CMI 10-K Fiscal year ended Dec. 31, 2017

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•	a sustained slowdown or significant downturn in our markets;

•	changes in the engine outsourcing practices of significant customers;

•	the development of new technologies that reduce demand for our current products and services;

•	any significant additional problems in our engine platforms or aftertreatment systems;

•	product recalls;

•	lower than expected acceptance of new or existing products or services;

•	a slowdown in infrastructure development and/or depressed commodity prices;

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

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

•	changes in taxation;

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

•	a major customer experiencing financial distress;

•	our plan to reposition our portfolio of product offerings through exploring strategic acquisitions and divestitures and related uncertainties of entering such transactions;

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

•	competitor activity;

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

•	policy changes in international trade;

•	foreign currency exchange rate changes;

•	variability in material and commodity costs;

•	failure to realize expected results from our investment in Eaton Cummins Automated Transmission Technologies joint venture;

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

•	global legal and ethical compliance costs and risks;

•	aligning our capacity and production with our demand;

•	product liability claims;

•	increasingly stringent environmental laws and regulations;

•	future bans or limitations on the use of diesel-powered vehicles;

•	the price and availability of energy;

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

•	labor relations;

•	changes in accounting standards;

•	our sales mix of products;

•	protection and validity of our patent and other intellectual property rights;

•	technological implementation and cost/financial risks in our increasing use of large, multi-year contracts;

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

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

•	other risk factors described in Item 1A under the caption "Risk Factors."

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•	Engines with a displacement range of 2.8 to 15 liters and horsepower ranging from 48 to 715 and

•	New parts and service, as well as remanufactured parts and engines, through our extensive distribution network.

•	Heavy-duty truck - We manufacture diesel and natural gas engines that range from 310 to 605 horsepower serving global heavy-duty truck customers worldwide, primarily in North America, China, Latin America and Australia.

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Medium-duty truck and bus - We manufacture diesel and natural gas engines ranging from 130 to 450 horsepower serving medium-duty truck and bus customers worldwide, with key markets including North America, Latin America, China, Europe and India. Applications include pickup and delivery trucks, vocational truck, school bus, transit bus and shuttle bus. We also provide 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 Fiat Chrysler Automobiles (Fiat Chrysler) and Nissan in North America, and LCV markets in Europe, Latin America and China.

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•	Off-highway - We manufacture diesel engines that range from 48 to 715 horsepower to key global markets including mining, marine, rail, oil and gas, defense, agriculture and construction equipment and also to the power generation business for standby, mobile and distributed power generation solutions throughout the world.

•	Parts;

•	Engines;

•	Power generation and

•	Service.

•	North America;

•	Asia Pacific;

•	Europe;

•	Africa and Middle East;

•	China;

•	India;

•	Latin America and

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•	Russia.

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Emission solutions - We are a global leader in designing, manufacturing and integrating aftertreatment technology and solutions for the commercial on- and off-highway light, medium, heavy-duty and high-horsepower engine markets. Aftertreatment is the mechanism used to convert engine emissions of criteria pollutants, such as particulate matter (PM), nitrogen oxides (NOx), carbon monoxide (CO) and unburned hydrocarbons (HC) into harmless emissions. Our products include custom engineering systems and integrated controls, oxidation catalysts, particulate filters, selective catalytic reduction systems and engineered components, including dosers. Our emission solutions business primarily serves markets in North America, Europe, China, India, Brazil, Russia and Australia. We serve both OEM first fit and retrofit customers.

•	Turbo technologies - We design, manufacture and market turbochargers for light-duty, mid-range, heavy-duty and high-horsepower diesel markets with worldwide sales and distribution. We provide critical air handling technologies for engines to meet challenging performance requirements and worldwide emission standards. We primarily serve markets in North America, Europe, China and India.

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Filtration - We design, manufacture and sell filters, coolant and chemical products. Our filtration business offers over 8,300 products for first fit and aftermarket applications including air filters, fuel filters, fuel water separators, lube filters, hydraulic filters, coolants, fuel additives and other filtration systems to OEMs, dealers/distributors and end users. We support a wide customer base in a diverse range of markets including on- and off-highway segments such as oil and gas, agriculture, mining, construction, power generation, marine and industrial markets. We produce and sell globally recognized Fleetguard® branded products in over 160 countries including countries in North America, Europe, South America, Asia and Africa. Fleetguard products are available through thousands of distribution points worldwide.

•	Electronics and fuel systems - We design and manufacture new, replacement and remanufactured fuel systems primarily for heavy-duty on-highway diesel engine applications, as well as develop and supply electronic control modules (ECMs), sensors and harnesses for the on-highway, off-highway and power generation applications.We primarily serve markets in North America, China, India and Europe.

•	Automated transmissions - We develop and supply automated transmissions to the heavy-duty and medium-duty commercial vehicle markets. Formed in 2017, the Eaton Cummins Automated Transmission Technologies joint venture is a consolidated 50/50 joint venture between Cummins Inc. and Eaton Corporation Plc. and primarily serves the North American market.

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

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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, the 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.

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•	Komatsu Cummins Chile, Ltda. - Komatsu Cummins Chile, Ltda. is a joint venture with Komatsu America Corporation. The joint venture is a distributor that offers the full range of our products and services to customers and end-users in Chile and Peru.

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•	North American Distributors - During 2016, we acquired the remaining interest in the final unconsolidated North American distributor joint venture.

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Beijing Foton Cummins Engine Co., Ltd. - Beijing Foton Cummins Engine Co., Ltd. is a joint venture in China with Beiqi Foton Motor Co., Ltd., a commercial vehicle manufacturer, which consists of two distinct lines of business, a light-duty business and a heavy-duty business. The light-duty business produces our families of ISF 2.8 liter to 4.5 liter high performance light-duty diesel engines in Beijing. These engines are used in light-duty commercial trucks, pickup trucks, buses, multipurpose and sport utility vehicles with main markets in China, Brazil and Russia. Certain types of marine, small construction equipment and industrial applications are also served by these engine families. The heavy-duty business produces ISG 10.5 liter and ISG 11.8 liter families of our high performance heavy-duty diesel engines in Beijing. These engines are used in heavy-duty commercial trucks in China and will be used by Cummins either directly sourced from China and/or locally assembled in other markets. Certain types of construction equipment and industrial applications are also served by these engine families.

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Dongfeng Cummins Engine Company, Ltd. - Dongfeng Cummins Engine Company, Ltd. (DCEC) is a joint venture in China with Dongfeng Automotive Co. Ltd., a subsidiary of Dongfeng Motor Corporation, one of the largest medium-duty and heavy-duty truck manufacturers in China. DCEC produces Cummins 3.9 to 13 -liter mechanical engines, full-electric diesel engines, with a power range from 80 to 680 horsepower, and natural gas engines.

•	Chongqing Cummins Engine Company, Ltd. - Chongqing Cummins Engine Company, Ltd. is a joint venture in China with Chongqing Machinery and Electric Co. Ltd. This joint venture manufactures several models of our heavy-duty and high-horsepower diesel engines, primarily serving the industrial and stationary power markets in China.

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Dongfeng Cummins Emission Solutions Co., Ltd. - Dongfeng Cummins Emission Solutions Co. Ltd. is a joint venture in China with Dongfeng Industrial Company, a subsidiary of Dongfeng Motor Group Company Limited, a manufacturer of numerous on-highway vehicles. This joint venture produces, purchases and sells advanced diesel engine aftertreatment solutions to support the full line of Dongfeng's commercial vehicles.

•	Shanghai Fleetguard Filter Co., Ltd. - Shanghai Fleetguard Filter Co. Ltd. is a joint venture in China with Dongfeng Motor Co., Ltd., a manufacturer of numerous on-highway vehicles. This joint venture produces and sells filters and filter parts to support the full line of Dongfeng's commercial vehicles.

•	Cummins Westport, Inc. - Cummins Westport Inc. is a joint venture in Canada with Westport Innovations Inc. to market and sell automotive spark-ignited natural gas engines worldwide and to participate in joint technology projects on low-emission technologies.

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•	working with suppliers to measure and improve their environmental footprint;

•	selecting and managing suppliers to comply with our supplier code of conduct; and

•	assuring our suppliers comply with Cummins' prohibited and restricted materials policy.

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•	a new product vision statement — "powering the future through product innovation that makes people's lives better and reduces our environmental footprint;"

•	partnering with customers to improve the fuel efficiency of our products in use, targeting an annual run-rate reduction of 3.5 million metric tons of carbon dioxide and saving 350 million gallons of fuel by 2020;

•	achieving a 32 percent energy intensity reduction from company facilities by 2020 (using a baseline year of 2010) and increasing the portion of electricity we use derived from renewable sources;

•	reducing direct water use by 50 percent adjusted for hours worked and achieving water neutrality at 15 sites by 2020;

•	increasing our recycling rate from 88 percent to 95 percent and achieving zero disposal at 30 sites by 2020; and

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•	utilizing the most efficient methods and modes to move goods across our network to reduce carbon dioxide per kilogram of goods moved by 10 percent by 2020.

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•	the difficulty of enforcing agreements and collecting receivables through foreign legal systems;

•	trade protection measures and import or export licensing requirements;

•	the imposition of taxes on foreign income and tax rates in certain foreign countries that exceed those in the U.S.;

•	the imposition of tariffs, exchange controls or other restrictions;

•	difficulty in staffing and managing widespread operations and the application of foreign labor regulations;

•	required compliance with a variety of foreign laws and regulations; and

•	changes in general economic and political conditions in countries where we operate, particularly in emerging markets.

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•	Executive Summary and Financial Highlights

•	2018 Outlook

•	Results of Operations

•	Operating Segment Results

•	Liquidity and Capital Resources

•	Contractual Obligations and Other Commercial Commitments

•	Application of Critical Accounting Estimates

•	Recently Adopted and Recently Issued Accounting Pronouncements

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•	North American heavy-duty truck demand is expected to improve.

•	North American medium-duty truck demand will remain strong.

•	Demand for pick up trucks in North America will remain strong.

•	Industry production of medium-duty trucks in North America will remain strong.

•	Market demand may continue to improve in global mining.

•	Global construction markets could continue to improve.

•	Economic conditions in Brazil may begin to improve, which could contribute to improved demand in our end-markets.

•	Market demand in truck markets in China is expected to decline.

•	Marine markets are expected to remain weak.

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•	Engine segment sales increase d 15 percent primarily due to higher demand in most North American on-highway markets and improved demand in most global construction markets.

•	Components segment sales increase d 22 percent due to higher demand across all businesses, especially the emission solutions business, due to strong on-highway sales in India, North America and China.

•	Distribution segment sales increase d 14 percent primarily due to an increase in organic sales and higher sales related to the acquisition of a North American distributor in the fourth quarter of 2016.

•	Power Systems segment sales increase d 15 percent due to higher demand in all product lines, especially in industrial markets, due to higher demand in global mining and North American oil and gas markets.

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•	Engine segment sales decreased 10 percent primarily due to lower demand in North American heavy-duty and medium-duty 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 14 percent primarily due to lower demand in all product lines and decreased sales in most regions with the largest declines in North America, Asia, China, Latin America, the Middle East, Africa and Western Europe.

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•	Components segment sales decreased 6 percent primarily due to lower demand in most lines of business, principally 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, Chinese renminbi, Indian rupee, Brazilian real, South African rand, Canadian dollar and Australian dollar.

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•	Heavy-duty truck engine sales increase d $397 million primarily due to higher demand in North American heavy-duty truck markets with increased shipments of 20 percent.

•	Off-highway sales increase d $365 million primarily due to improved demand in global industrial markets, especially in international construction markets, with increased unit shipments of 54 percent primarily in China and Western Europe.

•	Medium-duty truck and bus sales increase d $241 million primarily due to higher demand in North American medium-duty truck markets with increased engine shipments of 20 percent.

•	Light-duty automotive sales increase d $146 million primarily due to higher sales to Chrysler and higher sales of light commercial vehicles, partially offset by lower sales to Nissan.

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•	Heavy-duty truck sales decreased $673 million primarily due to lower demand in the North American heavy-duty truck market with decreased engine shipments of 38 percent.

•	Medium-duty truck and bus sales decreased $235 million primarily due to lower demand in most global medium-duty truck markets with decreased engine shipments of 17 percent, primarily in North America, Brazil and Mexico.

•	Off-highway sales decreased $64 million primarily due to decreased engine shipments in several North American industrial markets, partially offset by increased unit shipments of 25 percent in international construction markets.

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(1)	See Restructuring Actions and Other Charges section of "Results of Operations" for additional information.

(2)	Segment EBIT for 2016 and 2015 included gains of $15 million and $18 million , respectively, resulting from acquisitions of controlling interests in North American distributors. See Note 18 , " ACQUISITIONS ," to the Consolidated Financial Statements for additional information.

(3)	North American distributor acquisitions are dilutive to segment EBIT as a percentage of sales.

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•	Emission solutions sales increase d $437 million primarily due to increased sales of products to meet new emission standards in India and stronger market demand for trucks in North America and China.

•	Electronics and fuel systems sales increase d $166 million primarily due to higher demand in China, Mexico and India.

•	Automated transmissions contributed North American sales of $164 million following the consolidation of the ECJV during the third quarter of 2017.

•	Turbo technologies sales increase d $143 million primarily due to higher demand in China and North America.

•	Filtration sales increase d $143 million primarily due to higher demand in North America, Australia and China.

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•	Emission solutions sales decreased $211 million primarily due to lower demand in North American on-highway markets, partially offset by higher demand in China.

•	Turbo technologies sales decreased $105 million primarily due to lower demand in North American on-highway markets, partially offset by higher demand in China.

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

•	Electronics and fuel systems sales decreased $20 million primarily due to lower demand in North American on-highway markets, partially offset by higher demand in China.

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•	Industrial sales increase d $458 million primarily due to higher demand in global mining markets, especially in Europe, North America and China, and oil and gas markets in North America.

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•	Power generation sales increase d $49 million primarily due to higher demand in Western Europe, North America and China, partially offset by lower demand in the Middle East, Africa and Eastern Europe.

•	Generator technologies sales increase d $34 million primarily due to higher demand in Europe.

•	Power generation sales decreased $332 million, in most regions, with the largest declines in demand primarily in Asia, the Middle East, North America, Latin America, China, Western Europe, Africa and Mexico.

•	Industrial sales decreased $180 million primarily due to lower demand in North America (mainly oil and gas and mining markets, partially offset by rail markets), Asia (mainly marine and mining markets), China (mainly marine and mining markets) and Africa.

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

•	Generator technologies sales decreased $38 million primarily due to lower demand in China and North America.

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(1)	Includes principal payments and expected interest payments based on the terms of the obligations .

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•	Management's Report to Shareholders

•	Report of Independent Registered Public Accounting Firm

•	Consolidated Statements of Income for the years ended December 31, 2017 , 2016 and 2015

•	Consolidated Statements of Comprehensive Income for the years ended December 31, 2017 , 2016 and 2015

•	Consolidated Balance Sheets at December 31, 2017 and 2016

•	Consolidated Statements of Cash Flows for the years ended December 31, 2017 , 2016 and 2015

•	Consolidated Statements of Changes in Equity for the years ended December 31, 2017 , 2016 and 2015

•	Notes to Consolidated Financial Statements

•	Selected Quarterly Financial Data (Unaudited)

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(a)	Includes sales to nonconsolidated equity investees of $ 1,174 million , $ 1,028 million and $ 1,209 million for the years ended December 31, 2017 , 2016 and 2015 , respectively.

