Edgar Filing: CUMMINS INC

10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2015

Commission File Number 1-4949

CUMMINS INC.



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

500 Jackson Street

Box 3005

Columbus, Indiana 47202-3005

(Address of principal executive offices)

Telephone (812) 377-5000

Securities registered pursuant to Section 12(b) of the Act:



Title of each class		Name of each exchange on which registered
Common Stock, $2.50 par value		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None.

__________________________________________________________________________________________________

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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



Large accelerated filer x	Accelerated filer o	Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o

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

The aggregate market value of the voting stock held by non-affiliates was approximately $23.9 billion at June 28, 2015. This value includes all shares of the registrant's common stock, except for treasury shares.

As of February 5, 2016, there were 174,320,797 shares outstanding of $2.50 par value common stock.

Documents Incorporated by Reference

Portions of the registrant's definitive Proxy Statement for its 2016 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission on Schedule 14A within 120 days after the end of 2015, will be incorporated by reference in Part III of this Form 10-K to the extent indicated therein upon such filing.

Website Access to Company's Reports

We maintain an internet website at www.cummins.com. Investors may obtain copies of our filings from this website free of charge as soon as reasonable practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission.

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CUMMINS INC. AND SUBSIDIARIES

TABLE OF CONTENTS



PART	ITEM		PAGE
		Cautionary Statements Regarding Forward-Looking Information	3
I	1	Business	5
		Overview	5
		Operating Segments	5
		Engine Segment	5
		Distribution Segment	6
		Components Segment	7
		Power Generation Segment	8
		Joint Ventures, Alliances and Non-Wholly-Owned Subsidiaries	9
		Supply	10
		Patents and Trademarks	11
		Seasonality	11
		Largest Customers	11
		Backlog	12
		Research and Development	12
		Environmental Sustainability	12
		Environmental Compliance	13
		Employees	14
		Available Information	14
		Executive Officers of the Registrant	15
	1A	Risk Factors	17
	1B	Unresolved Staff Comments	23
	2	Properties	24
	3	Legal Proceedings	26
	4	Mine Safety Disclosures	26
II	5	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	27
	6	Selected Financial Data	29
	7	Management's Discussion and Analysis of Financial Condition and Results of Operations	30
	7A	Quantitative and Qualitative Disclosures About Market Risk	62
	8	Financial Statements and Supplementary Data	65
		Index to Financial Statements	65
	9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	116
	9A	Controls and Procedures	116
	9B	Other Information	116
III	10	Directors, Executive Officers and Corporate Governance	116
	11	Executive Compensation	116
	12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	117
	13	Certain Relationships, Related Transactions and Director Independence	117
	14	Principal Accounting Fees and Services	117
IV	15	Exhibits and Financial Statement Schedules	117
		Signatures	118
		Cummins Inc. Exhibit Index	119

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

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

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


•	a sustained slowdown or significant downturn in our markets;


•	a downturn in the North American truck industry;


•	a major customer experiencing financial distress;


•	changes in the engine outsourcing practices of significant customers;


•	any significant problems in our new engine platforms;


•	a further slowdown in infrastructure development;


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


•	foreign currency exchange rate changes;


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


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


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


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


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


•	variability in material and commodity costs;


•	product recalls;


•	the development of new technologies;


•	competitor pricing activity;


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


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


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


•	changes in taxation;


•	global legal and ethical compliance costs and risks;


•	aligning our capacity and production with our demand;


•	product liability claims;


•	increasingly stringent environmental laws and regulations;


•	the price and availability of energy;


•	the performance of our pension plan assets;


•	labor relations;


•	changes in actuarial and accounting standards;

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•	our sales mix of products;


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


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


•	the cyclical nature of some of our markets;


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


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


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

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

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PART I

ITEM 1. Business

OVERVIEW

Cummins Inc. was founded in 1919 as a corporation in Columbus, Indiana, as one of the first diesel engine manufacturers. We are a global power leader that designs, manufactures, distributes and services diesel and natural gas engines and engine-related component products, including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems and electric power generation systems. We sell our products to original equipment manufacturers (OEMs), distributors and other customers worldwide. We serve our customers through a network of approximately 600 company-owned and independent distributor locations and over 7,200 dealer locations in more than 190 countries and territories.

OPERATING SEGMENTS

We have four complementary operating segments: Engine, Distribution, Components and Power Generation. These segments share technology, customers, strategic partners, brand recognition and our distribution network in order to compete more efficiently and effectively in their respective markets. In each of our operating segments, we compete worldwide with a number of other manufacturers and distributors that produce and sell similar products. Our products compete primarily on the basis of performance, fuel economy, speed of delivery, quality, customer support and price. Financial information about our operating segments, including geographic information, is incorporated by reference from Note 21, "OPERATING SEGMENTS," to our Consolidated Financial Statements.

Engine Segment

Engine segment sales and earnings before interest and taxes (EBIT) as a percentage of consolidated results were:



	Years ended December 31,
	2015		2014		2013
Percent of consolidated net sales⁽¹⁾	43	%	45	%	47	%
Percent of consolidated EBIT⁽¹⁾	38	%	48	%	48	%

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⁽¹⁾ Measured before intersegment eliminations

Our Engine segment manufactures and markets a broad range of diesel and natural gas powered engines under the Cummins brand name, as well as certain customer brand names, for the heavy- and medium-duty truck, bus, recreational vehicle (RV), light-duty automotive, agricultural, construction, mining, marine, oil and gas, rail and governmental equipment markets. We offer a wide variety of engine products including:


•	Engines with a displacement range of 2.8 to 95 liters and horsepower ranging from 49 to 5,100;


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


•	The newly developed 5.0 liter V8 diesel engine, which will be sold through the RV, pick-up, bus and certain medium-duty truck markets; and


•	The newly developed 95 liter QSK95 diesel engine which began production in 2015.

In the first quarter of 2015, our Engine segment reorganized its reporting structure to include the following markets:


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

•

Medium-duty truck and bus - We manufacture medium-duty diesel engines ranging from 200 to 450 horsepower serving medium-duty truck and bus customers worldwide, with key markets including North America, Latin America, Europe and Mexico. We also provide diesel or natural gas engines for school buses, transit buses and shuttle buses worldwide, with key markets including North America, Europe, Latin America and Asia. We also provide diesel engines for Class A motor homes (RVs), primarily in North America.

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

•

Industrial - We provide mid-range, heavy-duty and high-horsepower engines that range from 49 to 4,400 horsepower for a wide variety of equipment in the construction, agricultural, mining, rail, government, oil and gas, and commercial and recreational marine applications throughout the world. Across these markets we have major customers in North America, Europe, Middle East, Africa, China, Korea, Japan, Latin America, India, Russia, Southeast Asia, South Pacific and Mexico.


•	Stationary Power - We provide mid-range, heavy-duty and high-horsepower engines that range from 60 to 5,100 horsepower to our power generation business for standby, mobile and distributed power generation solutions throughout the world.

The principal customers of our heavy-duty truck engines include truck manufacturers such as PACCAR Inc. (PACCAR), Daimler Trucks North America, Navistar International Corporation (Navistar) and Volvo. The principal customers of our medium-duty truck engines include truck manufacturers such as Daimler Trucks North America, PACCAR, Navistar, Ford Motor Company, Volvo and MAN Latin America. We sell our industrial engines to manufacturers of construction, agricultural and marine equipment, including Komatsu, Belaz, Hyundai, Hitachi and JLG. The principal customers of our light-duty on-highway engines are Fiat Chrysler Automobiles (Fiat Chrysler), Nissan and manufacturers of RVs.

In the markets served by our Engine segment, we compete with independent engine manufacturers as well as OEMs who manufacture engines for their own products. Our primary competitors in North America are Navistar, Daimler Trucks North America, Caterpillar Inc. (CAT), Volvo Powertrain, Ford Motor Company and Hino Power. Our primary competitors in international markets vary from country to country, with local manufacturers generally predominant in each geographic market. Other engine manufacturers in international markets include Weichai Power Co. Ltd., MAN Nutzfahrzeuge AG (MAN), Fiat Power Systems, GuangxiYuchai Group, GE Jenbacher, Tognum AG, CAT, Volvo, Yanmar Co., Ltd. and Deutz AG.

Distribution Segment

Distribution segment sales and EBIT as a percentage of consolidated results were:



	Years ended December 31,
	2015		2014		2013
Percent of consolidated net sales⁽¹⁾	25	%	22	%	18	%
Percent of consolidated EBIT⁽¹⁾	20	%	19	%	18	%

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⁽¹⁾ Measured before intersegment eliminations

Our Distribution segment consists of 37 company-owned and 5 joint venture distributors that service and distribute the full range of our products and services to end-users at approximately 500 locations in over 80 distribution territories. Our company-owned distributors are located in key markets, including North America, Australia, Europe, the Middle East, India, China, Africa, Russia, Japan, Brazil, Singapore and Central America, while our joint venture distributors are located in key markets, including North America, South America, China, Thailand, Singapore and Vietnam.

