$
648
$
642
$
643
$
694
$
2,627
Service
299
297
299
320
1,215
Power generation
275
326
291
347
1,239
Engines
241
279
271
309
1,100
Total sales
$ 1,463
$ 1,544
$ 1,504
$ 1,670
$
6,181

Component Segment Sales by Business

In the first quarter of 2017, our Components segment reorganized its reporting structure to move our electronics business out of the emission solutions business and into the fuel systems business to enhance operational, administrative and product development efficiencies. Prior year sales were reclassified to conform with this change. We renamed our fuel systems business to electronics and fuel systems.

In the third quarter of 2017, we formed the Eaton Cummins Automated Transmission Technologies joint venture (ECJV), which was consolidated and included in our Components segment as the automated transmissions business.

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

2017
In millions
Q1
Q2
Q3
Q4
YTD
Emission solutions
$
616
$
674
$
696
$
689
$
2,675
Turbo technologies
287
307
297
288
1,179
Filtration
277
291
287
298
1,153
Electronics and fuel systems
164
182
184
188
718
Automated transmissions
--
--
69
95
164
Total sales
$
1,344
$
1,454
$ 1,533
$ 1,558
$
5,889
2016
In millions
Q1
Q2
Q3
Q4
YTD
Emission solutions
$
589
$
603
$
522
$
524
$
2,238
Turbo technologies
265
276
241
254
1,036
Filtration
252
262
244
252
1,010
Electronics and fuel systems
131
138
136
147
552
Total sales
$
1,237
$
1,279
$ 1,143
$ 1,177
$
4,836
2015
In millions
YTD
Emission solutions
$
2,449
Turbo technologies
1,141
Filtration
1,010
Electronics and fuel systems
572
Total sales
$
5,172

Power Systems Segment Sales by Product Line and Unit Shipments by Engine Classification

In the first quarter of 2017, our Power Systems segment reorganized its product lines to better reflect how the segment is managed. Prior year sales were reclassified to reflect these changes.

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

2017
In millions
Q1
Q2
Q3
Q4
YTD
Power generation
$
526
$
570
$
580
$
629
$
2,305
Industrial
275
353
385
386
1,399
Generator technologies
81
94
91
88
354
Total sales
$
882
$ 1,017
$ 1,056
$ 1,103
$
4,058
2016
In millions
Q1
Q2
Q3
Q4
YTD
Power generation
$
518
$
602
$
543
$
593
$
2,256
Industrial
215
236
235
255
941
Generator technologies
75
83
78
84
320
Total sales
$
808
$
921
$
856
$
932
$
3,517
2015
In millions
YTD
Power generation
$ 2,588
Industrial
1,121
Generator technologies
358
Total sales
$ 4,067

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

2017
Units
Q1
Q2
Q3
Q4
YTD
Power generation
1,900
2,100
2,200
2,000
8,200
Industrial
1,300
1,700
1,600
1,800
6,400
Total units
3,200
3,800
3,800
3,800
14,600
2016
Units
Q1
Q2
Q3
Q4
YTD
Power generation
1,800
2,200
2,000
1,900
7,900
Industrial
1,000
1,100
1,000
1,300
4,400
Total units
2,800
3,300
3,000
3,200
12,300

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SOURCE: Cummins Inc.

Cummins Inc.
Carole Casto, 317-610-2480
Vice President - Marketing and Communications
carole.casto@cummins.com