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Nature of Operations

We were founded in 1919 as Cummins Engine Company, a corporation in Columbus, Indiana and one of the first diesel engine manufacturers. In 2001, we changed our name to Cummins Inc. 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, transmissions 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 approximately 500 wholly-owned and independent distributor locations and over 7,500 dealer locations in more than 190 countries and territories.

Principles of Consolidation

Our Consolidated Financial Statements include the accounts of all wholly-owned and majority-owned domestic and foreign subsidiaries where our ownership is more than 50 percent of outstanding equity interests except for majority-owned subsidiaries that are considered variable interest entities (VIEs) where we are not deemed to have a controlling financial interest. In addition, we also consolidate, regardless of our ownership percentage, VIEs for which we are deemed to have a controlling financial interest. Intercompany balances and transactions are eliminated in consolidation. Where our ownership interest is less than 100 percent, the noncontrolling ownership interests are reported in our Consolidated Balance Sheets . The noncontrolling ownership interest in our income, net of tax, is classified as "Net (loss) income attributable to noncontrolling interests" in our Consolidated Statements of Income .

We have variable interests in several businesses accounted for under the equity method of accounting that are deemed to be VIEs and are subject to generally accepted accounting principles in the United States of America (GAAP) for variable interest entities. Most of these VIEs are unconsolidated.

Reclassifications

Certain amounts for 2016 and 2015 have been reclassified to conform to the current year presentation.

Investments in Equity Investees

We use the equity method to account for our investments in joint ventures, affiliated companies and alliances in which we have the ability to exercise significant influence, generally represented by equity ownership or partnership equity of at least 20 percent but not more than 50 percent . Generally, under the equity method, original investments in these entities are recorded at cost and subsequently adjusted by our share of equity in income or losses after the date of acquisition. Investment amounts in excess of our share of an investee's net assets are amortized over the life of the related asset creating the excess. If the excess is goodwill, then it is not amortized. Equity in income or losses of each investee is recorded according to our level of ownership; if losses accumulate, we record our share of losses until our investment has been fully depleted. If our investment has been fully depleted, we recognize additional losses only when we are the primary funding source. We eliminate (to the extent of our ownership percentage) in our Consolidated Financial Statements the profit in inventory held by our equity method investees that has not yet been sold to a third-party. Our investments are classified as "Investments and advances related to equity method investees" in our Consolidated Balance Sheets. Our share of the results from joint ventures, affiliated companies and alliances is reported in our Consolidated Statements of Income as "Equity, royalty and interest income from investees," and is reported net of all applicable income taxes.

Our foreign equity investees are presented net of applicable foreign income taxes in our Consolidated Statements of Income . Our remaining United States (U.S.) equity investees are partnerships (non-taxable), thus there is no difference between gross or net of tax presentation as the investees are not taxed. See NOTE 3 , " INVESTMENTS IN EQUITY INVESTEES ," for additional information.

Use of Estimates in the Preparation of the Financial Statements

Preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts presented and disclosed in our Consolidated Financial Statements . Significant estimates and assumptions in these Consolidated Financial Statements require the exercise of judgment and are used for, but not limited to, allowance for doubtful accounts, estimates of future cash flows and other assumptions associated with goodwill and long-lived asset impairment tests, useful lives for depreciation and amortization, warranty programs, determination of discount rate and

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other assumptions for pension and other postretirement benefit costs, income taxes and deferred tax valuation allowances, lease classification and contingencies. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be different from these estimates.

Revenue Recognition

We recognize revenue, net of estimated costs of returns, allowances and sales incentives, when it is realized or realizable, which generally occurs when:

•	Persuasive evidence of an arrangement exists;

•	The product has been shipped and legal title and all risks of ownership have been transferred;

•	The sales price is fixed or determinable; and

•	Payment is reasonably assured.

Products are generally sold on open account under credit terms customary to the geographic region of distribution. We perform ongoing credit evaluations of our customers and generally do not require collateral to secure our accounts receivable. For engines, service parts, service tools and other items sold to independent distributors and to partially-owned distributors accounted for under the equity method, revenues are recorded when title and risk of ownership transfers. This transfer is based on the agreement in effect with the respective distributor, which generally occurs when the products are shipped. To the extent of our ownership percentage, margins on sales to distributors accounted for under the equity method are deferred until the distributor sells the product to unrelated parties.

We provide various sales incentives to both our distribution network and our OEM customers. These programs are designed to promote the sale of our product in the channel or encourage the usage of our products by OEM customers. Sales incentives primarily fall into three categories:

•	Volume rebates;

•	Market share rebates; and

•	Aftermarket rebates.

For volume rebates, we provide certain customers with rebate opportunities for attaining specified volumes during a particular quarter or year. We accrue for the expected amount of these rebates at the time of the original sale and update our accruals quarterly based on our best estimate of the volume levels the customer will reach during the measurement period. For market share rebates, we provide certain customers with rebate opportunities based on the percentage of their production that utilizes our product. These rebates are typically measured either quarterly or annually and are accrued at the time of the original sale based on the current market shares, with adjustments made as the level changes. For aftermarket rebates, we provide incentives to promote sales to certain dealers and end-markets. These rebates are typically paid on a quarterly, or more frequent, basis and estimates are made at the end of each quarter as to the amount yet to be paid. These estimates are based on historical experience with the particular program. The incentives are classified as a reduction in sales in our Consolidated Statements of Income .

We classify shipping and handling billed to customers as sales in our Consolidated Statements of Income . Substantially all shipping and handling costs are included in "Cost of sales."

Rights of return do not exist for the majority of our sales, other than for quality issues. We do offer certain return rights in our aftermarket business, where some aftermarket customers are permitted to return small amounts of parts and filters each year and in our power systems business, which sells portable generators to retail customers. An estimate of future returns is accrued at the time of sale based on historical return rates.

Foreign Currency Transactions and Translation

We translate assets and liabilities of foreign entities to U.S. dollars, where the local currency is the functional currency, at year-end exchange rates. We translate income and expenses to U.S. dollars using weighted-average exchange rates for the year. We record adjustments resulting from translation in a separate component of accumulated other comprehensive loss (AOCL) and include the adjustments in net income only upon sale, loss of controlling financial interest or liquidation of the underlying foreign investment.

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Foreign currency transaction gains and losses are included in current net income. For foreign entities where the U.S. dollar is the functional currency, including those operating in highly inflationary economies when applicable, we remeasure non-monetary balances and the related income statement using historical exchange rates. We include in income the resulting gains and losses, including the effect of derivatives in our Consolidated Statements of Income , which combined with transaction gains and losses amounted to a net loss of $ 6 million , $ 12 million and $ 18 million for the years ended December 31, 2017 , 2016 and 2015 , respectively.

Fair Value Measurements

A three-level valuation hierarchy, based upon the observable and unobservable inputs, is used for fair value measurements. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions based on the best evidence available. These two types of inputs create the following fair value hierarchy:

•	Level 1 - Quoted prices for identical instruments in active markets;

•	Level 2 - Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose significant inputs are observable; and

•	Level 3 - Instruments whose significant inputs are unobservable .

Derivative Instruments

We make use of derivative instruments in foreign exchange, commodity price and interest rate hedging programs. Derivatives currently in use are foreign currency forward contracts, commodity physical forward contracts, options and interest rate swaps. These contracts are used strictly for hedging and not for speculative purposes.

We are exposed to market risk from fluctuations in interest rates. We manage our exposure to interest rate fluctuations through the use of interest rate swaps. The objective of the swaps is to more effectively balance our borrowing costs and interest rate risk. The gain or loss on these derivative instruments as well as the offsetting gain or loss on the hedged item are recognized in current income as "Interest expense." For more detail on our interest rate swaps, see NOTE 9 , " DEBT ."

Due to our international business presence, we are exposed to foreign currency exchange risk. We transact in foreign currencies and have assets and liabilities denominated in foreign currencies. Consequently, our income experiences some volatility related to movements in foreign currency exchange rates. In order to benefit from global diversification and after considering naturally offsetting currency positions, we enter into foreign currency forward contracts to minimize our existing exposures (recognized assets and liabilities) and hedge forecasted transactions. Foreign currency forward contracts are designated and qualify as foreign currency cash flow hedges under GAAP. The effective portion of the unrealized gain or loss on the forward contract is deferred and reported as a component of AOCL. When the hedged forecasted transaction (sale or purchase) occurs, the unrealized gain or loss is reclassified into income in the same line item associated with the hedged transaction in the same period or periods during which the hedged transaction affects income.

To minimize the income volatility resulting from the remeasurement of net monetary assets and payables denominated in a currency other than the functional currency, we enter into foreign currency forward contracts, which are considered economic hedges. The objective is to offset the gain or loss from remeasurement with the gain or loss from the fair market valuation of the forward contract. These derivative instruments are not designated as hedges under GAAP.

We are exposed to fluctuations in commodity prices due to contractual agreements with component suppliers. In order to protect ourselves against future price volatility and, consequently, fluctuations in gross margins, we periodically enter into commodity physical forward contracts and zero-cost collar contracts with designated banks and other counterparties to fix the cost of certain raw material purchases with the objective of minimizing changes in inventory cost due to market price fluctuations. The physical forward contracts qualify for the normal purchases scope exceptions and are treated as purchase commitments. The commodity zero-cost collar contracts that represent an economic hedge, but are not designated for hedge accounting, are marked to market through earnings.

Income Tax Accounting

We determine our income tax expense using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax effects of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax benefits of net operating loss and credit carryforwards are also recognized as deferred tax assets. We evaluate the recoverability of our deferred tax assets each quarter by assessing the likelihood of future profitability and available tax planning strategies that could be implemented to realize our net deferred tax assets. A valuation allowance is recorded to reduce the tax assets to the net value management believes is more likely than not to be realized. In the event our operating performance deteriorates, future assessments could conclude that a larger valuation

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allowance will be needed to further reduce the deferred tax assets. In addition, we operate within multiple taxing jurisdictions and are subject to tax audits in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. We accrue for the estimated additional tax and interest that may result from tax authorities disputing uncertain tax positions. We have taken and we believe we have made adequate provisions for income taxes for all years that are subject to audit based upon the latest information available. A more complete description of our income taxes and the future benefits of our net operating loss and credit carryforwards is disclosed in NOTE 2 , " INCOME TAXES ."

Cash and Cash Equivalents

Cash equivalents are defined as short-term, highly liquid investments with an original maturity of 90 days or less at the time of purchase. The carrying amounts reflected in our Consolidated Balance Sheets for cash and cash equivalents approximate fair value due to the short-term maturity of these investments.

		Years ended December 31,
In millions		2017				2016				2015
Cash payments for income taxes, net of refunds		$	622			$	430			$	732
Cash payments for interest, net of capitalized interest		82				68				65

Marketable Securities

We account for marketable securities in accordance with GAAP for investments in debt and equity securities. We determine the appropriate classification of all marketable securities as "held-to-maturity," "available-for-sale" or "trading" at the time of purchase, and re-evaluate such classifications at each balance sheet date. At December 31, 2017 and 2016 , all of our investments were classified as available-for-sale.

Available-for-sale (AFS) securities are carried at fair value with the unrealized gain or loss, net of tax, reported in other comprehensive income. Unrealized losses considered to be "other-than-temporary" are recognized currently in income. The cost of securities sold is based on the specific identification method. The fair value of most investment securities is determined by currently available market prices. Where quoted market prices are not available, we use the market price of similar types of securities that are traded in the market to estimate fair value. See NOTE 4 , " MARKETABLE SECURITIES ," for a detailed description of our investments in marketable securities.

Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are recorded at the invoiced amount, which approximates net realizable value, and generally do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. We determine the allowance based on our historical collection experience and by performing an analysis of our accounts receivable in light of the current economic environment. We review our allowance for doubtful accounts on a regular basis. In addition, when necessary, we provide an allowance for the full amount of specific accounts deemed to be uncollectible. Account balances are charged off against the allowance in the period in which we determine that it is probable the receivable will not be recovered. The allowance for doubtful accounts balances for the years ended December 31, 2017 and 2016 were $ 16 million and $ 16 million , respectively.

Inventories

Our inventories are stated at the lower of cost or market. For the years ended December 31, 2017 and 2016 , approximately 12 percent and 13 percent , respectively, of our consolidated inventories (primarily heavy-duty and high-horsepower engines and parts) were valued using the last-in, first-out (LIFO) cost method. The cost of other inventories is generally valued using the first-in, first-out (FIFO) cost method. Our inventories at interim and year-end reporting dates include estimates for adjustments related to annual physical inventory results and for inventory cost changes under the LIFO cost method. Due to significant movements of partially-manufactured components and parts between manufacturing plants, we do not internally measure, nor do our accounting systems provide, a meaningful segregation between raw materials and work-in-process. See NOTE 5 , " INVENTORIES ," for additional information.

Property, Plant and Equipment

We record property, plant and equipment, inclusive of assets under capital leases, at cost. We depreciate the cost of the majority of our property, plant and equipment using the straight-line method with depreciable lives ranging from 20 to 40 years for buildings and 3 to 15 years for machinery, equipment and fixtures. Capital lease amortization is recorded in depreciation expense. We expense normal maintenance and repair costs as incurred. Depreciation expense totaled $ 467 million , $ 434 million and $ 419 million for the years ended December 31, 2017 , 2016 and 2015 , respectively. See NOTE 6 , " PROPERTY, PLANT AND EQUIPMENT ," for additional information.

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Impairment of Long-Lived Assets

We review our long-lived assets for possible impairment whenever events or circumstances indicate that the carrying value of an asset or asset group may not be recoverable. We assess the recoverability of the carrying value of the long-lived assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. An impairment of a long-lived asset or asset group exists when the expected future pre-tax cash flows (undiscounted and without interest charges) estimated to be generated by the asset or asset group is less than its carrying value. If these cash flows are less than the carrying value of such asset or asset group, an impairment loss is measured based on the difference between the estimated fair value and carrying value of the asset or asset group. Assumptions and estimates used to estimate cash flows in the evaluation of impairment and the fair values used to determine the impairment are subject to a degree of judgment and complexity. Any changes to the assumptions and estimates resulting from changes in actual results or market conditions from those anticipated may affect the carrying value of long-lived assets and could result in a future impairment charge. See NOTE 19 , " IMPAIRMENT OF LIGHT-DUTY DIESEL ASSETS ," for additional information.

Goodwill

Under GAAP for goodwill, we have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value as a basis for determining whether it is necessary to perform an annual two-step goodwill impairment test. We have elected this option on certain reporting units. The two-step impairment test is now only required if an entity determines through this qualitative analysis that it is more likely than not that the fair value of the reporting unit is less than its carrying value. In addition, the carrying value of goodwill must be tested for impairment on an interim basis in certain circumstances where impairment may be indicated. When we are required or opt to perform the two-step impairment test, the fair value of each reporting unit is estimated by discounting the after tax future cash flows less requirements for working capital and fixed asset additions. Our reporting units are generally defined as one level below an operating segment. However, there are two situations where we have aggregated two or more reporting units which share similar economic characteristics and thus are aggregated into a single reporting unit for testing purposes. These two situations are described further below:

•	Within our Components segment, our emission solutions and filtration businesses have been aggregated into a single reporting unit.