The Distribution segment consists of the following businesses which service and/or distribute the full range of our products and services:


•	Parts and filtration;


•	Engines;


•	Power generation; and


•	Service.

The Distribution segment is organized into seven primary geographic regions:


•	North and Central America;


•	Asia Pacific;


•	Europe, Commonwealth of Independent States (CIS) and China;

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•	Africa;


•	Middle East;


•	India; and


•	South America.

Asia Pacific is composed of six smaller regional distributor organizations (South Pacific, Korea, Japan, Philippines, Malaysia and Singapore) which allow us to better manage these vast geographic territories.

Our distribution network consists of independent, partially-owned and wholly-owned distributors which provide parts and service to our customers. These full-service solutions include maintenance contracts, engineering services and integrated products, where we customize our products to cater to specific needs of end-users. Our distributors also serve and develop dealers, predominantly OEM dealers, in their territories by providing new products, technical support, tools, training, parts and product information.

In addition to managing our involvement with our wholly-owned and partially-owned distributors, our Distribution segment is responsible for managing the performance and capabilities of our independent distributors. Our Distribution segment serves a highly diverse customer base with approximately 41 percent of its 2015 sales being generated from new engines and power generation equipment, compared to 43 percent in 2014, with its remaining sales generated by parts and filtration and service revenue.

Financial information about our distributors accounted for under the equity method are incorporated by reference from Note 2, "INVESTMENTS IN EQUITY INVESTEES," to our Consolidated Financial Statements.

Our distributors compete with distributors or dealers that offer similar products. In many cases, these competing distributors or dealers are owned by, or affiliated with the companies that are listed as competitors of our Engine, Components or Power Generation segments. These competitors vary by geographical location.

In September 2013, we announced our intention to acquire the equity that we do not already own in most of our partially-owned North American distributors over three to five years. During 2015, we paid $120 million to acquire the remaining interest in three North American distributors including the related debt retirements. Refer to Note 20, "ACQUISITIONS," to our Consolidated Financial Statements for additional information.

Components Segment

Components segment sales and EBIT as a percentage of consolidated results were:



	Years ended December 31,
	2015		2014		2013
Percent of consolidated net sales⁽¹⁾	21	%	21	%	21	%
Percent of consolidated EBIT⁽¹⁾	35	%	27	%	24	%

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⁽¹⁾ Measured before intersegment eliminations

Our Components segment supplies products which complement our Engine segment, including aftertreatment systems, turbochargers, filtration products and fuel systems for commercial diesel applications. We manufacture filtration systems for on- and off-highway heavy-duty and mid-range equipment, and we are a supplier of filtration products for industrial and passenger car applications. In addition, we develop aftertreatment systems and turbochargers to help our customers meet increasingly stringent emission standards and fuel systems which to date have primarily supplied our Engine segment and our joint venture partner Scania.

Our Components segment is organized around the following businesses:

•

Emission solutions - Our emission solutions business is a global leader in designing, manufacturing and integrating aftertreatment technology and solutions for the commercial on-and off-highway medium-duty, heavy-duty and high-horsepower engine markets. Our emission solutions business develops and produces various emission solutions, including custom engineering systems and integrated controls, oxidation catalysts, particulate filters, oxides of nitrogen (NOx) reduction systems such as selective catalytic reduction and NOx adsorbers and engineered components including dosers and sensors. Our emission solutions business primarily serves markets in North America, Europe, China, Brazil, Russia and Australia and serves both OEM first fit and retrofit customers.

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•

Turbo technologies - Our turbo technologies business designs, manufactures and markets turbochargers for light-duty, mid-range, heavy-duty and high-horsepower diesel markets with manufacturing facilities in five countries and sales and distribution worldwide. Our turbo technologies business provides critical air handling technologies for engines, including variable geometry turbochargers, to meet challenging performance requirements and worldwide emission standards. Our turbo technologies business primarily serves markets in North America, Europe, Asia and Brazil.

•

Filtration - Our filtration business designs, manufactures and sells 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. Our filtration business supports a wide customer base in a diverse range of markets including on-highway, 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, Australia and Africa. Fleetguard products are available through thousands of distribution points worldwide.


•	Fuel systems - Our fuel systems business designs and manufactures new and replacement fuel systems primarily for heavy-duty on-highway diesel engine applications and also remanufactures fuel systems.

Customers of our Components segment generally include our Engine and Distribution segments, truck manufacturers and other OEMs, many of which are also customers of our Engine segment, such as PACCAR, Daimler, Navistar, Volvo, Scania, Fiat, Komatsu, Ford and other manufacturers that use our components in their product platforms.

Our Components segment competes with other manufacturers of aftertreatment systems, filtration, turbochargers and fuel systems. Our primary competitors in these markets include Robert Bosch GmbH, Donaldson Company, Inc., Clarcor Inc., Mann+Hummel Group, Honeywell International, Borg-Warner, Tenneco Inc., Eberspacher Holding GmbH & Co. KG and Denso Corporation.

Power Generation Segment

Power Generation segment sales and EBIT as a percentage of consolidated results were:



	Years ended December 31,
	2015		2014		2013
Percent of consolidated net sales⁽¹⁾	11	%	12	%	14	%
Percent of consolidated EBIT⁽¹⁾	7	%	6	%	10	%

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⁽¹⁾ Measured before intersegment eliminations

Our Power Generation segment designs and manufactures most of the components that make up power generation systems, including controls, alternators, transfer switches and switchgear. This segment is a global provider of power generation systems, components and services for a diversified customer base, including the following:


•	Standby power solutions for customers who rely on uninterrupted sources of power to meet the needs of their customers;


•	Distributed generation power solutions for customers with less reliable electrical power infrastructures, typically in developing countries. In addition, our power solutions provide an alternative source of generating capacity located close to its point of use, which is purchased by utilities, independent power producers and large power customers for use as prime or peaking power; and


•	Mobile power solutions, which provide a secondary source of power (other than drivetrain power) for mobile applications.

In the first quarter of 2015, our Power Generation segment reorganized its reporting structure to include the following businesses:


•	Power systems - We manufacture generators for commercial and consumer applications ranging from 2 kilowatts to 3.5 megawatts, as well as paralleling systems and transfer switches for applications such as data centers, health care facilities and waste water treatment plants.

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•	Alternators - We design, manufacture, sell and service A/C generator/alternator products internally as well as to other 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.


•	Power Solutions - We provide turnkey solutions for distributed generation and energy management applications using natural or biogas as a fuel. The business also serves a global rental account for diesel and gas generator sets.

This segment continuously explores emerging technologies and provides integrated power generation products using technologies other than reciprocating engines. We use our own research and development capabilities as well as those of our business partnerships to develop cost-effective and environmentally sound power solutions.

Our customer base for our power generation products is highly diversified, with customer groups varying based on their power needs. India, China, the United Kingdom (U.K.), Western Europe, Latin America and the Middle East are our largest geographic markets outside of North America.

Power Generation competes with a variety of engine manufacturers and generator set assemblers across the world. Our primary competitors are CAT, Tognum (MTU) and Kohler/SDMO (Kohler Group), but we also compete with GE Jenbacher, FG Wilson (CAT group), Generac, Mitsubishi (MHI) and numerous regional generator set assemblers. Our alternators business competes globally with Emerson Electric Co., Marathon Electric and Meccalte, among others.

JOINT VENTURES, ALLIANCES AND NON-WHOLLY-OWNED SUBSIDIARIES

We have entered into a number of joint venture agreements and alliances with business partners around the world. Our joint ventures are either distribution or manufacturing entities. We also own controlling interests in non-wholly-owned manufacturing and distribution subsidiaries. Three entities, in which we own more than a 50 percent equity interest or have a controlling interest, are consolidated in our Distribution segment results as well as several manufacturing joint ventures in the other operating segments.

In the event of a change of control of either party to certain of these joint ventures and other strategic alliances, certain consequences may result including automatic termination and liquidation of the venture, exercise of "put" or "call" rights of ownership by the non-acquired partner, termination or transfer of technology license rights to the non-acquired partner and increases in component transfer prices to the acquired partner. We will continue to evaluate joint venture and partnership opportunities in order to penetrate new markets, develop new products and generate manufacturing and operational efficiencies.

Financial information about our investments in joint ventures and alliances is incorporated by reference from Note 2, "INVESTMENTS IN EQUITY INVESTEES," to the Consolidated Financial Statements.

Our equity income from these investees was as follows:



	Years ended December 31,
In millions	2015				2014					2013
Distribution Entities
North American distributors	$	33	12	%	$	107		32	%	$	129		40	%
Komatsu Cummins Chile, Ltda.	31		11	%	29			9	%	25			8	%
All other distributors	3		1	%	4			1	%	1			—	%
Manufacturing Entities
Beijing Foton Cummins Engine Co., Ltd.	62		23	%	(2		)	(1	)%	(4		)	(1	)%
Dongfeng Cummins Engine Company, Ltd.	51		19	%	67			20	%	63			19	%
Chongqing Cummins Engine Company, Ltd.	41		15	%	51			16	%	58			18	%
All other manufacturers	52		19	%	74			23	%	53			16	%
Cummins share of net income⁽¹⁾	$	273	100	%	$	330		100	%	$	325		100	%

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⁽¹⁾ This total represents our share of net income of our equity investees and is exclusive of royalties and interest income from our equity investees. To see how this amount reconciles to "Equity, royalty and interest income from investees" in the Consolidated Statements of Income, see Note 2, "INVESTMENTS IN EQUITY INVESTEES," to our Consolidated Financial Statements for additional information.