•	Our Distribution segment is considered a single reporting unit as it is managed geographically and all regions share similar economic characteristics and provide similar products and services.

Our valuation method requires us to make projections of revenue, operating expenses, working capital investment and fixed asset additions for the reporting units over a multi-year period. Additionally, management must estimate a weighted-average cost of capital, which reflects a market rate, for each reporting unit for use as a discount rate. The discounted cash flows are compared to the carrying value of the reporting unit and, if less than the carrying value, a separate valuation of the goodwill is required to determine if an impairment loss has occurred. In addition, we also perform a sensitivity analysis to determine how much our forecasts can fluctuate before the fair value of a reporting unit would be lower than its carrying amount. We performed the required procedures as of the end of our fiscal third quarter and determined that our goodwill was not impaired. At December 31, 2017 , our recorded goodwill was $ 1,082 million , approximately 36 percent of which resided in the aggregated emission solutions and filtration reporting unit. For this reporting unit, the fair value exceeded its carrying value by a substantial margin. Approximately 50 percent and 4 percent of goodwill resides in our new automated transmissions reporting unit and our Brammo Inc. acquisition (not yet allocated to a segment), respectively. Since these businesses were just acquired in the second half of 2017, we did not perform an additional quantitative test as of the end of our third fiscal quarter. See NOTE 18 , " ACQUISITIONS ," for additional information on the acquisition related goodwill recorded at the respective acquisition dates. Changes in our projections or estimates, a deterioration of our operating results and the related cash flow effect or a significant increase in the discount rate could decrease the estimated fair value of our reporting units and result in a future impairment of goodwill. See NOTE 7 , " GOODWILL AND OTHER INTANGIBLE ASSETS ," for additional information.

Other Intangible Assets

We capitalize other intangible assets, such as trademarks, patents, and customer relationships, that have been acquired either individually or with a group of other assets.  These intangible assets are amortized on a straight-line basis over their estimated useful lives generally ranging from 3 to 25 years. Intangible assets are reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable over the remaining lives of the assets. See NOTE 7 , " GOODWILL AND OTHER INTANGIBLE ASSETS ," for additional information.

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Software

We capitalize software that is developed or obtained for internal use. Software costs are amortized on a straight-line basis over their estimated useful lives generally ranging from 3 to 12 years. Software assets are reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable over the remaining lives of the assets. Upgrades and enhancements are capitalized if they result in significant modifications that enable the software to perform tasks it was previously incapable of performing. Software maintenance, training, data conversion and business process reengineering costs are expensed in the period in which they are incurred. See NOTE 7 , " GOODWILL AND OTHER INTANGIBLE ASSETS ," for additional information.

Warranty

We charge the estimated costs of warranty programs, other than product recalls, to cost of sales at the time products are sold and revenue is recognized. We use historical experience to develop the estimated liability for our various warranty programs. As a result of the uncertainty surrounding the nature and frequency of product recall programs, the liability for such programs is recorded when we commit to a recall action or when a recall becomes probable and estimable, which generally occurs when it is announced. The liability for these programs is reflected in the provision for warranties issued. We review and assess the liability for these programs on a quarterly basis. We also assess our ability to recover certain costs from our suppliers and record a receivable when we believe a recovery is probable. In addition to costs incurred on warranty and recall programs, from time to time we also incur costs related to customer satisfaction programs for items not covered by warranty. We accrue for these costs when agreement is reached with a specific customer. These costs are not included in the provision for warranties, but are included in cost of sales.

In addition, we sell extended warranty coverage on most of our engines. The revenue collected is initially deferred and is recognized as revenue in proportion to the costs expected to be incurred in performing services over the contract period. We compare the remaining deferred revenue balance quarterly to the estimated amount of future claims under extended warranty programs and provide an additional accrual when the deferred revenue balance is less than expected future costs. See NOTE 8 , " PRODUCT WARRANTY LIABILITY ," for additional information.

Research and Development

Our research and development program is focused on product improvements, product extensions, innovations and cost reductions for our customers. Research and development expenditures include salaries, contractor fees, building costs, utilities, testing, technical IT, administrative expenses and allocation of corporate costs and are expensed, net of contract reimbursements, when incurred. From time to time, we enter into agreements with customers and government agencies to fund a portion of the research and development costs of a particular project. We generally account for these reimbursements as an offset to the related research and development expenditure. Research and development expenses, net of contract reimbursements, were $ 734 million in 2017 , $ 616 million in 2016 and $ 718 million in 2015 . Contract reimbursements were $ 137 million in 2017 , $ 131 million in 2016 and $ 98 million in 2015 .

Related Party Transactions

In accordance with the provisions of various joint venture agreements, we may purchase products and components from our joint ventures, sell products and components to our joint ventures and our joint ventures may sell products and components to unrelated parties. Joint venture transfer prices may differ from normal selling prices. Certain joint venture agreements transfer product at cost, some transfer product on a cost-plus basis, and others transfer product at market value. Our related party sales are presented on the face of our Consolidated Statements of Income . Our related party purchases were not material to our financial position or results of operations.

RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Accounting Pronouncements Recently Adopted

In February 2018, the Financial Accounting Standards Board (FASB) amended its standard on comprehensive income to provide an option for an entity to reclassify the stranded tax effects of the Tax Cuts and Jobs Act (Tax Legislation) that was passed in December of 2017 from accumulated other comprehensive income (AOCI) directly to retained earnings.  The stranded tax effects result from the remeasurement of deferred tax assets and liabilities which were originally recorded in comprehensive income but whose remeasurement is reflected in the income statement.  This is a one-time amendment applicable only to the changes resulting from the Tax Legislation.  The standard is effective for us on January 1, 2019, and may be reflected retroactively to any period in which the impacts of the Tax Legislation are recognized.  The standard permits early adoption for any financial statements that have not been released as of the date of the revised standard. We elected to early adopt this standard in our 2017 financial statements using specific identification and as a result reclassified $ 126 million from

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AOCI to retained earnings which is reflected in the rollforward of AOCI. This reclassification relates only to the change in the statutory tax rate. See NOTE 14 , " ACCUMULATED OTHER COMPREHENSIVE LOSS ," for additional information.

In March 2016, the FASB amended its standards related to accounting for stock compensation, which became effective for us beginning January 1, 2017. The amendment replaced the requirement to record excess tax benefits and certain tax deficiencies in additional paid-in capital by recording all excess tax benefits and tax deficiencies as income tax expense / benefit in the Consolidated Statements of Income and was adopted prospectively. In addition, the standard impacted our Consolidated Statements of Cash Flow retrospectively, as excess tax benefits are now required to be presented as an operating activity and the cash paid to tax authorities is required to be presented as a financing activity. This resulted in a net reclassification of $ 4 million and $ 6 million from operating to financing activities for the year ended December 31, 2016 and 2015, respectively. Finally, in accordance with the standard, we elected to continue our historical approach of estimating forfeitures during the award's vesting period and adjusting our estimate when it is no longer probable that the employee will fulfill the service condition. The adoption of the standard was not material to our Consolidated Financial Statements .

Accounting Pronouncements Issued But Not Yet Effective

In August 2017, the FASB amended its standards related to accounting for derivatives and hedging. These amendments allow the initial hedge effectiveness assessment to be performed by the end of the first quarter in which the hedge is designated rather than concurrently with entering into the hedge transaction. The changes also expand the use of a periodic qualitative hedge effectiveness assessment in lieu of an ongoing quantitative assessment performed throughout the life of the hedge. The revision removes the requirement to record ineffectiveness on cash flow hedges through the income statement when a hedge is considered highly effective, instead deferring all related hedge gains and losses in "Other comprehensive income" until the hedged item impacts earnings. The modifications permit hedging the contractually-specified price of a component of a commodity purchase and revises certain disclosure requirements. The amendments are effective January 1, 2019 and early adoption is permitted in any interim period or fiscal year prior to the effective date. The revised standard is required to be adopted on a modified retrospective basis for any cash flow or net investment hedge relationships that exist on the date of adoption and prospectively for disclosures. We do not expect the amendments to have a material effect on our Consolidated Financial Statements and are still evaluating early adoption.

In March 2017, the FASB amended its standards related to the presentation of pension and other postretirement benefit costs in the financial statements beginning January 1, 2018. Under the new standard, we will be required to separate service costs from all other elements of pension costs and reflect the other elements of pension costs outside of operating income in our Consolidated Statements of Income . In addition, the standard will limit the amount eligible for capitalization (into inventory or self-constructed assets) to the amount of service cost. This portion of the standard will be applied on a prospective basis. The remainder of the new standard is effective for us on a retrospective basis. The retroactive adoption of this standard will result in a reduction in operating income and a corresponding increase in other income (primarily related to the return on pension assets) of $ 31 million and $ 48 million for the years ended December 31, 2017 and 2016, respectively.

In August 2016, the FASB amended its standards related to the classification of certain cash receipts and cash payments. The new standard will make 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. 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 do not expect adoption of this standard to have a material impact on our Consolidated Statements of Cash Flows.

In June 2016, the FASB amended its standards related to accounting for credit losses on financial instruments. This amendment introduces new guidance 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 do not expect adoption of this standard to have a material impact on our Consolidated Financial Statements.

In February 2016, the FASB amended its standards related to the accounting for leases. Under the new standard, lessees will now be required to 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 occur in a manner 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 of an arrangement. The new standard is effective on January 1, 2019, with early adoption permitted. We are still evaluating the impact the standard could have on our Consolidated Financial Statements , including our internal controls over financial

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reporting. 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 do not expect the standard to have a material impact on our Consolidated Financial Statements .

The following table summarizes income before income taxes:

		Years ended December 31,
In millions		2017				2016				2015
U.S. income		$	1,237			$	995			$	1,275
Foreign income		1,128				935				750
Income before income taxes		$	2,365			$	1,930			$	2,025

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Income tax expense (benefit) consists of the following:

		Years ended December 31,
In millions		2017				2016				2015
Current
U.S. federal and state		$	355			$	211			$	516
Foreign		289				213				147
Impact of tax legislation		349				—				—
Total current		993				424				663
Deferred
U.S. federal and state		( 42		)		57				( 151		)
Foreign		( 12		)		( 7		)		43
Impact of tax legislation		432				—				—
Total deferred		378				50				( 108		)
Income tax expense		$	1,371			$	474			$	555

A reconciliation of the statutory U.S. federal income tax rate to the effective tax rate was as follows:

		Years ended December 31,
		2017			2016			2015
Statutory U.S. federal income tax rate		35.0	%		35.0	%		35.0	%
State income tax, net of federal effect		0.6			0.8			1.2
Differences in rates and taxability of foreign subsidiaries and joint ventures		( 6.4	)		( 7.2	)		( 6.6	)
Research tax credits		( 1.4	)		( 1.7	)		( 1.4	)
Impact of tax legislation		33.1			—			—
Other, net		( 2.9	)		( 2.3	)		( 0.8	)
Effective tax rate		58.0	%		24.6	%		27.4	%

Our income tax rates are generally less than the 35 percent U.S. statutory income tax rate primarily because of lower taxes on foreign earnings and research tax credits. On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (Tax Legislation) , which changed the U.S. statutory rate to 21 percent effective January 1, 2018 and requires companies to pay a one-time transition tax on certain previously undistributed earnings of certain foreign subsidiaries and foreign joint ventures that were tax deferred. Our effective tax rate for 2017 was 58.0 percent compared to 24.6 percent for 2016 . The impacts of the Tax Legislation resulted in additional tax expense of $ 781 million .

The Securities and Exchange Commission (SEC) issued guidance which addressed the uncertainty in the application of GAAP to the Tax Legislation where certain income tax effects cannot be finalized at December 31, 2017. This guidance allows entities to record provisional amounts based on current estimates that are updated on a quarterly basis. As a result, our accounting for the effects of the Tax Legislation are not considered complete at this time. The final transition impacts of the Tax Legislation may differ from our estimates, possibly materially, due to, among other things, changes in interpretations of the Tax Legislation, any legislative action to address questions that arise because of the Tax Legislation, any changes in accounting standards for income taxes or related interpretations in response to the Tax Legislation, or any updates or changes to estimates the company has utilized to calculate the transition impacts. The SEC requires final calculations to be completed within the one year measurement period ending December 22, 2018, and reflect any additional guidance issued throughout the year. Any adjustments of provisional amounts will be reported in continuing operations in the period in which the estimates change. We have made provisional estimates of the effects of the Tax Legislation in three primary areas: (1) our existing deferred tax balances; (2) the one-time transition tax and (3) the withholding tax accrued on those earnings no longer considered permanently reinvested at December 31, 2017. Each of these items is described in more detail below.

Deferred tax assets and liabilities

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 . See NOTE 3 , " INVESTMENTS IN EQUITY INVESTEES ," for the impact to our equity investees.

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One-time transition tax

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 with a cash impact of $ 338 million .

Withholding tax

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 . See NOTE 3 , " INVESTMENTS IN EQUITY INVESTEES ," and NOTE 16 , " NONCONTROLLING INTERESTS ," for the impact of withholding taxes to our equity investees and noncontrolling interests.

Carryforward tax benefits and the tax effect of temporary differences between financial and tax reporting that give rise to net deferred tax (liabilities) assets were as follows:

		December 31,
In millions		2017				2016
Deferred tax assets
U.S. state carryforward benefits		$	200			$	159
Foreign carryforward benefits		159				154
Employee benefit plans		274				401
Warranty expenses		300				405
Accrued expenses		95				107
Other		70				64
Gross deferred tax assets		1,098				1,290
Valuation allowance		( 347		)		( 307		)
Total deferred tax assets		751				983
Deferred tax liabilities
Property, plant and equipment		( 250		)		( 319		)
Unremitted income of foreign subsidiaries and joint ventures		( 331		)		( 59		)
Employee benefit plans		( 224		)		( 213		)
Other		( 31		)		( 48		)
Total deferred tax liabilities		( 836		)		( 639		)
Net deferred tax (liabilities) assets		$	( 85	)		$	344

Our 2017 U.S. carryforward benefits include $ 200 million of state credit and net operating loss carryforward benefits that begin to expire in 2018. Our foreign carryforward benefits include $ 159 million of net operating loss carryforwards that begin to expire in 2018. A valuation allowance is recorded to reduce the gross deferred tax assets to an amount we believe is more likely than not to be realized. The valuation allowance was $ 347 million and increased in 2017 by a net $ 40 million . The valuation allowance is primarily attributable to the uncertainty regarding the realization of a portion of the U.S. state and foreign net operating loss and tax credit carryforward benefits.

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Our Consolidated Balance Sheets contain the following tax related items:

		December 31,
In millions		2017				2016
Prepaid and other current assets
Refundable income taxes		$	152			$	192
Other assets
Deferred income tax assets		306				420
Long-term refundable income taxes		6				22
Accrued expenses
Income tax payable		77				48
Other liabilities and deferred revenue
Income tax payable		281				—
Deferred income tax liabilities		391				76

A reconciliation of unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015 was as follows:

		December 31,
In millions		2017				2016				2015
Balance at beginning of year		$	59			$	135			$	174
Additions to current year tax positions		11				10				8
Additions to prior years' tax positions		9				18				24
Reductions to prior years' tax positions		( 3		)		—				—
Reductions for tax positions due to settlements with taxing authorities		( 35		)		( 104		)		( 71		)
Balance at end of year		$	41			$	59			$	135

Included in the December 31, 2017, 2016 and 2015, balances are $ 32 million , $ 31 million and $ 78 million , respectively, related to tax positions that, if recognized, would favorably impact the effective tax rate in future periods. Also, we had accrued interest expense related to the unrecognized tax benefits of $ 4 million , $ 3 million and $ 8 million as of December 31, 2017, 2016 and 2015, respectively. We recognize potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. For the years ended December 31, 2017, 2016 and 2015, we recognized $ 3 million , $ 2 million and $ 5 million in net interest expense, respectively.