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Distribution Entities

•

North American Distributors - At December 31, 2015, our distribution channel in North America included one unconsolidated distributor with a 50 percent ownership interest and one consolidated distributor in which we had more than a 50 percent ownership interest. While each distributor is a separate legal entity, the business of each is substantially the same as that of our wholly-owned distributors based in other parts of the world. All of our distributors, irrespective of their legal structure or ownership, offer the full range of our products and services to customers and end-users in their respective markets.


•	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 the Chilean and Peruvian markets.

See further discussion of our distribution network under the Distribution segment section above.

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 Generation segment manufacturing facilities. Our Components segment joint ventures and wholly owned entities provide fuel systems, filtration, aftertreatment systems and turbocharger products that are used in 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.

•

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 ISF 2.8 liter and ISF 3.8 liter families of our 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 in world wide markets. Certain types of construction equipment and industrial applications will also be served by these engine families in the future.

•

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 (Dongfeng), one of the largest medium-duty and heavy-duty truck manufacturers in China. DCEC produces Cummins 4- to 13-liter mechanical engines, full-electric diesel engines, with a power range from 125 to 545 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.

Non-Wholly-Owned Subsidiary

We have a controlling interest in Cummins India Ltd. (CIL), which is a publicly listed company on various stock exchanges in India. CIL produces mid-range, heavy-duty and high-horsepower engines, generators for the Indian and export markets and natural gas spark-ignited engines for power generation, automotive and industrial applications. CIL also has distribution and power generation operations.

SUPPLY

The performance of the end-to-end supply chain, extending through to our suppliers, is foundational to our ability to meet customers' expectations and support long-term growth. We are committed to having a robust strategy for how we select and manage our suppliers to enable a market focused supply chain. This requires us to continuously evaluate and upgrade our supply base, as necessary, to ensure we are meeting the needs of our customers.

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We use a category strategy process (a process designed to create the most value for the company) that reviews our long term needs and guides decisions on what we make internally and what we purchase externally. For the items we decide to purchase externally, the strategies also identify the suppliers we should partner with long term to provide the best technology, the lowest total cost and highest supply chain performance. We design and/or manufacture our strategic components used in or with our engines and power generation units, including cylinder blocks and heads, turbochargers, connecting rods, camshafts, crankshafts, filters, alternators, electronic and emissions controls, and fuel systems. We source externally purchased material and manufactured components from leading global suppliers. Many key suppliers are managed through long-term supply agreements that assure capacity, delivery, quality and cost requirements are met over an extended period. Approximately 56 percent of the direct material in our product designs are single sourced to external suppliers. Although we have elected to source a relatively high proportion of our total raw materials and components from single suppliers, we have an established sourcing strategy and supplier management process to evaluate and mitigate risk. These processes are leading us to determine our need for dual sourcing and increase our use of dual and parallel sources to minimize risk and increase supply chain responsiveness. Our current target for dual and parallel sourcing is approximately 63 percent of our direct material spend. As of December 31, 2015, our analysis indicates that we have 44 percent of direct material spend with dual or parallel sources or 70 percent of our target.

Other important elements of our sourcing strategy include:


•	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.

PATENTS AND TRADEMARKS

We own or control a significant number of patents and trademarks relating to the products we manufacture. These patents and trademarks were granted and registered over a period of years. Although these patents and trademarks are generally considered beneficial to our operations, we do not believe any patent, group of patents, or trademark (other than our leading brand house trademarks) is significant to our business.

SEASONALITY

While individual product lines may experience modest seasonal variation in production, there is no material effect on the demand for the majority of our products on a quarterly basis with the exception that our Power Generation segment normally experiences seasonal declines in the first quarter due to general declines in construction spending during this period and our Distribution segment normally experiences seasonal declines in its first quarter business activity due to holiday periods in Asia and Australia.

LARGEST CUSTOMERS

We have thousands of customers around the world and have developed long-standing business relationships with many of them. PACCAR is our largest customer, accounting for approximately 15 percent of our consolidated net sales in 2015, compared to approximately 14 percent in 2014 and 12 percent in 2013. We have long-term supply agreements with PACCAR for our heavy-duty ISX 15 liter and ISX 11.9 liter engines and our ISL 9 liter mid-range engine. While a significant number of our sales to PACCAR are under long-term supply agreements, these agreements provide for particular engine requirements for specific vehicle models and not a specific volume of engines. PACCAR is our only customer accounting for more than 10 percent of our net sales in 2015. The loss of this customer or a significant decline in the production level of PACCAR vehicles that use our engines would have an adverse effect on our results of operations and financial condition. We have been an engine supplier to PACCAR for over 71 years. A summary of principal customers for each operating segment is included in our segment discussion.

In addition to our agreement with PACCAR, we have long-term heavy-duty engine supply agreements with Daimler Trucks North America, Navistar and Volvo Trucks North America and long-term mid-range supply agreements with Daimler Trucks North America, Navistar and MAN. We also have an agreement with Fiat Chrysler to supply engines for its Ram trucks. In our off-highway markets, we have various engine and component supply agreements across our mid-range and high-horsepower businesses with Komatsu Ltd., as well as various joint ventures and other license agreements in our Engine, Component and Distribution segments. Collectively, our net sales to these seven customers, including PACCAR, were approximately 40 percent of our consolidated net sales in 2015, compared to approximately 36 percent in 2014 and 34 percent in 2013. Excluding PACCAR, net sales to any single customer were less than 9 percent of our consolidated net sales in 2015, compared to less than

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8 percent in 2014 and less than 7 percent in 2013. These agreements contain standard purchase and sale agreement terms covering engine and engine parts pricing, quality and delivery commitments, as well as engineering product support obligations. The basic nature of our agreements with OEM customers is that they are long-term price and operations agreements that help assure the availability of our products to each customer through the duration of the respective agreements. Agreements with most OEMs contain bilateral termination provisions giving either party the right to terminate in the event of a material breach, change of control or insolvency or bankruptcy of the other party.

BACKLOG

We have supply agreements with some truck and off-highway equipment OEMs, however most of our business is transacted through open purchase orders. These open orders are historically subject to month-to-month releases and are subject to cancellation on reasonable notice without cancellation charges and therefore are not considered firm. At December 31, 2015, we did not have any significant backlogs.

RESEARCH AND DEVELOPMENT

In 2015, we decreased our research, development and engineering expenses however; we continued to invest in future critical technologies and products. We will continue to make investments to improve our current technologies, continue to meet the future emission requirements around the world and improve fuel economy.

Our research and development program is focused on product improvements, innovations and cost reductions for our customers. Research and development expenditures include salaries, contractor fees, building costs, utilities, 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 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 $718 million in 2015, $737 million in 2014 and $700 million in 2013. Contract reimbursements were $98 million in 2015, $121 million in 2014 and $76 million in 2013.

For 2015, 2014 and 2013, approximately $90 million, $60 million and $32 million, or 13 percent, 8 percent and 5 percent, respectively, of our research and development expenditures were directly related to compliance with 2017 EPA emission standards.

ENVIRONMENTAL SUSTAINABILITY

We adopted our first comprehensive environmental sustainability plan in 2014 to continue to positively impact the environment through the products we make, the way we use our facilities, management of our supply chain and improvement of the communities where we live and work. We examined our entire environmental footprint, focusing on the key areas of water, waste, energy and greenhouse gases and identified the top four environmental sustainability priorities of products in-use, materials and fuel efficiency, transportation and facilities and operations. We set initial goals in our facilities where we have the most data, influence and experience to:


•	reduce energy use and greenhouse gas emissions by 25 percent and 27 percent, respectively, by 2015 against a 2005 baseline and adjusted for sales;


•	reduce direct water use by 33 percent adjusted for hours worked and achieve water neutrality at 15 sites by 2020; and


•	increase our recycling rate from 88 percent to 95 percent and achieve zero disposal at 30 sites by 2020.

In 2015, we set two new environmental sustainability goals:


•	First, we will partner with customers to improve the fuel efficiency of our products in-use, to target an annual reduction of 3.5 million metric tons of carbon dioxide and save 350 million gallons of fuel by 2020 .


•	Second, we will work to utilize the most efficient methods and modes to move goods across the Cummins network to reduce carbon dioxide per kilogram of goods moved by 10 percent by 2020.

In addition, in 2016, we expect to articulate a strategy around efficiency in product design and a material management strategy to decouple business growth from natural resource use.

Since 2010, we reduced company-wide water use intensity by approximately 36 percent, U.S.-wide process-derived hazardous waste generation by approximately 29 percent and company-wide disposal waste by approximately 41 percent, all normalized to total work hours. As part of the U.S. Department of Energy's Better Buildings, Better Plants program, we pledged to achieve

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a 25 percent energy intensity (energy use adjusted for sales) reduction by 2015; at the end of 2014, we had achieved a 34 percent reduction.

We articulated our positions on key public policy issues and on a wide range of environmental issues. We are actively engaged with regulatory, industry and other stakeholder groups around the world as greenhouse gas and fuel efficiency standards become more prevalent globally. For the tenth consecutive year, we were named to the Dow Jones North American Sustainability Index and were included in the 2015 “Disclosure Leadership Index” of the Carbon Disclosure Project’s climate report. In 2014, we were identified as a “Natural Capital Decoupling Leader” by Green Biz Group and Trucost for reductions in environmental footprint amid company growth. Our Sustainability Report for 2014/2015 and prior reports as well as data book of more detailed environmental data are available on our website at www.cummins.com, although such reports and data book are not incorporated into this Form 10-K.

ENVIRONMENTAL COMPLIANCE

Product Environmental Compliance

Cummins strives to have robust certification and compliance processes, adhering to all emissions regulations worldwide, including prohibiting the use of defeat devices in all of our products. We are transparent with all governing bodies in these processes, from disclosure of the design and operation of the emission control system, to test processes and results, and later to any necessary reporting and corrective action processes if required.

We work collaboratively and proactively with emission regulators globally to ensure emission standards are clear, appropriately stringent, and enforceable, in an effort to ensure our products deliver on our commitments to our customers and the environment in real world use every day.

Our engines are subject to extensive statutory and regulatory requirements that directly or indirectly impose standards governing emission and noise. We have substantially increased our global environmental compliance presence and expertise to, understand and meet emerging product environmental regulations around the world. Our ability to comply with these and future emission standards is an essential element in maintaining our leadership position in regulated markets. We have made, and will continue to make, significant capital and research expenditures to comply with these standards. Our failure to comply with these standards could result in adverse effects on our future financial results.

EU and EPA Engine Certifications

The current on-highway emission standards came into effect in the European Union (EU) on January 1, 2013 (Euro VI) and on January 1, 2010 for the EPA. To meet the more stringent heavy-duty on-highway emission standards, we used an evolution of our proven selective catalytic reduction (SCR) and exhaust gas recirculation (EGR) technology solutions and refined them for the EU and EPA certified engines to maintain power and torque with substantial fuel economy improvement and maintenance intervals comparable with our previous compliant engines. We offer a complete lineup of on-highway engines to meet the near-zero emission standards. Mid-range and heavy-duty engines for EU and EPA require NOx aftertreatment. NOx reduction is achieved by an integrated technology solution comprised of the XPI High Pressure Common Rail fuel system, SCR technology, next-generation cooled EGR, advanced electronic controls, proven air handling and the Cummins Diesel Particulate Filter (DPF). The EU, EPA, and California Air Resources Board (CARB) have certified that our engines meet the current emission requirements. Emission standards in international markets, including Japan, Mexico, Australia, Brazil, Russia, India and China are becoming more stringent. We believe that our experience in meeting the EU and EPA emission standards leaves us well positioned to take advantage of opportunities in these markets as the need for emission control capability grows.

We received certification from the EPA that we met both the EPA 2013 and 2014 greenhouse gas (GHG) regulations and rules. The EPA 2013 regulations add the requirement of On-Board Diagnostics, which were introduced on the ISX15 in 2010, across the full on-highway product line in 2013 in addition to maintaining the same near-zero emission levels of NOx and Particulate Matter (PM) required in 2010. On-Board Diagnostics provide enhanced service capability with standardized diagnostic trouble codes, service tool interface, in-cab warning lamp and service information availability. The new GHG and fuel-efficiency regulations were required for all heavy-duty diesel and natural gas engines beginning in January 2014. Our GHG certification was the first engine certificate issued by the EPA and uses the same proven base engine with the XPI fuel system, Variable Geometry Turbocharger (VGT^TM), Cummins Aftertreatment System with DPF and SCR technology.

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Other Environmental Statutes and Regulations

Expenditures for environmental control activities and environmental remediation projects at our facilities in the U.S. have not been a substantial portion of our annual capital outlays and are not expected to be material in 2016. We believe we are in compliance in all material respects with laws and regulations applicable to our plants and operations.

In the U.S., pursuant to notices received from federal and state agencies and/or defendant parties in site environmental contribution actions, we have been identified as a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended or similar state laws, at fewer than 20 waste disposal sites. Based upon our experiences at similar sites we believe that our aggregate future remediation costs will not be significant. We have established accruals that we believe are adequate for our expected future liability with respect to these sites.

In addition, we have several other sites where we are working with governmental authorities on remediation projects. The costs for these remediation projects are not expected to be material.

EMPLOYEES

AVAILABLE INFORMATION

We file annual, quarterly and current reports, proxy statements and other information electronically with the Securities and Exchange Commission (SEC). You may read and copy any document we file with the SEC at the SEC's public reference room at 100 F Street, N.E., Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room. The SEC maintains an internet site that contains annual, quarterly and current reports, proxy and information statements and other information that issuers (including Cummins) file electronically with the SEC. The SEC's internet site is www.sec.gov.

Our internet site is www.cummins.com. You can access our Investors and Media webpage through our internet site, by clicking on the heading "Investors and Media" followed by the "Investor Relations" link. We make available, free of charge, on or through our Investors and Media webpage, our proxy statements, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934 or the Securities Act of 1933, as amended, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC.

We also have a Corporate Governance webpage. You can access our Governance Documents webpage through our internet site, www.cummins.com, by clicking on the heading "Investors and Media," followed by the "Investor Relations" link and then the topic heading of "Governance Documents" within the "Corporate Governance" heading. Code of Conduct, Committee Charters and other governance documents are included at this site. Our Code of Conduct applies to all employees, regardless of their position or the country in which they work. It also applies to the employees of any entity owned or controlled by us. We will post any amendments to the Code of Conduct and any waivers that are required to be disclosed by the rules of either the SEC or the New York Stock Exchange LLC (NYSE), on our internet site. The information on our internet site is not incorporated by reference into this report.

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EXECUTIVE OFFICERS OF THE REGISTRANT

Following are the names and ages of our executive officers, their positions with us at January 31, 2016 and summaries of their backgrounds and business experience:



Name and Age	Present Cummins Inc. position and year appointed to position	Principal position during the past five years other than Cummins Inc. position currently held
N. Thomas Linebarger (53)	Chairman of the Board of Directors and Chief Executive Officer (2012)	President and Chief Operating Officer (2008-2011)
Richard J. Freeland (58)	President and Chief Operating Officer (2014)	Vice President and President— Engine Business (2010-2014)
Sherry A. Aaholm (53)	Vice President—Chief Information Officer (2013)	Executive Vice President, Information Technology, FedEx Services (2006-2013)
Sharon R. Barner (58)	Vice President—General Counsel (2012)	Partner—Law firm of Foley & Lardner (2011-2012) Deputy Under Secretary of Commerce—Intellectual Property and Deputy Director of the United States Patent and Trademark Office (2009-2011)
Steven M. Chapman (61)	Group Vice President—China and Russia (2009)
Jill E. Cook (52)	Vice President—Chief Human Resources Officer (2003)
Dave J. Crompton (50)	Vice President and President— Engine Business (2014)	Vice President and General Manager—Engine Business (2013-2014) Vice President and General Manager—Midrange Engine Business (2005-2013)
Tracy A. Embree (42)	Vice President and President— Components Group and Business Development (2015)	Vice President and President— Turbo Technologies (2012-2014) General Manager, Turbo Technologies—Asia (2011-2012) Executive Director—On Highway Business (2010-2011)
Thaddeaus B. Ewald (48)	Vice President—Corporate Strategy and Business Development (2010)
Marsha L. Hunt (52)	Vice President—Corporate Controller (2003)
Donald G. Jackson (46)	Vice President—Treasurer (2015)	Executive Director—Assistant Treasurer (2013-2015) Vice President—Americas Finance, Hewlett-Packard Co. (2010-2013)
Antonio Leitao (51)	Vice President and President—Power Generation (2015)	Vice President—Power Products (2011 - 2015) Executive Director—Global Commercial Products (2008-2011)
Mark J. Osowick (48)	Vice President—Human Resources Operations (2014)	Executive Director—Human Resources, Components Segment & India ABO (2010-2014)
Marya M. Rose (53)	Vice President—Chief Administrative Officer (2011)	Vice President—General Counsel and Corporate Secretary (2001-2011)

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Jennifer Rumsey (42)	Vice President—Chief Technical Officer (2015)	Vice President—Engineering, Heavy Duty, Medium and Light Duty Products (2013-2014) Executive Director—HD Engineering (2010-2013)
Livingston L. Satterthwaite (55)	Vice President and President—Distribution Business (2015)	Vice President and President—Power Generation (2008-2015)
Anant J. Talaulicar (54)	Vice President, and Chairman and Managing Director—Cummins India Area Business Organization (2003)	Vice President and President—Components Group (2010-2014)
Patrick J. Ward (52)	Vice President—Chief Financial Officer (2008)
Lisa M. Yoder (52)	Vice President—Global Supply Chain & Manufacturing (2011)	Vice President—Corporate Supply Chain (2010-2011)

Our Chairman and Chief Executive Officer is elected annually by our Board of Directors and holds office until the meeting of the Board of Directors at which his election is next considered. Other officers are appointed by the Chairman and Chief Executive Officer, are ratified by our Board of Directors and hold office for such period as the Chairman and Chief Executive Officer or the Board of Directors may prescribe.