Audit outcomes and the timing of audit settlements are subject to significant uncertainty. Although we believe that adequate provision has been made for such issues, there is the possibility that the ultimate resolution of such issues could have an adverse effect on our earnings. Conversely, if these issues are resolved favorably in the future, the related provision would be reduced, thus having a positive impact on earnings.

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Investments and advances related to equity method investees and our ownership percentage was as follows:

				December 31,
In millions		Ownership %		2017				2016
Beijing Foton Cummins Engine Co., Ltd.		50 %		$	223			$	163
Komatsu alliances		20-50%		219				197
Dongfeng Cummins Engine Company, Ltd.		50 %		146				111
Cummins-Scania XPI Manufacturing, LLC		50 %		87				82
Chongqing Cummins Engine Company, Ltd.		50 %		84				73
Tata Cummins, Ltd.		50 %		59				63
Other		Various		338				257
Investments and advances related to equity method investees				$	1,156			$	946

We have approximately $ 614 million in our investment account at December 31, 2017 , that represents cumulative undistributed income in our equity investees. Dividends received from our unconsolidated equity investees were $ 219 million , $ 212 million and $ 248 million in 2017 , 2016 and 2015 , respectively.

Equity, royalty and interest income from investees, net of applicable taxes, was as follows:

		Years ended December 31,
In millions		2017				2016				2015
Distribution entities
Komatsu Cummins Chile, Ltda.		$	30			$	34			$	31
North American distributors		—				21				33
All other distributors		( 1		)		—				3
Manufacturing entities
Beijing Foton Cummins Engine Co., Ltd.		94				52				62
Dongfeng Cummins Engine Company, Ltd.		73				46				51
Chongqing Cummins Engine Company, Ltd.		41				38				41
Dongfeng Cummins Emission Solutions Co., Ltd.		13				9				6
Shanghai Fleetguard Filter Co., Ltd.		12				10				10
Cummins Westport, Inc.		9			(1)	11				18
All other manufacturers		37			(1)	39				18
Cummins share of net income		308				260				273
Royalty and interest income		49				41				42
Equity, royalty and interest income from investees		$	357			$	301			$	315

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⁽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. See Note 2 , " INCOME TAXES ," to our Consolidated Financial Statements for additional information .

Distribution Entities

We have an extensive worldwide distributor and dealer network through which we sell and distribute our products and services. Generally, our distributors are divided by geographic region with some of our distributors being wholly-owned by Cummins, some partially-owned and some independently owned. We consolidate all wholly-owned distributors and partially-owned distributors where we are the primary beneficiary and account for other partially-owned distributors using the equity method of accounting.

•	Komatsu Cummins Chile, Ltda. - Komatsu Cummins Chile, Ltda. is a joint venture with Komatsu America Corporation. The joint venture is a distributor that offers the full range of our products and services to customers and end-users in Chile and Peru.

•	North American Distributors - During 2016, we acquired the remaining interest in the final unconsolidated North American distributor joint venture.

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In certain cases where we own a partial interest in a distributor, we may be obligated to purchase the other equity holders' interests if certain events occur (such as the death or resignation of the distributor principal or a change in control of Cummins Inc.). The purchase consideration of the equity interests may be determined based on the fair vale of the distributor's assets. Repurchase obligations and practices vary by geographic region.

All distributors that are partially-owned are considered to be related parties in our Consolidated Financial Statements .

Manufacturing Entities

Our manufacturing joint ventures have generally been formed with customers and generally are intended to allow us to increase our market penetration in geographic regions, reduce capital spending, streamline our supply chain management and develop technologies. Our largest manufacturing joint ventures are based in China and are included in the list below. Our engine manufacturing joint ventures are supplied by our Components segment in the same manner as it supplies our wholly-owned Engine segment and Power Systems segment manufacturing facilities. Our Components segment joint ventures and wholly owned entities provide fuel systems, filtration, aftertreatment systems, turbocharger products and transmissions that are used with our engines as well as some competitors' products. The results and investments in our joint ventures in which we have 50 percent or less ownership interest are included in “Equity, royalty and interest income from investees” and “Investments and advances related to equity method investees” in our Consolidated Statements of Income and Consolidated Balance Sheets , respectively.

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Beijing Foton Cummins Engine Co., Ltd. - Beijing Foton Cummins Engine Co., Ltd. is a joint venture in China with Beiqi Foton Motor Co., Ltd., a commercial vehicle manufacturer, which consists of two distinct lines of business, a light-duty business and a heavy-duty business. The light-duty business produces our families of ISF 2.8 liter to 4.5 liter high performance light-duty diesel engines in Beijing. These engines are used in light-duty commercial trucks, pickup trucks, buses, multipurpose and sport utility vehicles with main markets in China, Brazil and Russia. Certain types of marine, small construction equipment and industrial applications are also served by these engine families. The heavy-duty business produces ISG 10.5 liter and ISG 11.8 liter families of our high performance heavy-duty diesel engines in Beijing. These engines are used in heavy-duty commercial trucks in China and will be used by Cummins either directly sourced from China and/or locally assembled in other markets. Certain types of construction equipment and industrial applications are also served by these engine families.

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Dongfeng Cummins Engine Company, Ltd. - Dongfeng Cummins Engine Company, Ltd. (DCEC) is a joint venture in China with Dongfeng Automotive Co. Ltd., a subsidiary of Dongfeng Motor Corporation, one of the largest medium-duty and heavy-duty truck manufacturers in China. DCEC produces Cummins 3.9 to 13 -liter mechanical engines, full-electric diesel engines, with a power range from 80 to 680 horsepower, and natural gas engines.

•	Chongqing Cummins Engine Company, Ltd. - Chongqing Cummins Engine Company, Ltd. is a joint venture in China with Chongqing Machinery and Electric Co. Ltd. This joint venture manufactures several models of our heavy-duty and high-horsepower diesel engines, primarily serving the industrial and stationary power markets in China.

•

Dongfeng Cummins Emission Solutions Co., Ltd. - Dongfeng Cummins Emission Solutions Co. Ltd. is a joint venture in China with Dongfeng Industrial Company, a subsidiary of Dongfeng Motor Group Company Limited, a manufacturer of numerous on-highway vehicles. This joint venture produces, purchases and sells advanced diesel engine aftertreatment solutions to support the full line of Dongfeng's commercial vehicles.

•	Shanghai Fleetguard Filter Co., Ltd. - Shanghai Fleetguard Filter Co. Ltd. is a joint venture in China with Dongfeng Motor Co., Ltd., a manufacturer of numerous on-highway vehicles. This joint venture produces and sells filters and filter parts to support the full line of Dongfeng's commercial vehicles.

•	Cummins Westport, Inc. - Cummins Westport Inc. is a joint venture in Canada with Westport Innovations Inc. to market and sell automotive spark-ignited natural gas engines worldwide and to participate in joint technology projects on low-emission technologies.

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Equity Investee Financial Summary

Summary financial information for our equity investees was as follows:

		For the years ended and at December 31,
In millions		2017				2016				2015
Net sales		$	7,050			$	5,654			$	5,946
Gross margin		1,422				1,182				1,265
Net income		680				499				521
Cummins share of net income		$	308			$	260			$	273
Royalty and interest income		49				41				42
Total equity, royalty and interest from investees		$	357			$	301			$	315
Current assets		$	3,416			$	2,602
Non-current assets		1,379				1,377
Current liabilities		( 2,567		)		( 1,938		)
Non-current liabilities		( 237		)		( 232		)
Net assets		$	1,991			$	1,809
Cummins share of net assets		$	1,116			$	927

Sale of Equity Investee

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

		December 31,
		2017												2016
In millions		Cost				Gross unrealized gains/(losses)				Estimated fair value				Cost				Gross unrealized gains/(losses)				Estimated fair value
Available-for-sale (1)
Debt mutual funds		$	170			$	—			$	170			$	132			$	—			$	132
Bank debentures		—				—				—				114				—				114
Equity mutual funds		12				3				15				12				—				12
Certificates of deposit		12				—				12				—				—				—
Government debt securities		1				—				1				2				—				2
Total marketable securities		$	195			$	3			$	198			$	260			$	—			$	260

______________________________________________________

⁽¹⁾ All marketable securities are classified as Level 2 securities. The fair value of Level 2 securities is estimated using actively quoted prices for similar instruments from brokers 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 2017 or 2016.

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

•	Debt mutual funds — The fair value measure for the vast majority of these investments is the daily net asset value published on a 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.

•

Bank debentures and Certificates of deposit — These investments provide us with a contractual rate of return and generally range in maturity from three months to five years . The counterparties 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.

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•	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 — 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 from the sale of available-for-sale (AFS) securities were as follows:

		Years ended December 31,
In millions		2017				2016				2015
Proceeds from sales and maturities of marketable securities		$	266			$	306			$	270
Gross realized gains from the sale of available-for-sale securities (1)		—				—				1

____________________________________________________

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

At December 31, 2017 , the fair value of AFS investments in debt securities that utilize a Level 2 fair value measure is shown by contractual maturity below:

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

Details of our property, plant and equipment balance were as follows:

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The following table summarizes the changes in the carrying amount of goodwill for the years ended December 31, 2017 and 2016 :

In millions	Components				Distribution				Power Systems				Engine				Total
Balance at December 31, 2015	$	391			$	75			$	10			$	6			$	482
Acquisitions	—				4				—				—				4
Translation and other	( 5		)		—				( 1		)		—				( 6		)
Balance at December 31, 2016	386				79				9				6				480
Acquisitions	544			(1)	—				—				—				544
Translation and other	10				—				1				—				11
Balance at December 31, 2017	$	940			$	79			$	10			$	6			$	1,035
Goodwill not yet allocated to segments																	47			(2)
																	$	1,082

____________________________________________________

(1)	Acquisition goodwill relates to Eaton Cummins Automated Transmission Technologies. See Note 18 , " ACQUISITIONS ," for additional information.

(2)	Goodwill associated with the Brammo Inc. acquisition was presented as a reconciling item as it had not yet been assigned to a reportable segment at December 31, 2017. Effective January 1, 2018, Brammo Inc. will be assigned to a new reportable segment called Electrified Power. See Note 18 , " ACQUISITIONS ," for additional information.

Intangible assets that have finite useful lives are amortized over their estimated useful lives. The following table summarizes our other intangible assets with finite useful lives that are subject to amortization:

	December 31,
In millions	2017				2016
Software	$	718			$	617
Less: Accumulated amortization	( 386		)		( 330		)
Software, net	332				287
Trademarks, patents, customer relationships and other	786				164
Less: Accumulated amortization	( 145		)		( 119		)
Trademarks, patents, customer relationships and other, net	641				45
Total other intangible assets, net	$	973			$	332

Amortization expense for software and other intangibles totaled $ 112 million , $ 92 million and $ 90 million for the years ended December 31, 2017 , 2016 and 2015 , respectively. The projected amortization expense of our intangible assets, assuming no further acquisitions or dispositions, is as follows:

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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:

		December 31,
In millions		2017				2016				2015
Balance, beginning of year		$	1,414			$	1,404			$	1,283
Provision for warranties issued		557				334				391
Deferred revenue on extended warranty contracts sold		240				231				290
Payments		( 398		)		( 385		)		( 389		)
Amortization of deferred revenue on extended warranty contracts		( 219		)		( 201		)		( 179		)
Changes in estimates for pre-existing warranties		85				44				20
Foreign currency translation		8				( 13		)		( 12		)
Balance, end of year		$	1,687			$	1,414			$	1,404

Warranty related deferred revenues and the long-term portion of the warranty liabilities on our Consolidated Balance Sheets were as follows:

Loans Payable and Commercial Paper

Loans payable at December 31, 2017 and 2016 were $ 57 million and $ 41 million , respectively, and consisted primarily of notes payable to financial institutions. The weighted-average interest rate for notes payable, bank overdrafts and current maturities of long-term debt at December 31 was as follows:

		2017			2016			2015
Weighted-average interest rate		3.01	%		4.20	%		3.65	%

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We can issue up to $1.75 billion of unsecured short-term promissory notes ("commercial paper") pursuant to our board authorized commercial paper programs. The programs facilitate the private placement of unsecured short-term debt through third party brokers. We intend to use the net proceeds from the commercial paper borrowings for general corporate purposes. We had $ 298 million in outstanding borrowings under our commercial paper programs at December 31, 2017 , with a weighted-average interest rate of 1.56 percent .

Revolving Credit Facilities

On November 13, 2015, we entered into an amended and restated five-year revolving credit agreement with a syndicate of lenders, which provides us with a $ 1.75 billion senior unsecured revolving credit facility and expires on November 13, 2020 . Amounts payable under our revolving credit facility will rank pro rata with all of our unsecured, unsubordinated indebtedness. Up to $ 300 million under our credit facility is available for swingline loans. Advances under the facility bear interest at (i) a base rate or (ii) a rate equal to the LIBOR rate plus an applicable margin based on the credit ratings of our outstanding senior unsecured long-term debt. Based on our current long-term debt ratings, the applicable margin on LIBOR rate loans was 0.75 percent per annum at December 31, 2017 . Advances under the facility may be prepaid without premium or penalty, subject to customary breakage costs.

On September 5, 2017, we entered into a 364-day credit facility that allows us to borrow up to $ 1 billion of additional unsecured funds at any time through September 2018.

These credit agreements include various covenants, including, among others, maintaining a leverage ratio of no more than 3.5 to 1.0. At December 31, 2017 , we were in compliance with the covenants.

There were no outstanding borrowings under these facilities at December 31, 2017 . We intend to maintain credit facilities of a similar aggregate amount by renewing or replacing these facilities before expiration. Revolving credit facilities are maintained primarily to provide backup liquidity for our commercial paper borrowings, letters of credit and general corporate purposes. At December 31, 2017 , we had $ 298 million of commercial paper outstanding, which effectively reduced the $ 1.75 billion available capacity under our five-year revolving credit facility to $ 1.45 billion . At December 31, 2017, we also had $ 1 billion available under our 364-day facility.

At December 31, 2017 , we also had $ 240 million available for borrowings under our international and other domestic credit facilities.

Long-term Debt

	December 31,
In millions	2017				2016
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	76				51
Unamortized discount	( 54		)		( 56		)
Fair value adjustments due to hedge on indebtedness	35				47
Capital leases	121				88
Total long-term debt	1,651				1,603
Less: Current maturities of long-term debt	63				35
Long-term debt	$	1,588			$	1,568

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

In millions	2018				2019				2020				2021				2022
Principal payments	$	63			$	50			$	12			$	6			$	6

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Interest on the $ 500 million aggregate principal amount of 3.65 % senior unsecured notes due in 2023 and the $ 500 million aggregate principal amount of 4.875 % senior unsecured notes due in 2043 pay interest semi-annually on April 1 and October 1 of each year.