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ITEM 1A. Risk Factors

Set forth below and elsewhere in this Annual Report on Form 10-K are some of the principal risks and uncertainties that could cause our actual business results to differ materially from any forward-looking statements contained in this Report and could individually, or in combination, have a material adverse effect on our results of operations, financial position or cash flows. These risk factors should be considered in addition to our cautionary comments concerning forward-looking statements in this Report, including statements related to markets for our products and trends in our business that involve a number of risks and uncertainties. Our separate section above, "CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION," should be considered in addition to the following statements.

A sustained slowdown or significant downturn in our markets could materially and adversely affect our results of operations, financial condition or cash flows.

Our financial performance in the last 3 years has been supported by improving demand in on-highway markets in North America, while demand in most international markets has been weak. Our revenues from international markets have been significantly impacted by unfavorable foreign currency fluctuations related to the stronger U.S. dollar and slower growth in emerging markets, especially China, which has negatively impacted global demand for off-highway equipment. If the global economy or some of our significant markets encounter a sustained slowdown, depending upon the length, duration and severity of such a slowdown, our results of operations, financial condition or cash flows would almost certainly be materially adversely affected. Specifically, our revenues would likely decrease, we may be forced to consider further restructuring actions, we may need to increase our allowance for doubtful accounts, our days sales outstanding may increase and we could experience impairments to assets of certain of our businesses.

A downturn in the North American truck industry or other factors negatively affecting any of our truck OEM customers could materially adversely impact our results of operations.

We recognize significant sales of engines and components to a few large truck OEMs in North America. The North American on-highway markets have been a large driver of our positive business results for the last few years. If the North American truck market suffers a significant downturn, or if one of our large truck OEM customers experiences financial distress or bankruptcy, such circumstance would likely lead to significant reductions in our revenues and earnings, commercial disputes, receivable collection issues, and other negative consequences that could have a material adverse impact on our results of operations.

Our truck manufacturers and original equipment manufacturers (OEMs) customers may not continue to outsource their engine supply needs.

Several of our engine customers, including PACCAR, Volvo AB, Navistar, Fiat Chrysler Daimler and DCEC, are truck manufacturers or OEMs that manufacture engines for some of their own products. Despite their own engine manufacturing abilities, these customers have historically chosen to outsource certain types of engine production to us due to the quality of our engine products, our emission capabilities, our systems integration, their customers' preferences, their desire for cost reductions, their desire for eliminating production risks and their desire to maintain company focus. However, there can be no assurance that these customers will continue to outsource, or outsource as much of, their engine production in the future. In fact, several of these customers have expressed their intention to significantly increase their own engine production and to decrease engine purchases from us. In addition, increased levels of OEM vertical integration could result from a number of factors, such as shifts in our customers' business strategies, acquisition by a customer of another engine manufacturer, the inability of third-party suppliers to meet product specifications and the emergence of low-cost production opportunities in foreign countries. Any significant reduction in the level of engine production outsourcing from our truck manufacturer or OEM customers could have a material adverse effect on our results of operations.

The discovery of any significant problems with our recently-introduced engine platforms in North America could materially adversely impact our results of operations, financial condition and cash flow.

The EPA and CARB have certified all of our 2012/2013 on-highway and off-highway engines, which utilize SCR technology to meet requisite emission levels. We introduced SCR technology into our engine platforms in 2010. The effective performance of SCR technology and the overall performance of these engine platforms impact a number of our operating segments and remain crucial to our success in North America. While these 2010 and 2013 engine platforms have generally performed well in the field, the discovery of any significant problems in these platforms could result in recall campaigns, increased warranty costs, reputational risk and brand risk, and could materially adversely impact our results of operations, financial condition or cash flows.

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Further slowdown in infrastructure development could adversely affect our business.

Infrastructure development has been a significant driver of growth over time, but as the pace of investment in infrastructure has slowed in recent years, especially in the emerging markets of China and Brazil, demand for our products in off-highway markets has weakened. If the slowdown in infrastructure development continues or increases in severity as a result of weaker economic growth or other circumstances, our business could be adversely affected.

Unpredictability in the adoption, implementation and enforcement of increasingly stringent emission standards by multiple jurisdictions around the world could adversely affect our business.

Our engines are subject to extensive statutory and regulatory requirements governing emission and noise, including standards imposed by the EPA, the European Union, state regulatory agencies (such as the CARB) and other regulatory agencies around the world. We have made, and will be required to continue to make, significant capital and research expenditures to comply with these emission standards. Developing engines and components to meet numerous changing government regulatory requirements, with different implementation timelines and emission requirements, makes developing engines efficiently for multiple markets complicated and could result in substantial additional costs that may be difficult to recover in certain markets. In some cases, we may be required to develop new products to comply with new regulations, particularly those relating to air emissions. While we have met previous deadlines, our ability to comply with other existing and future regulatory standards will be essential for us to maintain our position in the engine markets we serve. The successful development and introduction of new and enhanced products in order to comply with new regulatory requirements are subject to other risks, such as delays in product development, cost over-runs and unanticipated technical and manufacturing difficulties.

In addition to these risks, the nature and timing of government implementation and enforcement of increasingly stringent emission standards in emerging markets are unpredictable and subject to change. Any delays in implementation or enforcement could result in the products we developed or modified to comply with these standards becoming unnecessary or becoming necessary later than expected thereby, in some cases, negating our competitive advantage. This in turn can delay, diminish or eliminate the expected return on capital and research expenditures that we have invested in such products and may adversely affect our perceived competitive advantage in being an early, advanced developer of compliant engines.

We are subject to foreign currency exchange rate and other related risks.

We conduct operations in many areas of the world involving transactions denominated in a variety of currencies. We are subject to foreign currency exchange rate risk to the extent that our costs are denominated in currencies other than those in which we earn revenues. In addition, since our financial statements are denominated in U.S. dollars, changes in foreign currency exchange rates between the U.S. dollar and other currencies have had, and will continue to have, an impact on our results of operations. The U.S. dollar has strengthened in recent years and has resulted in material unfavorable impacts on our financial statements. If the U.S. dollar continues to strengthen against other currencies, we will continue to experience additional unfavorable impacts to our financial statements.

While we customarily enter into financial transactions that attempt to address these risks and many of our supply agreements with customers include foreign currency exchange rate adjustment provisions, there can be no assurance that foreign currency exchange rate fluctuations will not adversely affect our results of operations. In addition, while the use of currency hedging instruments may provide us with some protection from adverse fluctuations in foreign currency exchange rates, by utilizing these instruments we potentially forego the benefits that might result from favorable fluctuations in foreign currency exchange rates.

We also face risks arising from the imposition of foreign exchange controls and currency devaluations. Foreign exchange controls may limit our ability to convert foreign currencies into U.S. dollars or to remit dividends and other payments by our foreign subsidiaries or businesses located in or conducted within a country imposing controls. Currency devaluations result in a diminished value of funds denominated in the currency of the country instituting the devaluation.

We derive significant income from investees that we do not directly control.

For 2015, we recognized $315 million of equity, royalty and interest income from investees, compared to $370 million in 2014. Approximately half of our equity, royalty and interest income from investees is from three of our 50 percent owned joint ventures in China, Beijing Foton Cummins Engine Co., Ltd. (BFCEC), Dongfeng Cummins Engine Company, Ltd. (DCEC) and Chongqing Cummins Engine Company, Ltd. (CCEC). As a result, although a significant percentage of our net income is derived from these unconsolidated entities, we do not unilaterally control their management or their operations, which puts a substantial portion of our net income at risk from the actions or inactions of these entities. A significant reduction in the level of contribution by these entities to our net income would likely have a material adverse effect on our results of operations.

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We may fail to realize all of the expected enhanced revenue, earnings, cash flow, cost savings and other benefits from the integration of our partially-owned United States and Canadian distributors.

Our ability to realize all of the expected enhanced revenue, earnings, cash flow, cost savings and other benefits from our recent distributor acquisitions will depend, in substantial part, on our ability to successfully complete the integration of the acquired distributors with our other businesses. While we believe we will ultimately achieve these expected benefits, it is possible that we will be unable to achieve all of the objectives within our anticipated time frame or in the anticipated amounts. The expected benefits from integration also may not be fully realized or may be delayed due to certain prohibitions in applicable state franchise and distributor laws. If we are not able to successfully complete our integration strategy, the anticipated enhanced revenue, earnings, cash flow, cost savings and other benefits, resulting from our distributor acquisitions may not be realized fully or may take longer to realize than expected.

Delays encountered or increased costs incurred in completing the integration of these acquisitions could negatively impact our revenues, expenses, operating results, cash flow and financial condition after completion of the acquisitions, including the loss of current customers or suppliers, increased exposure to legal claims and other liabilities and the distraction or departure of key managers and employees.

Our plan to grow through strategic acquisitions may expose us to additional costs and risks.

Part of our strategic plan is to increase our revenue and earnings by strategic acquisitions if we determine they are likely to provide future financial and operational benefits. There can be no assurance that we will be able to identify suitable candidates or consummate these acquisitions on favorable terms. The successful identification and completion of any strategic acquisition depends on a number of factors that are not entirely within our control, including the availability of suitable candidates and our ability to negotiate terms acceptable to all parties involved, conclude satisfactory agreements and obtain all necessary regulatory approvals. Accordingly, we may not be able to successfully negotiate and complete a specific transaction. In addition, our ability to effectively integrate any potential acquisition into our existing business and culture may not be successful, which could jeopardize future financial and operational performance for the combined businesses. The exploration, negotiation and consummation of strategic transactions may involve significant expenditures by us, which may adversely affect our results of operations at the time such expenses are incurred, and may divert management’s attention from our existing business. Acquisitions also may have adverse effects on our existing business relationships with suppliers and customers.

If required, the financing for strategic transactions could result in an increase in our indebtedness, dilute the interests of our shareholders or both. Any acquisition may not be accretive to us for a significant period of time following the completion of such acquisition. In addition, if an acquisition results in any additional goodwill or increase in other intangible assets on our balance sheet and subsequently becomes impaired, we would be required to record a non-cash impairment charge, which could result in a material adverse effect on our financial condition and results of operations.

We may experience difficulties and delays or unexpected costs in completing our restructuring and cost reduction initiatives, including achieving any anticipated savings and other benefits of these initiatives.

During the fourth quarter of 2015, we undertook restructuring and cost reduction initiatives to respond to the slowdown in our global markets. As we implement these initiatives, we may not realize anticipated savings or other benefits from one or more of the initiatives in the amounts or within the time periods we expect. Other events and circumstances, such as implementation difficulties and delays or unexpected costs, may occur which could result in our not realizing our targeted cost reductions. We are also subject to the risks of negative publicity and business disruption in connection with our restructuring and other cost reduction initiatives. If we are unable to realize the expected savings or benefits from these initiatives, certain aspects of our business may be adversely affected. If we experience any of these circumstances or otherwise fail to realize the anticipated savings or benefits from our restructuring and cost reduction initiatives, our results of operations could be materially and adversely affected.

We are vulnerable to supply shortages from single-sourced suppliers.

During 2015, we single sourced approximately 56 percent of the total types of parts in our product designs, compared to approximately 55 percent in 2014. Any delay in our suppliers' deliveries may adversely affect our operations at multiple manufacturing locations, forcing us to seek alternative supply sources to avoid serious disruptions. Delays may be caused by factors affecting our suppliers, including capacity constraints, labor disputes, economic downturns, availability of credit, the impaired financial condition of a particular supplier, suppliers' allocations to other purchasers, weather emergencies, natural disasters or acts of war or terrorism. Any extended delay in receiving critical supplies could impair our ability to deliver products to our customers and our results of operations.

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Our products are exposed to variability in material and commodity costs.

Our businesses establish prices with our customers in accordance with contractual time frames; however, the timing of material and commodity market price increases may prevent us from passing these additional costs on to our customers through timely pricing actions. Additionally, higher material and commodity costs around the world may offset our efforts to reduce our cost structure. While we customarily enter into financial transactions and contractual pricing adjustment provisions with our customers that attempt to address some of these risks (notably with respect to copper, platinum and palladium), there can be no assurance that commodity price fluctuations will not adversely affect our results of operations. In addition, while the use of commodity price hedging instruments and contractual pricing adjustments may provide us with some protection from adverse fluctuations in commodity prices, by utilizing these instruments we potentially forego the benefits that might result from favorable fluctuations in price. As a result, higher material and commodity costs, as well as hedging these commodity costs during periods of decreasing prices, could result in declining margins.

Our products are subject to recall for performance or safety-related issues.

Our products may be subject to recall for performance or safety-related issues. Product recalls subject us to harm to our reputation, loss of current and future customers, reduced revenue and product recall costs. Product recall costs are incurred when we decide, either voluntarily or involuntarily, to recall a product through a formal campaign to solicit the return of specific products due to a known or suspected performance issue. Any significant product recalls could have a material adverse effect on our results of operations, financial condition and cash flows.

We face significant competition in the markets we serve.

The markets in which we operate are highly competitive. We compete worldwide with a number of other manufacturers and distributors that produce and sell similar products. We primarily compete in the market with diesel engines and related diesel products; however, new technologies continue to be developed for gasoline, natural gas and other technologies and we will continue to face new competition from these expanding technologies. Our products primarily compete on the basis of price, performance, fuel economy, speed of delivery, quality and customer support. We also face competitors in some emerging markets who have established local practices and long standing relationships with participants in these markets. There can be no assurance that our products will be able to compete successfully with the products of other companies and in other markets. For a more complete discussion of the competitive environment in which each of our segments operates, see “Operating Segments” in “Item 1 Business.”

Increasing global competition among our customers may affect our existing customer relationships and restrict our ability to benefit from some of our customers' growth.

As our customers in emerging markets continue to grow in size and scope, they are increasingly seeking to export their products to other countries. This has meant greater demand for our advanced engine technologies to help these customers meet the more stringent emissions requirements of developed markets, as well as greater demand for access to our distribution systems for purposes of equipment servicing. As these emerging market customers enter into and begin to compete in more developed markets, they may increasingly begin to compete with our existing customers in these markets. Our further aid to emerging market customers could adversely affect our relationships with developed market customers and, as a result, we may be pressured to restrict sale or support of some of our products in the areas of increased competition. In addition, to the extent the competition does not correspond to overall growth in demand, we may see little or no benefit from this type of expansion by our emerging market customers.

We are exposed to, and may be adversely affected by, potential security breaches or other disruptions to our information technology systems and data security.

We rely on the capacity, reliability and security of our information technology systems and data security infrastructure in connection with various aspects of our business activities. We also rely on our ability to expand and continually update these systems and infrastructure in response to the changing needs of our business. As we implement new systems, they may not perform as expected. We also face the challenge of supporting our older systems and implementing necessary upgrades. In addition, some of these systems are managed by third party service providers and are not under our direct control. If we experience a problem with an important information technology system, including during system upgrades and/or new system implementations, the resulting disruptions could have an adverse effect on our business and reputation.

The information handled by our information technology systems is vulnerable to security threats. Our operations routinely involve receiving, storing, processing and transmitting sensitive information pertaining to our business, customers, dealers, suppliers, employees and other sensitive matters. Information technology security threats such as security breaches, computer malware and other "cyber attacks," which are increasing in both frequency and sophistication could result in unauthorized disclosures of information and create financial liability, subject us to legal or regulatory sanctions or damage our reputation

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with customers, dealers, suppliers and other stakeholders. We continuously seek to maintain a robust program of information security and controls, but the impact of a material information technology event could have a material adverse effect on our competitive position, reputation, results of operations, financial condition and cash flow.

We are exposed to political, economic and other risks that arise from operating a multinational business.

Approximately 44 percent of our net sales for 2015 and 48 percent in 2014 were attributable to customers outside the U.S. Accordingly, our business is subject to the political, economic and other risks that are inherent in operating in numerous countries. These risks include:


•	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.

As we continue to operate our business globally, our success will depend, in part, on our ability to anticipate and effectively manage these and other related risks. There can be no assurance that the consequences of these and other factors relating to our multinational operations will not have a material adverse effect upon us.

Unanticipated changes in our effective tax rate, the adoption of new tax legislation or exposure to additional income tax liabilities could adversely affect our profitability.

We are subject to income taxes in the U.S. and numerous international jurisdictions. Our income tax provision and cash tax liability in the future could be adversely affected by changes in the distribution of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes to our assertions regarding permanent reinvestment of our foreign earnings, changes in tax laws and the discovery of new information in the course of our tax return preparation process. The carrying value of deferred tax assets, which are predominantly in the U.S., is dependent on our ability to generate future taxable income in the U.S. We are also subject to ongoing tax audits. These audits can involve complex issues, which may require an extended period of time to resolve and can be highly judgmental. Tax authorities may disagree with certain tax reporting positions taken by us and, as a result, assess additional taxes against us. We regularly assess the likely outcomes of these audits in order to determine the appropriateness of our tax provision. The amounts ultimately paid upon resolution of these or subsequent tax audits could be materially different from the amounts previously included in our income tax provision and, therefore, could have a material impact on our tax provision.

Our global operations are subject to laws and regulations that impose significant compliance costs and create reputational and legal risk.