Interest on the 6.75 % debentures is payable on February 15 and August 15 of each year.

Interest on the $ 250 million 7.125 % debentures and $ 165 million 5.65 % debentures is payable on March 1 and September 1 of each year. The debentures are unsecured and are not subject to any sinking fund requirements. We can redeem the 7.125 % debentures and the 5.65 % debentures at any time prior to maturity at the greater of par plus accrued interest or an amount designed to ensure that the debenture holders are not penalized by the early redemption.

Our debt agreements contain several restrictive covenants. The most restrictive of these covenants applies to our revolving credit facility which will upon default, among other things, limit our ability to incur additional debt or issue preferred stock, enter into sale-leaseback transactions, sell or create liens on our assets, make investments and merge or consolidate with any other entity. In addition, we are subject to a maximum debt-to-EBITDA ratio financial covenant. At December 31, 2017 , we were in compliance with all of the covenants under our borrowing agreements.

Shelf Registration

As a well-known seasoned issuer, we filed an automatic shelf registration for an undetermined amount of debt and equity securities with the SEC 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.

Interest

For the years ended December 31, 2017 , 2016 and 2015 , total interest incurred was $ 85 million , $ 75 million and $ 68 million , respectively, and interest capitalized was $ 4 million , $ 6 million and $ 3 million , respectively.

Interest Rate Risk

We are exposed to market risk from fluctuations in interest rates. We manage our exposure to interest rate fluctuations through the use of interest rate swaps. The objective of the swaps is to more effectively balance our borrowing costs and interest rate risk.

We have a series of interest rate swaps to effectively convert our September 2013, $ 500 million debt issue, due in 2023, from a fixed rate of 3.65 percent to a floating rate equal to the one-month LIBOR plus a spread. The terms of the swaps mirror those of the debt, with interest paid semi-annually. The swaps were designated, and will be accounted for, as fair value hedges under GAAP. The gain or loss on these derivative instruments, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, are recognized in current income as “Interest expense.” The net swap settlements that accrue each period are also reported in interest expense.

The following table summarizes these gains and losses for the years presented below:

		Years ended December 31,
In millions		2017								2016								2015
Income Statement Classification		Gain/(Loss) on Swaps				Gain/(Loss) on Borrowings				Gain/(Loss) on Swaps				Gain/(Loss) on Borrowings				Gain/(Loss) on Swaps				Gain/(Loss) on Borrowings
Interest expense (1)		$	( 7	)		$	8			$	( 8	)		$	12			$	6			$	( 2	)

___________________________________________

⁽¹⁾ The difference between the gain/(loss) on swaps and borrowings represents hedge ineffectiveness.

Fair Value of Debt

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

		December 31,
In millions		2017				2016
Fair values of total debt (1)		$	2,301			$	2,077
Carrying values of total debt		2,006				1,856

___________________________________________

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Pension Plans

We sponsor several contributory and noncontributory pension plans covering substantially all employees. Generally, hourly employee pension benefits are earned based on years of service and compensation during active employment while future benefits for salaried employees are determined using a cash balance formula. However, the level of benefits and terms of vesting may vary among plans. Pension plan assets are administered by trustees and are principally invested in fixed income securities and equity securities. It is our policy to make contributions to our various qualified plans in accordance with statutory and contractual funding requirements and any additional contributions we determine are appropriate.

Obligations, Assets and Funded Status

Benefit obligation balances presented below reflect the projected benefit obligation (PBO) for our pension plans. The changes in the benefit obligations, the various plan assets, the funded status of the plans and the amounts recognized in our Consolidated Balance Sheets for our significant pension plans at December 31 were as follows:

		Qualified and Non-Qualified Pension Plans
		U.S. Plans								U.K. Plans
In millions		2017				2016				2017				2016
Change in benefit obligation
Benefit obligation at the beginning of the year		$	2,661			$	2,533			$	1,451			$	1,390
Service cost		107				90				26				21
Interest cost		106				109				40				50
Actuarial loss		61				111				53				316
Benefits paid from fund		( 155		)		( 175		)		( 54		)		( 55		)
Benefits paid directly by employer		( 15		)		( 16		)		—				—
Plan amendments		—				9				—				—
Exchange rate changes		—				—				146				( 271		)
Benefit obligation at end of year		$	2,765			$	2,661			$	1,662			$	1,451
Change in plan assets
Fair value of plan assets at beginning of year		$	2,751			$	2,636			$	1,753			$	1,712
Actual return on plan assets		351				200				78				402
Employer contributions		219				90				9				28
Benefits paid		( 155		)		( 175		)		( 54		)		( 55		)
Exchange rate changes		—				—				174				( 334		)
Fair value of plan assets at end of year		$	3,166			$	2,751			$	1,960			$	1,753
Funded status (including underfunded and nonfunded plans) at end of year		$	401			$	90			$	298			$	302
Amounts recognized in consolidated balance sheets
Pension assets - long-term		$	745			$	429			$	298			$	302
Accrued compensation, benefits and retirement costs - current liabilities		( 14		)		( 13		)		—				—
Pensions - long-term liabilities		( 330		)		( 326		)		—				—
Net amount recognized		$	401			$	90			$	298			$	302
Amounts recognized in accumulated other comprehensive loss
Net actuarial loss		$	649			$	770			$	207			$	172
Prior service cost		8				9				—				—
Net amount recognized		$	657			$	779			$	207			$	172

In addition to the pension plans in the above table, we also maintain less significant defined benefit pension plans primarily in 14 other countries outside of the U.S. and the U.K. that comprise approximately 3 percent and 4 percent of our pension plan assets and obligations , respectively at December 31, 2017 . These plans are reflected in "Other liabilities and deferred revenue" on our Consolidated Balance Sheets . In 2017, we made $ 11 million of contributions to these plans.

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The following table presents information regarding total accumulated benefit obligation, PBO's and underfunded pension plans that are included in the preceding table:

		Qualified and Non-Qualified Pension Plans
		U.S. Plans								U.K. Plans
In millions		2017				2016				2017				2016
Total accumulated benefit obligation		$	2,745			$	2,625			$	1,569			$	1,366
Plans with accumulated benefit obligation in excess of plan assets
Accumulated benefit obligation		323				304				—				—
Plans with projected benefit obligation in excess of plan assets
Projected benefit obligation		344				339				—				—

Components of Net Periodic Pension Cost

The following table presents the net periodic pension cost under our plans for the years ended December 31:

		Qualified and Non-Qualified Pension Plans
		U.S. Plans												U.K. Plans
In millions		2017				2016				2015				2017				2016				2015
Service cost		$	107			$	90			$	80			$	26			$	21			$	27
Interest cost		106				109				102				40				50				56
Expected return on plan assets		( 204		)		( 201		)		( 189		)		( 70		)		( 71		)		( 91		)
Amortization of prior service cost		—				—				( 1		)		—				—				—
Recognized net actuarial loss		37				29				45				40				15				34
Net periodic pension cost		$	46			$	27			$	37			$	36			$	15			$	26

Other changes in benefit obligations and plan assets recognized in other comprehensive income for the years ended December 31 were as follows:

In millions		2017				2016				2015
Amortization of prior service credit		$	—			$	—			$	1
Recognized net actuarial loss		( 77		)		( 44		)		( 79		)
Incurred actuarial (gain) loss		( 40		)		107				105
Foreign exchange translation adjustments		30				( 28		)		( 7		)
Total recognized in other comprehensive income		$	( 87	)		$	35			$	20
Total recognized in net periodic pension cost and other comprehensive income		$	( 5	)		$	77			$	83

The amount in accumulated other comprehensive loss expected to be recognized as a component of net periodic pension cost during the next fiscal year is a net actuarial loss of $ 62 million .

Assumptions

The table below presents various assumptions used in determining the PBO for each year and reflects weighted-average percentages for the various plans as follows:

		Qualified and Non-Qualified Pension Plans
		U.S. Plans						U.K. Plans
		2017			2016			2017			2016
Discount rate		3.66	%		4.12	%		2.55	%		2.70	%
Compensation increase rate		2.99	%		4.87	%		3.75	%		3.75	%

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The table below presents various assumptions used in determining the net periodic pension cost and reflects weighted-average percentages for the various plans as follows:

		Qualified and Non-Qualified Pension Plans
		U.S. Plans									U.K. Plans
		2017			2016			2015			2017			2016			2015
Discount rate		4.12	%		4.47	%		4.07	%		2.70	%		3.95	%		3.80	%
Expected return on plan assets		7.25	%		7.50	%		7.50	%		4.50	%		4.70	%		5.80	%
Compensation increase rate		4.87	%		4.87	%		4.88	%		3.75	%		3.75	%		4.25	%

Plan Assets

Our investment policies in the U.S. and U.K. provide for the rebalancing of assets to maintain our long-term strategic asset allocation. We are committed to this long-term strategy and do not attempt to time the market given empirical evidence that asset allocation is more critical than individual asset or investment manager selection. Rebalancing of the assets has and continues to occur. The rebalancing is critical to having the proper weighting of assets to achieve the expected total portfolio returns. We believe that our portfolio is highly diversified and does not have any significant exposure to concentration risk. The plan assets for our defined benefit pension plans do not include any of our common stock.

U.S. Plan Assets

For the U.S. qualified pension plans, our assumption for the expected return on assets was 7.25 percent in 2017 . Projected returns are based primarily on broad, publicly traded equity and fixed income indices and forward-looking estimates of active portfolio and investment management. We expect additional positive returns from this active investment management. Based on the historical returns and forward-looking return expectations in a rising interest rate environment, we have elected to reduce our assumption to 6.50 percent in 2018 .

The primary investment objective is to exceed, on a net-of-fee basis, the rate of return of a policy portfolio comprised of the following:

Asset Class		Target			Range
U.S. equities		10.0	%		+2.0/-8.0%
Non-U.S. equities		2.0	%		+3.0/-2.0%
Global equities		8.0	%		+1.0/-5.0%
Total equities		20.0	%
Real estate		6.0	%		+4.0/-6.0%
Private equity/venture capital		4.0	%		+6.0/-4.0%
Opportunistic credit		2.0	%		+8.0/-2.0%
Fixed income		68.0	%		+/-5.0%
Total		100.0	%

The fixed income component is structured to represent a custom bond benchmark that will closely hedge the change in the value of our liabilities. This component is structured in such a way that its benchmark covers approximately 100 percent of the plan's exposure to changes in its discount rate (AA corporate bond yields). In order to achieve a hedge on more than the targeted 68 percent of plan assets invested in fixed income securities, our Benefits Policy Committee (BPC) permits the fixed income managers, other managers or the custodian/trustee to utilize derivative securities, as part of a liability driven investment strategy to further reduce the plan's risk of declining interest rates. However, all managers hired to manage assets for the trust are prohibited from using leverage unless specifically discussed with the BPC and approved in their guidelines.

U.K. Plan Assets

For the U.K. qualified pension plans, our assumption for the expected return on assets was 4.5 percent in 2017 . The methodology used to determine the rate of return on pension plan assets in the U.K. was based on establishing an equity-risk premium over current long-term bond yields adjusted based on target asset allocations. Our strategy with respect to our investments in these assets is to be invested in a suitable mixture of return-seeking assets such as equities, real estate and liability matching assets such as group annuity insurance contracts and duration matched bonds. Therefore, the risk and return balance of our U.K. asset portfolio should reflect a long-term horizon. To achieve these objectives we have established the following targets:

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Asset Class		Target
Global equities		23.0	%
Real estate/private markets		5.0	%
Re-insurance		8.0	%
Corporate credit instruments		7.5	%
Fixed income		56.5	%
Total		100.0	%

As part of our strategy in the U.K. we have not prohibited the use of any financial instrument, including derivatives. As in the U.S. plan, derivatives may be used to better match liability duration and are not used in a speculative way. The 56.5 percent fixed income component is structured in a way that covers approximately 79 percent of the plan's exposure to changes in its discount rate. Based on the above discussion, we have elected an assumption of 4.00 percent in 2018 .

Fair Value of U.S. Plan Assets

The fair values of U.S. pension plan assets by asset category were as follows:

		Fair Value Measurements at December 31, 2017
In millions		Quoted prices in active markets for identical assets (Level 1)				Significant other observable inputs (Level 2)				Significant unobservable inputs (Level 3)				Total
Equities
U.S.		$	102			$	—			$	—			$	102
Non-U.S.		56				—				—				56
Fixed income
Government debt		—				691				—				691
Corporate debt
U.S.		—				590				—				590
Non-U.S.		—				73				—				73
Asset/mortgaged backed securities		—				78				—				78
Net cash equivalents (1)		50				25				—				75
Derivative instruments (2)		—				3				—				3
Private equity and real estate (3)		—				—				246				246
Net plan assets subject to leveling		$	208			$	1,460			$	246			$	1,914
Pending trade/purchases/sales														( 96		)
Accruals (4)														12
Investments measured at net asset value														1,336
Net plan assets														$	3,166

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		Fair Value Measurements at December 31, 2016
In millions		Quoted prices in active markets for identical assets (Level 1)				Significant other observable inputs (Level 2)				Significant unobservable inputs (Level 3)				Total
Equities
U.S.		$	145			$	—			$	—			$	145
Non-U.S.		125				—				—				125
Fixed income
Government debt		—				570				—				570
Corporate debt
U.S.		—				497				—				497
Non-U.S.		—				84				—				84
Asset/mortgaged backed securities		—				58				—				58
Net cash equivalents (1)		18				20				—				38
Derivative instruments (2)		—				9				—				9
Private equity and real estate (3)		—				—				212				212
Net plan assets subject to leveling		$	288			$	1,238			$	212			$	1,738
Pending trade/purchases/sales														( 83		)
Accruals (4)														12
Investments measured at net asset value														1,084
Net plan assets														$	2,751

____________________________________________________

(1)	Cash equivalents include commercial paper, short-term government/agency, mortgage and credit instruments.

(2)	Derivative instruments include interest rate swaps and credit default swaps.

(3)	The instruments in private equity, real estate and insurance funds, for which quoted market prices are not available, are valued at their estimated fair value as determined by applicable investment managers or by audited financial statements of the funds.

(4)	Accruals include interest or dividends that were not settled at December 31.

Certain of our assets are valued based on their respective net asset value (NAV) (or its equivalent), as an alternative to estimated fair value due to the absence of readily available market prices. The fair value of each such investment category was as follows:

•	U.S. and Non-U.S. Equities ( $ 428 million and $ 511 million at December 31, 2017 and 2016 , respectively) - These commingled funds have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days.

•	Government Debt ( $ 347 million and $ 178 million at December 31, 2017 and 2016 , respectively) - These commingled funds have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days.

•	U.S. and Non-U.S. Corporate Debt ( $ 321 million and $ 265 million at December 31, 2017 and 2016 , respectively) - These commingled funds have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days.

•	Real Estate ( $ 137 million and $ 129 million at December 31, 2017 and 2016 , respectively) - This asset type represents different types of real estate including development property, industrial property, individual mortgages, office property, property investment companies, and retail property. These funds are valued using NAVs and allow quarterly or more frequent redemptions.

•	Asset/Mortgage Backed Securities ( $ 103 million and $ 1 million at December 31, 2017 and 2016 , respectively) - This asset type represents investments in fixed- and floating-rate loans. These funds are valued using NAVs and allow quarterly or more frequent redemptions.

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The reconciliation of Level 3 assets was as follows:

		Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
In millions		Private Equity				Real Estate				Total
Balance at December 31, 2015		$	143			$	60			$	203
Actual return on plan assets
Unrealized gains on assets still held at the reporting date		6				6				12
Purchases, sales and settlements, net		( 1		)		( 2		)		( 3		)
Balance at December 31, 2016		148				64				212
Actual return on plan assets
Unrealized gains on assets still held at the reporting date		24				5				29
Purchases, sales and settlements, net		8				( 3		)		5
Balance at December 31, 2017		$	180			$	66			$	246

Fair Value of U.K. Plan Assets

In July 2012, the U.K. pension plan purchased an insurance contract that will guarantee payment of specified pension liabilities. The contract defers payment for 10 years and is included in the table below in Level 3 for years ended December 31, 2017 and 2016 at a value of $ 477 million and $ 439 million , respectively.

The fair values of U.K. pension plan assets by asset category were as follows:

		Fair Value Measurements at December 31, 2017
In millions		Quoted prices in active markets for identical assets (Level 1)				Significant other observable inputs (Level 2)				Significant unobservable inputs (Level 3)				Total
Equities
U.S.		$	—			$	63			$	—			$	63
Non-U.S.		—				91				—				91
Fixed income
Net cash equivalents (1)		29				—				—				29
Private equity, real estate and insurance (2)		—				—				671				671
Net plan assets subject to leveling		$	29			$	154			$	671			$	854
Investments measured at net asset value														1,106
Net plan assets														$	1,960

		Fair Value Measurements at December 31, 2016
In millions		Quoted prices in active markets for identical assets (Level 1)				Significant other observable inputs (Level 2)				Significant unobservable inputs (Level 3)				Total
Equities
U.S.		$	—			$	174			$	—			$	174
Non-U.S.		—				193				—				193
Fixed income
Net cash equivalents (1)		24				—				—				24
Private equity, real estate and insurance (2)		—				—				613				613
Net plan assets subject to leveling		$	24			$	367			$	613			$	1,004
Investments measured at net asset value														749
Net plan assets														$	1,753

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(1)	Cash equivalents include commercial paper, short-term government/agency, mortgage and credit instruments.

(2)	The instruments in private equity, real estate and insurance funds, for which quoted market prices are not available, are valued at their estimated fair value as determined by applicable investment managers or by audited financial statement of the funds.

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Certain of our assets are valued based on their respective NAV (or its equivalent), as an alternative to estimated fair value due to the absence of readily available market prices. The fair value of each such investment category was as follows:

•	U.S. and Non-U.S. Corporate Debt ( $ 822 million and $ 655 million at December 31, 2017 and 2016 , respectively) - These commingled funds have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days.

•	U.S. and Non-U.S. Equities ( $ 144 million and zero dollars at December 31, 2017 and 2016 , respectively) - These commingled funds have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days.

•	Re-insurance ( $ 86 million and $ 56 million at December 31, 2017 and 2016 , respectively) - This commingled fund has a NAV that is determined on a monthly basis and the investment may be sold at that value.

•	Managed Futures Funds ( $ 54 million and $ 38 million at December 31, 2017 and 2016 , respectively) - These commingled funds invest in commodities, fixed income and equity securities. They have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days.

The reconciliation of Level 3 assets was as follows:

		Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
In millions		Insurance				Real Estate				Private Equity				Total
Balance at December 31, 2015		$	445			$	57			$	99			$	601
Actual return on plan assets
Unrealized (losses) gains on assets still held at the reporting date		( 6		)		( 7		)		15				2
Purchases, sales and settlements, net		—				7				3				10
Balance at December 31, 2016		439				57				117				613
Actual return on plan assets
Unrealized gains on assets still held at the reporting date		38				10				28				76
Purchases, sales and settlements, net		—				( 8		)		( 10		)		( 18		)
Balance at December 31, 2017		$	477			$	59			$	135			$	671

Level 3 Assets

The investments in an insurance contract, venture capital, private equity, opportunistic credit and real estate funds, for which quoted market prices are not available, are valued at their estimated fair value as determined by applicable investment managers or by quarterly financial statements of the funds. These financial statements are audited at least annually. In conjunction with our investment consultant, we monitor the fair value of the insurance contract as periodically reported by our insurer and their counterparty risk. The fair value of all real estate properties, held in the partnerships, are valued at least once per year by an independent professional real estate valuation firm. Fair value generally represents the fund's proportionate share of the net assets of the investment partnerships as reported by the general partners of the underlying partnerships. Some securities with no readily available market are initially valued at cost, utilizing independent professional valuation firms as well as market comparisons with subsequent adjustments to values which reflect either the basis of meaningful third-party transactions in the private market or the fair value deemed appropriate by the general partners of the underlying investment partnerships. In such instances, consideration is also given to the financial condition and operating results of the issuer, the amount that the investment partnerships can reasonably expect to realize upon the sale of the securities and any other factors deemed relevant. The estimated fair values are subject to uncertainty and therefore may differ from the values that would have been used had a ready market for such investments existed and such differences could be material.

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Estimated Future Contributions and Benefit Payments

We plan to contribute approximately $ 38 million to our defined benefit pension plans in 2018 . The table below presents expected future benefit payments under our pension plans:

		Qualified and Non-Qualified Pension Plans
In millions		2018				2019				2020				2021				2022				2023 - 2027
Expected benefit payments		$	239			$	237			$	242			$	248			$	253			$	1,320

Other Pension Plans

We also sponsor defined contribution plans for certain hourly and salaried employees. Our contributions to these plans were $ 84 million , $ 68 million and $ 74 million for the years ended December 31, 2017 , 2016 and 2015 .

Other Postretirement Benefits

Our other postretirement benefit plans provide various health care and life insurance benefits to eligible employees, who retire and satisfy certain age and service requirements, and their dependents. The plans are contributory and contain cost-sharing features such as caps, deductibles, coinsurance and spousal contributions. Employer contributions are limited by formulas in each plan. Retiree contributions for health care benefits are adjusted annually, and we reserve the right to change benefits covered under these plans. There were no plan assets for the postretirement benefit plans as our policy is to fund benefits and expenses for these plans as claims and premiums are incurred.

Obligations and Funded Status

Benefit obligation balances presented below reflect the accumulated postretirement benefit obligations (APBO) for our other postretirement benefit plans. The changes in the benefit obligations, the funded status of the plans and the amounts recognized in our Consolidated Balance Sheets for our significant other postretirement benefit plans were as follows:

In millions		2017				2016
Change in benefit obligation
Benefit obligation at the beginning of the year		$	364			$	385
Interest cost		14				16
Plan participants' contributions		24				14
Actuarial (gain) loss		( 35		)		9
Benefits paid directly by employer		( 49		)		( 60		)
Benefit obligation at end of year		$	318			$	364
Funded status at end of year		$	( 318	)		$	( 364	)
Amounts recognized in consolidated balance sheets
Accrued compensation, benefits and retirement costs - current liabilities		$	( 29	)		$	( 35	)
Postretirement benefits other than pensions-long-term liabilities		( 289		)		( 329		)
Net amount recognized		$	( 318	)		$	( 364	)
Amounts recognized in accumulated other comprehensive loss:
Net actuarial loss		$	27			$	69
Prior service credit		( 4		)		( 5		)
Net amount recognized		$	23			$	64

In addition to the other postretirement plans in the above table, we also maintain less significant postretirement plans in four other countries outside the U.S. that comprise approximately 6 percent and 5 percent of our postretirement obligations at December 31, 2017 and 2016 , respectively. These plans are reflected in "Other liabilities and deferred revenue" in our Consolidated Balance Sheets .

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Components of Net Periodic Other Postretirement Benefits Cost

The following table presents the net periodic other postretirement benefits cost under our plans:

		Years ended December 31,
In millions		2017				2016				2015
Interest cost		$	14			$	16			$	15
Recognized net actuarial loss		6				5				5
Net periodic other postretirement benefit cost		$	20			$	21			$	20

Other changes in benefit obligations recognized in other comprehensive income for the years ended December 31 were as follows:

		Years ended December 31,
In millions		2017				2016				2015
Recognized net actuarial loss		$	( 6	)		$	( 6	)		$	( 5	)
Incurred actuarial (gain) loss		( 35		)		9				6
Total recognized in other comprehensive income		$	( 41	)		$	3			$	1
Total recognized in net periodic other postretirement benefit cost and other comprehensive income		$	( 21	)		$	24			$	21

The amount in accumulated other comprehensive loss expected to be recognized as a component of net periodic other postretirement benefit cost during the next fiscal year is approximately zero .

Assumptions

The table below presents assumptions used in determining the other postretirement benefit obligation for each year and reflects weighted-average percentages for our other postretirement plans as follows:

		2017			2016
Discount rate		3.55	%		4.00	%

The table below presents assumptions used in determining the net periodic other postretirement benefits cost and reflects weighted-average percentages for the various plans as follows:

		2017			2016			2015
Discount rate		4.00	%		4.35	%		3.90	%

Our consolidated other postretirement benefit obligation is determined by application of the terms of health care and life insurance plans, together with relevant actuarial assumptions and health care cost trend rates. For measurement purposes, an 8.00 percent annual rate of increase in the per capita cost of covered health care benefits was assumed in 2017 . The rate is assumed to decrease on a linear basis to 5.00 percent through 2026 and remain at that level thereafter. An increase in the health care cost trends of 1 percent would increase our APBO by $ 16 million at December 31, 2017 and the net periodic other postretirement benefit cost for 2018 by $ 1 million . A decrease in the health care cost trends of 1 percent would decrease our APBO by $ 14 million at December 31, 2017 and the net periodic other postretirement benefit cost for 2018 by $ 1 million .

Estimated Benefit Payments

The table below presents expected benefit payments under our other postretirement benefit plans:

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Other liabilities and deferred revenue included the following:

	December 31,
In millions	2017				2016
Deferred revenue	$	604			$	589
Accrued warranty	466				336
Deferred income taxes	391				76
Income tax payable (1)	281				—
Accrued compensation	151				151
Other long-term liabilities	134				137
Other liabilities and deferred revenue	$	2,027			$	1,289

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⁽¹⁾ Long-term income taxes payable are the result of Tax Legislation and relate to the non-current portion of

the one-time transition tax on accumulated foreign earnings. See Note 2 , " INCOME TAXES ," to our

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; product recalls; 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 pursuant to GAAP 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 Contingencies

Third Party Aftertreatment

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 for 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.

As the certificate holder, we recorded a charge of $ 60 million in 2015 for the expected cost of the proposed voluntary Campaign. The Campaign design was finalized with our original equipment manufacturer (OEM) customer, reviewed with the EPA and submitted for final approval in 2016. We concluded based upon additional in-use emission testing performed in 2016 that the Campaign should be expanded to include a larger population of vehicles manufactured by this one OEM. We recorded additional charges of $ 138 million in 2016 to reflect the estimated cost of our overall participation in the Campaign.

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In late 2016, litigation arose with our OEM customer regarding cost allocation for this Campaign. In January 2018, a settlement was reached with our customer to fully resolve this matter, which resulted in an incremental charge of $ 5 million recorded in the fourth quarter of 2017.

These charges are reflected in a separate line item on our Consolidated Statements of Income .

Engine System

During 2017, the CARB and U.S. EPA selected certain of our pre-2013 model year engine systems for additional emissions testing. Some of these engine systems failed CARB and EPA's tests as a result of degradation of an aftertreatment component. We have not been issued an official notice from the CARB or EPA regarding these particular engine systems. We are working with the agencies and will meet with them beginning in the first quarter of 2018, to develop a resolution of these matters. We are developing and testing a variety of solutions to address the technical issues, which could include a combination of calibration changes, service practices and hardware changes. We recorded a charge of $ 29 million to "cost of sales" in our Consolidated Statements of Income in the third quarter of 2017 for the expected cost of field campaigns to repair some of these engine systems.

In addition, we continue to evaluate other engine systems for model years 2010 through 2015 that could potentially be subject to similar aftertreatment component degradation issues.  At the close of 2017, we had not yet determined the impact to other model years or engine systems or the percentage of the engine system populations that could be affected.

Since there are many unresolved variables with respect to these degradation issues, we are not yet able to estimate the financial impact of these matters. It is possible that they could have a material impact on our results of operations in the periods in which these degradation issues are resolved and a solution is determined.

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

Guarantees and Commitments

Periodically, 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 December 31, 2017, the maximum potential loss related to these guarantees was $ 51 million .

We have arrangements with certain suppliers that require us to purchase minimum volumes or be subject to monetary penalties. At December 31, 2017, if we were to stop purchasing from each of these suppliers, the aggregate amount of the penalty would be approximately $ 84 million , of which $ 23 million relates to a contract with a components supplier that extends to 2018 and $ 19 million relates to a contract with a power systems supplier that extends to 2019. 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 exceed two years . At December 31, 2017, the total commitments under these contracts were $ 17 million . These arrangements enable us to fix the prices of these commodities, which otherwise are subject to market volatility.

We have guarantees with certain customers that require us to satisfactorily honor contractual or regulatory obligations, or compensate for monetary losses related to nonperformance. These performance bonds and other performance-related guarantees were $ 102 million at December 31, 2017 .

Periodically, we enter into various contractual arrangements where we agree to indemnify a third-party against certain types of losses. Common types 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 counterparty for losses suffered as a result of a misrepresentation in the contract.

We regularly evaluate the probability of having to incur costs associated with these indemnities and accrue for expected losses that are probable. Because 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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Leases

We lease certain manufacturing equipment, facilities, warehouses, office space and equipment, aircraft and automobiles for varying periods under lease agreements. Most of the leases are non-cancelable operating leases with fixed rental payments, expire over the next 10 years and contain renewal provisions. Rent expense under these leases was as follows:

		Years ended December 31,
In millions		2017				2016				2015
Rent expense		$	215			$	210			$	205

The following is a summary of the leased property under capital leases by major classes:

		December 31,
In millions		2017				2016
Building		$	158			$	113
Equipment		94				109
Land		16				15
Less: Accumulated depreciation		( 137		)		( 133		)
Total		$	131			$	104

Following is a summary of the future minimum lease payments due under capital and operating leases with terms of more than one year at December 31, 2017 , together with the net present value of the minimum payments due under capital leases:

Preferred and Preference Stock

We are authorized to issue one million shares each of zero par value preferred and preference stock with preferred shares being senior to preference shares. We can determine the number of shares of each series, and the rights, preferences and limitations of each series. At December 31, 2017 , there was no preferred or preference stock outstanding.

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Common Stock

Changes in shares of common stock, treasury stock and common stock held in trust for employee benefit plans were as follows:

In millions		Common Stock			Treasury Stock			Common Stock Held in Trust
Balance at December 31, 2014		222.3			40.1			1.1
Shares acquired		—			7.2			—
Shares issued		0.1			( 0.1	)		( 0.2	)
Balance at December 31, 2015		222.4			47.2			0.9
Shares acquired		—			7.3			—
Shares issued		—			( 0.3	)		( 0.2	)
Balance at December 31, 2016		222.4			54.2			0.7
Shares acquired		—			2.9			—
Shares issued		—			( 0.4	)		( 0.2	)
Balance at December 31, 2017		222.4			56.7			0.5

Treasury Stock

Shares of common stock repurchased by us are recorded at cost as treasury stock and result in a reduction of shareholders' equity in our Consolidated Balance Sheets . Treasury shares may be reissued as part of our stock-based compensation programs. When shares are reissued, we use the weighted-average cost method for determining cost. The gains between the cost of the shares and the issuance price are added to additional paid-in-capital. The losses are deducted from additional paid-in capital to the extent of the gains. Thereafter, the losses are deducted from retained earnings. Treasury stock activity for the three-year period ended December 31, 2017 , consisting of shares issued and repurchased is presented in our Consolidated Statements of Changes in Equity .