Due to the international scope of our operations, we are subject to a complex system of commercial and trade regulations around the world. Recent years have seen an increase in the development and enforcement of laws regarding trade compliance and anti-corruption such as the U.S. Foreign Corrupt Practices Act and similar laws from other countries. Our numerous foreign subsidiaries, affiliates and joint venture partners are governed by laws, rules and business practices that differ from those of the U.S. The activities of these entities may not comply with U.S. laws or business practices or our Code of Business Conduct. Violations of these laws may result in severe criminal or civil sanctions, could disrupt our business, and result in an adverse effect on our reputation, business and results of operations or financial condition. We cannot predict the nature, scope or effect of future regulatory requirements to which our operations might be subject or the manner in which existing laws might be administered or interpreted.

We face the challenge of accurately aligning our capacity with our demand.

We can experience idle capacity as economies slow or demand for certain products decline. Accurately forecasting our expected volumes and appropriately adjusting our capacity have been, and will continue to be, important factors in determining our results of operations. If we overestimate our demand and overbuild our capacity, we may have significantly underutilized assets and we may experience reduced margins. If we do not accurately align our manufacturing capabilities with demand it could have a material adverse effect on our results of operations.

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Our business is exposed to risks of product liability claims.

We face an inherent business risk of exposure to product liability claims in the event that our products' failure to perform to specification results or is alleged to result in property damage, bodily injury and/or death. At any given time, we are subject to various and multiple product liability claims, any one of which, if decided adversely to us, may have a material adverse effect on our reported results of operation in the period in which our liability with respect to any such claim is recognized. While we maintain insurance coverage with respect to certain product liability claims, we may not be able to obtain such insurance on acceptable terms in the future, if at all, and any such insurance may not provide adequate coverage against product liability claims. In addition, product liability claims can be expensive to defend and can divert the attention of management and other personnel for significant periods of time, regardless of the ultimate outcome. Furthermore, even if we are successful in defending against a claim relating to our products, claims of this nature could cause our customers to lose confidence in our products and us.

Our operations are subject to increasingly stringent environmental laws and regulations.

Our plants and operations are subject to increasingly stringent environmental laws and regulations in all of the countries in which we operate, including laws and regulations governing air emission, discharges to water and the generation, handling, storage, transportation, treatment and disposal of waste materials. While we believe that we are in compliance in all material respects with these environmental laws and regulations, there can be no assurance that we will not be adversely impacted by costs, liabilities or claims with respect to existing or subsequently acquired operations, under either present laws and regulations or those that may be adopted or imposed in the future. We are also subject to laws requiring the cleanup of contaminated property. If a release of hazardous substances occurs at or from any of our current or former properties or at a landfill or another location where we have disposed of hazardous materials, we may be held liable for the contamination and the amount of such liability could be material.

We are exposed to risks arising from the price and availability of energy.

The level of demand for our products and services is influenced in multiple ways by the price and availability of energy. High energy costs generally drive greater demand for better fuel economy in almost all countries in which we operate. Some of our engine products have been developed with a primary purpose of offering fuel economy improvements, and if energy costs decrease or increase less than expected, demand for these products may likewise decrease. The relative unavailability of electricity in some emerging market countries also influences demand for our electricity generating products, such as our diesel generators. If these countries add energy capacity by expanding their power grids at a rate equal to or faster than the growth in demand for energy, the demand for our generating products could also decrease or increase less than would otherwise be the case.

Significant declines in future financial and stock market conditions could diminish our pension plan asset performance and adversely impact our results of operations, financial condition and cash flow.

We sponsor both funded and unfunded domestic and foreign defined benefit pension and other retirement plans. Our pension cost and the required contributions to our pension plans are directly affected by the value of plan assets, the projected and actual rates of return on plan assets and the actuarial assumptions we use to measure our defined benefit pension plan obligations, including the discount rate at which future projected and accumulated pension obligations are discounted to a present value. We could experience increased pension cost due to a combination of factors, including the decreased investment performance of pension plan assets, decreases in the discount rate and changes in our assumptions relating to the expected return on plan assets.

Significant declines in future financial and stock market conditions could cause material losses in our pension plan assets, which could result in increased pension cost in future years and adversely impact our results of operations, financial condition and cash flow. Depending upon the severity of market declines and government regulatory changes, we may be legally obligated to make pension payments in the U.S. and perhaps other countries and these contributions could be material.

We may be adversely impacted by work stoppages and other labor matters.

At December 31, 2015, we employed approximately 55,200 persons worldwide. Approximately 17,740 of our employees worldwide are represented by various unions under collective bargaining agreements that expire between 2016 and 2021. While we have no reason to believe that we will be materially impacted by work stoppages or other labor matters, there can be no assurance that future issues with our labor unions will be resolved favorably or that we will not encounter future strikes, work stoppages, or other types of conflicts with labor unions or our employees. Any of these consequences may have an adverse effect on us or may limit our flexibility in dealing with our workforce. In addition, many of our customers and suppliers have unionized work forces. Work stoppages or slow-downs experienced by our customers or suppliers could result in slow-downs or closures that would have a material adverse effect on our results of operations, financial condition and cash flow.

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Our financial statements are subject to changes in accounting standards that could adversely impact our profitability or financial position.

Our financial statements are subject to the application of generally accepted accounting principles (GAAP) in the United States of America, which are periodically revised and/or expanded. Accordingly, from time to time we are required to adopt new or revised accounting standards issued by recognized authoritative bodies, including the Financial Accounting Standards Board. Recently, accounting standard setters issued new guidance which further interprets or seeks to revise accounting pronouncements related to revenue recognition and lease accounting as well as to issue new standards expanding disclosures. The impact of accounting pronouncements that have been issued but not yet implemented is disclosed in our annual and quarterly reports on Form 10-K and Form 10-Q. An assessment of proposed standards is not provided, as such proposals are subject to change through the exposure process and, therefore, their effects on our financial statements cannot be meaningfully assessed. It is possible that future accounting standards we are required to adopt could change the current accounting treatment that we apply to our consolidated financial statements and that such changes could have a material adverse effect on the reported results of operations and financial position.

ITEM 1B. Unresolved Staff Comments

None.

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ITEM 2. Properties

Manufacturing Facilities

Our principal manufacturing facilities include our plants used by the following segments in the following locations:



Segment	U.S. Facilities	Facilities Outside the U.S.
Engine	Indiana: Columbus, Seymour	Brazil: Sao Paulo
	Tennessee: Memphis	India: Pune, Phaltan
	New Mexico: Clovis	Mexico: San Luis Potosi
	New York: Lakewood	U.K.: Darlington, Daventry, Cumbernauld
	North Carolina: Whitakers
Components	Indiana: Columbus	Australia: Kilsyth
	South Carolina: Charleston	Brazil: Sao Paulo
	Tennessee: Cookeville	China: Beijing, Shanghai, Wuxi, Wuhan
	Wisconsin: Mineral Point, Neillsville	France: Quimper
		Germany: Marktheidenfeld
		India: Pune, Dewas, Pithampur, Rudrapur
		Mexico: Ciudad Juarez, San Luis Potosi
		South Korea: Suwon
		Turkey: Ismir
		U.K.: Darlington, Huddersfield
Power Generation	Indiana: Elkhart	Brazil: Sao Paulo
	Minnesota: Fridley	China: Wuxi, Wuhan
		India: Pirangut, Ahmendnagar, Ranjangaon, Phaltan
		Mexico: San Luis Potosi
		Romania: Craiova
		U.K.: Margate, Manston, Stamford
		Nigeria: Lagos

In addition, engines and engine components are manufactured by joint ventures or independent licensees at manufacturing plants in the U.S., China, India, Mexico and Sweden.

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Distribution Facilities

The principal distribution facilities used by our Distribution and Engine segments are located in the following locations:



Segment	U.S. Facilities	Facilities Outside the U.S.
Distribution	Alaska: Anchorage	Australia: Scoresby
	Arkansas: Little Rock	Canada: Vancouver, Montreal
	Colorado: Commerce City, Henderson	Germany: Gross Gerau
	Florida: Orlando	India: Pune
	Georgia: Atlanta	Japan: Tokyo
	Illinois: Hodgkins	Korea: Cheonan
	Indiana: Indianapolis	Russia: Moscow
	Kansas: Wichita	Singapore: Singapore SG
	Louisiana: Kenner	South Africa: Johannesburg
	Massachusetts: Dedham	U.K.: Wellingborough
	Michigan: Grand Rapids	United Arab Emirates: Dubai
	Minnesota: White Bear Lake
	Missouri: Kansas City
	Nebraska: Omaha
	New Mexico: Farmington
	New York: Bronx
	North Carolina: Charlotte
	Ohio: Hilliard
	Oklahoma: Oklahoma City
	Oregon: Portland
	Pennsylvania: Bristol, Harrisburg
	Texas: Dallas
	Utah: Salt Lake City
	Washington: Renton, Spokane
Engine	Tennessee: Memphis	Belgium: Rumst

Headquarters and Other Offices

Our Corporate Headquarters are located in Columbus, Indiana. Additional marketing and operational headquarters are in the following locations:



U.S. Facilities		Facilities Outside the U.S.
Indiana: Columbus, Indianapolis		China: Beijing, Shanghai, Wuhan
Tennessee: Nashville		India: Pune
Washington, D.C.		U.K.: Staines, Stockton

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ITEM 3. Legal Proceedings

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

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

ITEM 4. Mine Safety Disclosures

Not Applicable.