In December 2016, our Board of Directors authorized the acquisition of up to $ 1 billion of additional common stock upon completion of the 2015 repurchase plan. In 2017 , we made the following purchases under the 2015 purchase programs:

In millions (except per share amounts) For each quarter ended		2017 Shares Purchased			Average Cost Per Share				Total Cost of Repurchases				Remaining Authorized Capacity (1)
April 2		0.3			$	151.32			$	51			$	445
July 2		0.5			153.95				69				376
October 1		1.7			155.05				271				105
December 31		0.4			166.00				60				46
Total		2.9			$	155.81			$	451

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⁽¹⁾ The remaining authorized capacity under the 2015 plan was calculated based on the cost to purchase the shares but excludes commission expenses in accordance with the authorized plan.

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 received 4.7 million shares at an average purchase price of $ 105.50 per share.

We repurchased $ 451 million , $ 778 million and $900 million of our common stock in the years ended December 31, 2017 , 2016 and 2015 respectively.

Quarterly Dividends

Total dividends paid to common shareholders in 2017 , 2016 and 2015 were $ 701 million , $ 676 million and $ 622 million , respectively. Declaration and payment of dividends in the future depends upon our income and liquidity position, among other factors, and is subject to declaration by our Board of Directors, who meet quarterly to consider our dividend payment. We expect to fund dividend payments with cash from operations.

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In July 2017 , the Board of Directors authorized an increase to our quarterly dividend of 5.4 percent from $ 1.025 per share to $ 1.08 . In July 2016 , the Board of Directors authorized a 5.1 percent increase to our quarterly cash dividend on our common stock from $ 0.975 per share to $ 1.025 per share. In July 2015 , the Board of Directors approved a 25 percent increase to our quarterly dividend on our common stock from $ 0.780 per share to $ 0.975 per share. Cash dividends per share paid to common shareholders for the last three years were as follows:

		Quarterly Dividends
		2017				2016				2015
First quarter		$	1.025			$	0.975			$	0.78
Second quarter		1.025				0.975				0.78
Third quarter		1.08				1.025				0.975
Fourth quarter		1.08				1.025				0.975
Total		$	4.21			$	4.00			$	3.51

Employee Benefits Trust

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Following are the changes in accumulated other comprehensive income (loss) by component:

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
Balance at December 31, 2014		$	( 669	)		$	( 406	)		$	( 1	)		$	( 2	)		$	( 1,078	)
Other comprehensive income before reclassifications
Before tax amount		( 81		)		( 366		)		—				17				( 430		)		$	( 15	)		$	( 445	)
Tax (expense) benefit		35				76				—				( 1		)		110				—				110
After tax amount		( 46		)		( 290		)		—				16				( 320		)		( 15		)		( 335		)
Amounts reclassified from accumulated other comprehensive income (1)(2)		61				—				( 1		)		( 10		)		50				—				50
Net current period other comprehensive income (loss)		15				( 290		)		( 1		)		6				( 270		)		$	( 15	)		$	( 285	)
Balance at December 31, 2015		$	( 654	)		$	( 696	)		$	( 2	)		$	4			$	( 1,348	)
Other comprehensive income before reclassifications
Before tax amount		( 111		)		( 469		)		1				( 38		)		( 617		)		$	( 17	)		$	( 634	)
Tax benefit (expense)		44				38				—				6				88				—				88
After tax amount		( 67		)		( 431		)		1				( 32		)		( 529		)		( 17		)		( 546		)
Amounts reclassified from accumulated other comprehensive income (1)(2)		36				—				—				20				56				—				56
Net current period other comprehensive income (loss)		( 31		)		( 431		)		1				( 12		)		( 473		)		$	( 17	)		$	( 490	)
Balance at December 31, 2016		$	( 685	)		$	( 1,127	)		$	( 1	)		$	( 8	)		$	( 1,821	)
Other comprehensive income before reclassifications
Before tax amount		73				335				2				( 12		)		398				$	20			$	418
Tax benefit (expense)		( 36		)		( 20		)		—				5				( 51		)		—				( 51		)
After tax amount		37				315				2				( 7		)		347				20				367
Amounts reclassified from accumulated other comprehensive income (1)(2)		62				—				—				12				74				—				74
Impact of tax legislation (Note 2)		( 103		)	(3)	—				—				—				( 103		)		—				( 103		)
Net current period other comprehensive income (loss)		( 4		)		315				2				5				318				$	20			$	338
Balance at December 31, 2017		$	( 689	)		$	( 812	)		$	1			$	( 3	)		$	( 1,503	)

_______________________________________________________________________

⁽¹⁾ Amounts are net of tax.

⁽²⁾ Reclassifications out of accumulated other comprehensive income (loss) and the related tax effects are immaterial for separate disclosure.

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In May of 2017 the Board of Directors approved an amendment to the shareholder approved stock incentive plan (the Plan) to increase the number of available shares. The revised Plan allows for the granting of up to 8.5 million total shares of equity awards to executives, employees and non-employee directors. Awards available for grant under the Plan include, but are not limited to, stock options, stock appreciation rights, performance shares and other stock awards. Shares issued under the Plan may be newly issued shares or reissued treasury shares.

Stock options are generally granted with a strike price equal to the fair market value of the stock on the date of grant and a life of 10 years. Stock options granted have a three-year vesting period. The strike price may be higher than the fair value of the stock on the date of the grant, but cannot be lower. Compensation expense is recorded on a straight-line basis over the vesting period beginning on the grant date. The compensation expense is based on the fair value of each option grant using the Black-Scholes option pricing model. Options granted to employees eligible for retirement under our retirement plan are fully expensed at the grant date.

Stock options are also awarded through the Key Employee Stock Investment Plan (KESIP) which allows certain employees, other than officers, to purchase shares of common stock on an installment basis up to an established credit limit. For every even block of 100 KESIP shares purchased by the employee 50 stock options are granted. The options granted through the KESIP program are considered awards under the Plan and are vested immediately. Compensation expense for stock options granted through the KESIP program is recorded based on the fair value of each option grant using the Black-Scholes option pricing model.

Performance shares are granted as target awards and are earned based on our return on equity (ROE) performance. A payout factor has been established ranging from 0 to 200 percent of the target award based on our actual ROE performance. Shares have a three-year performance period. The fair value of the award is equal to the average market price, adjusted for the present value of dividends over the vesting period, of our stock on the grant date. Compensation expense is recorded ratably over the period beginning on the grant date until the shares become unrestricted and is based on the amount of the award that is expected to be earned under the plan formula, adjusted each reporting period based on current information.

Restricted common stock is awarded from time to time at no cost to certain employees. Participants are entitled to cash dividends and voting rights. Restrictions limit the sale or transfer of the shares during a defined period. Generally, one-third of the shares become vested and free from restrictions after two years and one-third of the shares issued become vested and free from restrictions each year thereafter on the anniversary of the grant date, provided the participant remains an employee. The fair value of the award is equal to the average market price of our stock on the grant date. Compensation expense is determined at the grant date and is recognized over the restriction period on a straight-line basis.

Employee compensation expense (net of estimated forfeitures) related to our share-based plans for the years ended December 31, 2017, 2016 and 2015, was approximately $ 39 million , $ 31 million and $ 22 million , respectively. In addition, non-employee director share-based compensation expense for the years ended December 31, 2017 , 2016 and 2015 , was approximately $ 2 million , $ 1 million and $ 2 million , respectively. Shares granted to non-employee directors vest immediately and have no restrictions or performance conditions. The excess tax benefit associated with our employee share-based plans for the years ended December 31, 2017 , 2016 and 2015 , was $ 2 million , $ 1 million and $ 1 million , respectively. The total unrecognized compensation expense (net of estimated forfeitures) related to nonvested awards for our employee share-based plans was approximately $ 41 million at December 31, 2017 , and is expected to be recognized over a weighted-average period of less than two years .

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The tables below summarize the employee share-based activity in the Plan:

		Options			Weighted-average Exercise Price				Weighted-average Remaining Contractual Life (in years)		Aggregate Intrinsic Value (in millions)
Balance at December 31, 2014		1,626,724			$	108.30
Granted		476,205			135.21
Exercised		( 53,545	)		82.89
Forfeited		( 19,698	)		135.89
Balance at December 31, 2015		2,029,686			115.02
Granted		984,430			109.24
Exercised		( 215,890	)		87.27
Forfeited		( 63,462	)		119.56
Balance at December 31, 2016		2,734,764			115.02
Granted		648,900			149.98
Exercised		( 355,479	)		105.91
Forfeited		( 126,816	)		125.65
Balance at December 31, 2017		2,901,369			$	123.49			7.1		$	156
Exercisable, December 31, 2015		1,318,101			$	100.55			5.7		$	13
Exercisable, December 31, 2016		1,149,549			$	104.19			4.8		$	38
Exercisable, December 31, 2017		1,063,889			$	115.26			4.7		$	66

The weighted-average grant date fair value of options granted during the years ended December 31, 2017 , 2016 and 2015 , was $ 36.86 , $ 25.28 and $ 35.25 , respectively. The total intrinsic value of options exercised during the years ended December 31, 2017 , 2016 and 2015 , was approximately $ 19 million , $ 9 million and $ 3 million , respectively.

The weighted-average grant date fair value of performance and restricted shares was as follows:

		Performance Shares							Restricted Shares
Nonvested		Shares			Weighted-average Fair Value				Shares			Weighted-average Fair Value
Balance at December 31, 2014		466,693			$	119.78			11,275			$	110.94
Granted		133,975			128.48				—			—
Vested		( 112,901	)		115.48				( 7,021	)		110.66
Forfeited		( 67,398	)		118.71				—			—
Balance at December 31, 2015		420,369			123.88				4,254			111.40
Granted		169,150			98.26				8,089			117.69
Vested		( 115,680	)		106.55				( 2,502	)		114.57
Forfeited		( 69,345	)		110.52				—			—
Balance at December 31, 2016		404,494			120.41				9,841			115.76
Granted		150,225			138.23				—			—
Vested		( 85,020	)		141.50				( 1,752	)		106.89
Forfeited		( 58,460	)		132.52				—			—
Balance at December 31, 2017		411,239			$	120.84			8,089			$	117.68

The total vesting date fair value of performance shares vested during the years ended December 31, 2017 , 2016 and 2015 was $ 13 million , $ 12 million and $ 11 million , respectively. The total fair value of restricted shares vested was less than $ 1 million , $ 1 million and $ 1 million for the years ended December 31, 2017 , 2016 and 2015 , respectively.

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The fair value of each option grant was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions:

		2017			2016			2015
Expected life (years)		6			5			5
Risk-free interest rate		2.08	%		1.34	%		1.41	%
Expected volatility		29.97	%		30.96	%		33.06	%
Dividend yield		2.28	%		2.10	%		1.69	%

Expected life —The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding based upon our historical data.

Risk-free interest rate —The risk-free interest rate assumption is based upon the observed U.S. treasury security rate appropriate for the expected life of our employee stock options.

Expected volatility —The expected volatility assumption is based upon the weighted-average historical daily price changes of our common stock over the most recent period equal to the expected option life of the grant, adjusted for activity which is not expected to occur in the future.

Net (loss) income attributable to noncontrolling interests included a $ 43 million increase to income related to withholding taxes on foreign earnings as a result of tax legislation.

Noncontrolling interests in the equity of consolidated subsidiaries were as follows:

		December 31,
In millions		2017				2016
Eaton Cummins Automated Transmission Technologies (1)		$	609			$	—
Cummins India Ltd.		280			(2)	285
Other		16				14
Total		$	905			$	299

____________________________________________________

⁽¹⁾ See Note 18 , " ACQUISITIONS ," for additional information.

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We calculate basic earnings per share (EPS) of common stock by dividing net income attributable to Cummins Inc. by the weighted-average number of common shares outstanding for the period. The calculation of diluted EPS assumes the issuance of common stock for all potentially dilutive share equivalents outstanding. We exclude shares of common stock held in the Employee Benefits Trust (EBT) (see Note 13 , " SHAREHOLDERS' EQUITY ") from the calculation of the weighted-average common shares outstanding until those shares are distributed from the EBT to the Retirement Savings Plan. Following are the computations for basic and diluted earnings per share:

		Years ended December 31,
Dollars in millions, except per share amounts		2017				2016				2015
Net income attributable to Cummins Inc.		$	999			$	1,394			$	1,399
Weighted-average common shares outstanding
Basic		166,625,320				169,038,410				178,037,581
Dilutive effect of stock compensation awards		645,545				298,206				369,247
Diluted		167,270,865				169,336,616				178,406,828
Earnings per common share attributable to Cummins Inc.
Basic		$	5.99			$	8.25			$	7.86
Diluted		5.97				8.23				7.84

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 were as follows:

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Entity Acquired (Dollars in millions)		Date of Acquisition		Additional Percent Interest Acquired		Payments to Former Owners				Acquisition Related Debt Retirements				Total Purchase Consideration				Type of Acquisition (1)		Gain Recognized (1)				Goodwill Acquired				Intangibles Recognized (2)				Net Sales Previous Fiscal Year Ended
2017
Brammo Inc.		11/01/17		100 %		$	62			$	—			$	68		(3)	COMB		$	—			$	47			$	23			$	4
Eaton Cummins Automated Transmission Technologies		07/31/17		50 %		600			(4)	—				600				COMB		—				544				596				—			(4)
2016
Wuxi Cummins Turbo Technologies Co. Ltd		12/05/16		45 %		$	86			$	—			$	86			EQUITY		$	—			$	—			$	—			$	—
Cummins Pacific LLC		10/04/16		50 %		32				67				99				COMB		15				4				8				391			(5	)
Cummins Northeast LLC		01/01/16		35 %		12				—				12				EQUITY		—				—				—				—
2015
Cummins Crosspoint LLC		08/03/15		50 %		$	29			$	36			$	65			COMB		$	10			$	7			$	2			$	258		(5	)
Cummins Atlantic LLC		08/03/15		51 %		21				28				49				COMB		8				5				6				245			(5	)
Cummins Central Power LLC		06/29/15		20.01 %		8				—				8				EQUITY		—				—				—				—

____________________________________________________

(1)

All results from acquired entities (excluding Brammo Inc.) were included in segment results subsequent to the acquisition date. Previously consolidated entities were accounted for as equity transactions (EQUITY). Newly consolidated entities were accounted for as business combinations (COMB) with gains recognized based on the requirement to remeasure our pre-existing ownership to fair value in accordance with GAAP and are included in the Consolidated Statements of Income as " Other income, net . The Brammo Inc. acquisition had not yet been assigned to a reportable segment at December 31, 2017.

(2)	Intangible assets acquired in business combinations were mostly customer and technology related, the majority of which will be amortized over a period of`up to 25 years from the date of the acquisition.

(3)

The "Total Purchase Consideration" represents the total amount that will or is estimated to be paid to complete the acquisition. A portion of the Brammo Inc. acquisition payment has not yet been made and will be paid in future periods in accordance with the purchase contract. The Brammo Inc. acquisition contains an earnout based on future results of the acquired business and could result in a maximum contingent consideration payment of $ 100 million (fair value of $ 5 million) to the former owners.

⁽⁴⁾ This transaction created a newly formed joint venture that we consolidated. See additional information below.

(5)	Sales amounts are not fully incremental to our consolidated sales as the amount would be reduced by the elimination of sales to the previously unconsolidated entity.

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In April 2017, we entered into an agreement to form a joint venture with Eaton Corporation PLC (Eaton), which closed on July 31, 2017 (the acquisition date). We purchased a 50 percent interest in the new venture named Eaton Cummins Automated Transmission Technologies (ECJV) for $ 600 million in cash. In addition, each partner contributed $ 20 million for working capital. The joint venture will design, assemble, sell and support medium-duty and heavy-duty automated transmissions for the commercial vehicle market, including new product launches. The new generation products (Procision and Endurant) were launched in 2016 and 2017, respectively, and are owned by the joint venture. Eaton will continue to manufacture and sell the old generation products to the joint venture which will be marked up and sold to end customers. Eaton will also sell certain transmission components to the joint venture at prices approximating market rates. In addition, Eaton will provide certain manufacturing and administrative services to the joint venture, including but not limited to manufacturing labor in Mexico, information technology services, accounting services and purchasing services, at prices approximating market rates. Pro forma financial information was not provided as historical activity related to the products contributed to the joint venture was not material.

We consolidated the results of the joint venture in our Components segment as we have a majority voting interest in the venture by virtue of a tie-breaking vote on the joint venture's board of directors. The joint venture had an enterprise value at inception of $ 1.2 billion . Due to the structure of the joint venture and equal sharing of economic benefits, we did not apply a discount for lack of control to the noncontrolling interests. The final purchase price allocation was as follows:

In millions
Inventory	$	3
Fixed assets	58
Intangible assets
Customer relationships	424
Technology	172
Goodwill	544
Liabilities	( 1		)
Total business valuation	1,200
Less: Noncontrolling interest	600
Total purchase consideration	$	600

Customer relationship assets represent the value of the long-term strategic relationship the business has with its significant customers, which we are amortizing over 25 years. The assets were valued using an income approach, specifically the "multi-period excess earnings" method, which identifies an estimated stream of revenues and expenses for a particular group of assets from which deductions of portions of the projected economic benefits, attributable to assets other than the subject asset (contributory assets), are deducted in order to isolate the prospective earnings of the subject asset. This value is considered a level 3 measurement under the GAAP fair value hierarchy. Key assumptions used in the valuation of customer relationships include: (1) a rate of return of 10 percent and (2) an attrition rate of 3 percent . Technology assets primarily represent the associated patents and know how related to the Endurant and Procision next generation automated transmissions, which we are amortizing over 15 years. These assets were valued using the "relief-from-royalty" method, which is a combination of both the income approach and market approach that values a subject asset based on an estimate of the "relief" from the royalty expense that would be incurred if the subject asset were licensed from a third party. Key assumptions impacting this value include: (1) a market royalty rate of 5 percent , (2) a rate of return of 10 percent and (3) an economic depreciation rate of 7.5 percent . This value is considered a level 3 measurement under the GAAP fair value hierarchy. Annual amortization of the intangible assets for the next 5 years is expected to approximate $ 28 million .

Goodwill was determined based on the residual difference between the fair value of consideration transferred and the value assigned to tangible and intangible assets and liabilities. Approximately $ 31 million of the goodwill is deductible for tax purposes. Among the factors contributing to a purchase price resulting in the recognition of goodwill is the ability to integrate and optimize the engine and transmission development to deliver the world’s best power train, to realize synergies in service and aftermarket growth and to utilize our strength in international markets where automated transmission adoption rates are very low.

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We began development of a new North American light-duty diesel engine (LDD) platform in July of 2006 for use in a variety of on and off-highway applications. At December 31, 2015, we had capitalized investments of approximately $ 279 million , with a net book value prior to the impairment of $ 246 million ( $ 235 million of which was in our Engine segment and $ 11 million of which was in our Components segment). Market uncertainty due to the global recession in 2008/2009 resulted in some customers delaying or canceling their vehicle programs, while others remained active. We announced an agreement with Nissan Motor Co. Ltd. in 2013 to supply our light-duty diesel engine and began commercial shipment in 2015. In the fourth quarter of 2015, we learned that we were not successful in our bid to supply this product for an additional customer. In addition, the deterioration in global economic conditions and excess manufacturing capacity in other markets made it unlikely that we would manufacture additional products on the LDD line to utilize its excess capacity during the asset recovery period. As a result, we concluded that the combination of these events presented a triggering event requiring an assessment of the recoverability of these assets in the fourth quarter of 2015. The assessment indicated that the projected undiscounted cash flows related to this asset group were not sufficient to recover its carrying value. Consequently, we were required to write down the LDD asset group to fair value. Our 2015 fourth quarter results included an impairment charge of $ 211 million ( $ 133 million after-tax), of which $ 202 million was in the Engine segment and $ 9 million was in the Components segment, to reflect the assets at fair value. We remain committed to servicing existing contracts and are not exiting this product line.

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 1,900 employees , including approximately 370 employees accepting voluntary retirement packages with the remainder of the reductions being involuntary. We incurred a charge of $ 90 million ( $ 61 million after-tax) in the fourth quarter of 2015, of which $ 86 million related to severance costs for both voluntary and involuntary terminations and $ 4 million for asset impairments and other charges.

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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 President and Chief Operating Officer.

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, fuel systems and transmissions. The Power Systems segment is an integrated power provider, which designs, manufactures and sells engines (16 liters and larger) for industrial applications (including mining, oil and gas, marine and rail), standby and prime power generator sets, alternators and other power components.

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

The accounting policies of our operating segments are the same as those applied in our Consolidated Financial Statements . We prepared the financial 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. We allocate certain common costs and expenses, primarily corporate functions, among segments differently than we would for stand-alone financial information prepared in accordance with GAAP. These include certain costs and expenses of shared services, such as information technology, human resources, legal, finance and supply chain management. We do not allocate debt-related items, actuarial gains or losses, prior service costs or credits, changes in cash surrender value of corporate owned life insurance or income taxes to individual segments. EBIT may not be consistent with measures used by other companies.

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Summarized financial information regarding our reportable operating segments at December 31, is shown in the table below:

In millions		Engine				Distribution				Components (1)				Power Systems				Total Segment				Intersegment Eliminations (2)				Total
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
Loss contingency charge (5)		5				—				—				—				5				—				5
Segment EBIT		959				384				754				294				2,391				55				2,446
Net assets		1,290				2,700				3,028				3,124				10,142				—				10,142
Investments and advances to equity investees		531				267				194				164				1,156				—				1,156
Capital expenditures		188				101				127				90				506				—				506
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
Interest income		10				4				4				5				23				—				23
Loss contingency charge (5)		138				—				—				—				138				—				138
Segment EBIT		686				392			(6)	641				263			(7)	1,982				17				1,999
Net assets		1,620				2,604				1,868				2,629				8,721				—				8,721
Investments and advances to equity investees		427				204				176				139				946				—				946
Capital expenditures		200				96				143				92				531				—				531
2015
External sales		$	6,733			$	6,198			$	3,745			$	2,434			$	19,110			$	—			$	19,110
Intersegment sales		1,937				31				1,427				1,633				5,028				( 5,028		)		—
Total sales		8,670				6,229				5,172				4,067				24,138				( 5,028		)		19,110
Depreciation and amortization (3)		187				105				109				110				511				—				511
Research, development and engineering expenses		263				10				236				226				735				—				735
Equity, royalty and interest income from investees		146				78				35				56				315				—				315
Interest income		11				4				4				5				24				—				24
Loss contingency charge (5)		60				—				—				—				60				—				60
Impairment of light-duty diesel assets (8)		202				—				9				—				211				—				211
Restructuring actions and other charges (9)		17				23				13				26				79				11				90
Segment EBIT		636				412			(6)	727				335				2,110				( 20		)		2,090
Net assets		2,107				2,330				1,891				2,736				9,064				—				9,064
Investments and advances to equity investees		445				192				150				188				975				—				975
Capital expenditures		345				125				137				137				744				—				744

____________________________________________________

(1)	I ncludes Eaton Cummins Automated Transmission Technologies joint venture results consolidated during the third quarter of 2017. See Note

18 , " ACQUISITIONS ," for additional information.

(2)	Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the years ended December 31, 2017, 2016 and 2015, respectively.

(3)	Depreciation and amortization as shown on a segment basis excludes the amortization of debt discount and deferred costs that are included in the Consolidated Statements of Income as "Interest expense." The amortization of debt discount and deferred costs were $ 3 million , $ 3 million and $ 3 million for the years ended December 31, 2017, 2016 and 2015, respectively.

(4)	U.S. tax legislation passed in December 2017 decreased our equity earnings at certain equity investees, negatively impacting our equity, royalty and interest income from investees by $ 23 million , $ 4 million and $ 12 million for the Engine, Distribution and Components segments, respectively. See Note 2 , " INCOME TAXES ," for additional information.

(5)	See Note 12 , " COMMITMENTS AND CONTINGENCIES ," for additional information.

(6)	Distribution segment EBIT included gains on the fair value adjustment resulting from the acquisition of controlling interests in North American distributors of $ 15 million and $ 18 million for the years ended December 31, 2016 and 2015 , respectively. See Note 18 , " ACQUISITIONS ," for additional information.

(7)	Power Systems segment EBIT included a $ 17 million gain on the sale of an equity investee for the year ended December 31, 2016. See Note 3 , " INVESTMENTS IN EQUITY INVESTEES ," for additional information.

(8)	See Note 19 , " IMPAIRMENT OF LIGHT-DUTY DIESEL ASSETS ," for additional information.

(9)	See Note 20 , " RESTRUCTURING ACTIONS AND OTHER CHARGES ," for additional information.

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

		Years ended December 31,
In millions		2017				2016				2015
Total EBIT		$	2,446			$	1,999			$	2,090
Less: Interest expense		81				69				65
Income before income taxes		$	2,365			$	1,930			$	2,025

		December 31,
In millions		2017				2016				2015
Net assets for operating segments		$	10,142			$	8,721			$	9,064
Brammo Inc. assets		72			(1)	—				—
Liabilities deducted in arriving at net assets		7,397				6,152				5,920
Pension and other postretirement benefit adjustments excluded from net assets		156				( 284		)		( 242		)
Deferred tax assets not allocated to segments		306				420				390
Deferred debt costs not allocated to segments		2				2				2
Total assets		$	18,075			$	15,011			$	15,134

____________________________________________________

(1)	Assets associated with the Brammo Inc. acquisition were presented as a reconciling item as Brammo Inc. had not yet been assigned to a reportable segment at December 31, 2017. See Note 18 , " ACQUISITIONS ," for additional information.

The tables below present certain segment information by geographic area. Net sales attributed to geographic areas were based on the location of the customer.

In millions		Years ended December 31,
Net Sales		2017				2016				2015
United States		$	11,010			$	9,476			$	10,757
China		2,137				1,544				1,451
Other International		7,281				6,489				6,902
Total net sales		$	20,428			$	17,509			$	19,110

Long-lived assets include property, plant and equipment, net of depreciation, investments and advances to equity investees and other assets, excluding deferred tax assets, refundable taxes and deferred debt expenses.

In millions		December 31,
Long-lived assets		2017				2016				2015
United States		$	3,157			$	3,092			$	2,968
China		795				652				668
India		563				475				450
United Kingdom		339				254				349
Netherlands		221				197				172
Brazil		149				149				124
Mexico		136				131				108
Canada		116				132				133
Other international countries		293				236				261
Total long-lived assets		$	5,769			$	5,318			$	5,233

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UNAUDITED

		First Quarter				Second Quarter				Third Quarter				Fourth Quarter
In millions, except per share amounts		2017
Net sales		$	4,589			$	5,078			$	5,285			$	5,476
Gross margin		1,128				1,249				1,339				1,374
Net income attributable to Cummins Inc.		396				424				453				( 274		)	(1)
Earnings per common share attributable to Cummins Inc.—basic (2)		$	2.36			$	2.53			$	2.72			$	( 1.66	)	(1)
Earnings per common share attributable to Cummins Inc.—diluted (2)		2.36				2.53				2.71				( 1.65		)	(1)
Cash dividends per share		1.025				1.025				1.08				1.08
Stock price per share
High		$	155.51			$	164.23			$	170.68			$	181.79
Low		134.06				143.83				150.25				158.75

		2016
Net sales		$	4,291			$	4,528			$	4,187			$	4,503
Gross margin		1,056				1,197				1,079				1,120
Net income attributable to Cummins Inc.		321				406			(3)	289			(3)	378
Earnings per common share attributable to Cummins Inc.—basic (2)		$	1.87			$	2.41		(3)	$	1.72		(3)	$	2.26
Earnings per common share attributable to Cummins Inc.—diluted (2)		1.87				2.40			(3)	1.72			(3)	2.25
Cash dividends per share		0.975				0.975				1.025				1.025
Stock price per share
High		$	111.29			$	120.00			$	128.60			$	147.10
Low		79.88				104.30				107.51				121.22

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(1)	Net income attributable to Cummins Inc. and earnings per share were negatively impacted by a $ 777 million tax adjustment related to The Tax Cuts and Jobs Act passed in December of 2017. For the fourth quarter of 2017, results for basic and diluted earnings per share were reduced by $ 4.70 per share and $ 4.68 per share, respectively, due to tax reform.

(2)	Earnings per share in each quarter is computed using the weighted-average number of shares outstanding during that quarter while earnings per share for the full year is computed using the weighted-average number of shares outstanding during the year. Thus, the sum of the four quarters earnings per share may not equal the full year earnings per share.

(3)	The second quarter of 2016 included a $ 39 million loss contingency charge ( $ 24 million after-tax). The third quarter of 2016 included an additional $ 99 million loss contingency charge ( $ 50 million net of favorable compensation impact and after-tax).

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(1)	The number is comprised of 2,901,369 stock options, 411,239 performance shares and 8,089 restricted shares. See NOTE 15 , " STOCK INCENTIVE AND STOCK OPTION PLANS ," to the Consolidated Financial Statements for a description of how options and shares are awarded.

(2)	The weighted-average exercise price relates only to the 2,901,369 stock options. Performance and restricted shares do not have an exercise price and, therefore, are not included in this calculation.

(a)	The following Consolidated Financial Statements and schedules filed as part of this report can be found in Item 8 "Financial Statements and Supplementary Data":

•	Management's Report to Shareholders

•	Report of Independent Registered Public Accounting Firm

•	Consolidated Statements of Income for the years ended December 31, 2017 , 2016 and 2015

•	Consolidated Statements of Comprehensive Income for the years ended December 31, 2017 , 2016 and 2015

•	Consolidated Balance Sheets at December 31, 2017 and 2016

•	Consolidated Statements of Cash Flows for the years ended December 31, 2017 , 2016 and 2015

•	Consolidated Statements of Changes in Equity for the years ended December 31, 2017 , 2016 and 2015

•	Notes to Consolidated Financial Statements

•	Selected Quarterly Financial Data (Unaudited)

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(b)	The exhibits listed in the following Exhibit Index are filed as part of this Annual Report on Form 10-K.

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