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PART II

ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

(a) Our common stock is listed on the NYSE under the symbol "CMI." For information about the quoted market prices of our common stock, information regarding dividend payments and the number of common stock shareholders, see "Selected Quarterly Financial Data" in this report. For other matters related to our common stock and shareholders' equity, see Note 15, "SHAREHOLDERS' EQUITY," to the Consolidated Financial Statements.

(b) Use of proceeds—not applicable.



	Issuer Purchases of Equity Securities
Period	(a) Total Number of Shares Purchased⁽¹⁾	(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs⁽²⁾
September 28 - November 1, 2015	298,106	$	107.96	296,901	107,561
November 2 - November 29, 2015	1,621,179	103.62		1,621,179	111,730
November 30 - December 31, 2015	568,940	88.11		567,670	121,113
Total	2,488,225	100.59		2,485,750

_____________________________________________________________

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

⁽²⁾ These values reflect the sum of shares held in loan status under our Key Employee Stock Investment Plan. The repurchase program authorized by the Board of Directors does not limit the number of shares that may be purchased and was excluded from this column.

In July 2014, our Board of Directors authorized the acquisition of up to $1 billion of additional common stock. We repurchased $250 million of stock under this authorization during the three months ended December 31, 2015. In November 2015, our Board of Directors authorized the acquisition of up to $1 billion of additional common stock upon the completion of the 2014 repurchase plan.

During the fourth quarter of 2015, we repurchased 2,475 shares from employees in connection with the Key Employee Stock Investment Plan which allows certain employees, other than officers, to purchase shares of common stock on an installment basis up to an established credit limit. Loans are issued for five-year terms at a fixed interest rate established at the date of purchase and may be refinanced after its initial five-year period for an additional five-year period. Participants must hold shares for a minimum of six months from date of purchase. If the shares are sold before the loan is paid off, the employee must wait six months before another share purchase may be made. We hold participants’ shares as security for the loans and would, in effect repurchase shares if the participant defaulted in repayment of the loan. There is no maximum amount of shares that we may purchase under this plan.

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Performance Graph (Unaudited)

The following Performance Graph and related information shall not be deemed "soliciting material" or to be "filed" with the SEC, nor shall such information be incorporated by reference into any of our future filings under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.

The following graph compares the cumulative total shareholder return on our common stock for the last five years with the cumulative total return on the S&P 500 Index and an index of peer companies selected by us. Our peer group includes BorgWarner Inc, Caterpillar, Inc., Daimler AG, Danaher Corporation, Deere & Company, Donaldson Company Inc., Eaton Corporation, Emerson Electric Co., W.W. Grainger Inc., Honeywell International, Illinois Tool Works Inc., Ingersoll-Rand Company Ltd., Navistar, PACCAR, Parker-Hannifin Corporation, Textron Inc. and Volvo AB. Each of the measures of cumulative total return assumes reinvestment of dividends. The comparisons in this table are required by the SEC and are not intended to forecast or be indicative of possible future performance of our stock.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN

AMONG CUMMINS INC., S&P 500 INDEX AND CUSTOM PEER GROUP

ASSUMES $100 INVESTED ON DEC. 31, 2010

ASSUMES DIVIDENDS REINVESTED

FISCAL YEAR ENDING DEC. 31, 2015

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ITEM 6. Selected Financial Data

The selected financial information presented below for each of the last five years ended December 31, beginning with 2015, was derived from our Consolidated Financial Statements. This information should be read in conjunction with our Consolidated Financial Statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations."



In millions, except per share amounts	2015			2014			2013			2012			2011
For the years ended December 31,
Net sales	$	19,110		$	19,221		$	17,301		$	17,334		$	18,048
U.S. percentage of sales	56		%	52		%	48		%	47		%	41		%
Non-U.S. percentage of sales	44		%	48		%	52		%	53		%	59		%
Gross margin⁽¹⁾	4,947			4,861			4,280			4,416			4,589
Research, development and engineering expenses	735			754			713			728			629
Equity, royalty and interest income from investees	315			370			361			384			416
Interest expense⁽²⁾	65			64			41			32			44
Net income attributable to Cummins Inc.⁽³⁾	1,399			1,651			1,483			1,645			1,848
Earnings per common share attributable to Cummins Inc.
Basic	$	7.86		$	9.04		$	7.93		$	8.69		$	9.58
Diluted	7.84			9.02			7.91			8.67			9.55
Cash dividends declared per share	3.51			2.81			2.25			1.8			1.325
Net cash provided by operating activities	$	2,059		$	2,266		$	2,089		$	1,532		$	2,073
Capital expenditures	744			743			676			690			622
At December 31,
Cash and cash equivalents	$	1,711		$	2,301		$	2,699		$	1,369		$	1,484
Total assets	15,134			15,764			14,728			12,548			11,668
Long-term debt⁽²⁾	1,576			1,577			1,672			698			658
Total equity⁽⁴⁾	7,750			8,093			7,870			6,974			5,831

_____________________________________________________________

⁽¹⁾We revised the classification of certain amounts for "Cost of sales" and "Selling, general and administrative expenses" for 2013 and 2012. Certain activities that were previously classified in "Selling, general and administrative expenses" are now classified as "Cost of sales." The reclassifications for the years ended December 31, 2013 and 2012, were $103 million and $92 million, respectively. The revision had no impact on reported net income, cash flows or the balance sheet. The amounts for the year ended December 31, 2011, were not reclassified to be consistent with the current presentation.

⁽²⁾ In September 2013, we issued $1 billion of senior unsecured debt.

⁽³⁾ For the year ended December 31, 2015, consolidated net income included $211 million for an impairment of light-duty diesel assets ($133 million after-tax), $90 million of restructuring actions and other charges ($61 million after-tax) and a $60 million accrual for a loss contingency ($38 million after-tax). For the year ended December 31, 2014, consolidated net income included $32 million of restructuring and other charges ($21 million after-tax) for operating actions related to the Power Generation segment. For the year ended December 31, 2012, consolidated net income included $52 million of restructuring and other charges ($35 million after-tax) and a $20 million charge ($12 million after-tax) related to legal matters. For the year ended December 31, 2011, consolidated net income included a $68 million gain ($37 million after-tax) related to the disposition of certain assets and liabilities of our exhaust business and a $53 million gain ($33 million after-tax) recorded for the disposition of certain assets and liabilities of our light-duty filtration business, both from the Components segment, and a $38 million gain ($24 million after-tax) related to flood damage recoveries from the insurance settlement related to a June 2008 flood in Southern Indiana.

⁽⁴⁾ In 2015, 2014, 2013, 2012 and 2011, we recorded non-cash charges (credits) to equity of $63 million, $78 million, $(102) million, $83 million and $96 million, respectively, to record net actuarial (gains) losses associated with the valuation of our pension plans. These (gains) losses include the effects of market conditions on our pension trust assets and the effects of economic factors on the valuation of the pension liability. In 2015, 2014, 2013, 2012 and 2011, we recorded non-cash charges (credits) to equity of $290 million, $227 million, $18 million, ($37) million and $108 million, respectively, to record unrealized (gains) losses associated with the foreign currency translation adjustments.

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ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

ORGANIZATION OF INFORMATION

The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) was prepared to provide the reader with a view and perspective of our business through the eyes of management and should be read in conjunction with our Consolidated Financial Statements and the accompanying notes to those financial statements. Our MD&A is presented in the following sections:


•	Executive Summary and Financial Highlights


•	2016 Outlook


•	Results of Operations


•	Comprehensive Income


•	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

EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS

We are a global power leader that designs, manufactures, distributes and services diesel and natural gas engines and engine-related component products, including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems and electric power generation systems. We sell our products to original equipment manufacturers (OEMs), distributors and other customers worldwide. We have long-standing relationships with many of the leading manufacturers in the markets we serve, including PACCAR Inc, Daimler Trucks North America, Navistar International Corporation, Fiat Chrysler Automobiles (Fiat Chrysler), Volvo AB, Komatsu and MAN Nutzfahrzeuge AG. We serve our customers through a network of approximately 600 company-owned and independent distributor locations and over 7,200 dealer locations in more than 190 countries and territories.

Our reportable operating segments consist of the following: Engine, Distribution, Components and Power Generation. This reporting structure is organized according to the products and markets each segment serves. The Engine segment produces engines and parts for sale to customers in on-highway and various industrial markets. Our engines are used in trucks of all sizes, buses and recreational vehicles, as well as in various industrial applications, including construction, mining, agriculture, marine, oil and gas, rail and military equipment. The Distribution segment includes wholly-owned and partially-owned distributorships engaged in wholesaling engines, generator sets and service parts, as well as performing service and repair activities on our products and maintaining relationships with various OEMs throughout the world. The Components segment sells filtration products, aftertreatment systems, turbochargers and fuel systems. The Power Generation segment is an integrated provider of power systems, which sells engines, generator sets and alternators.

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

Worldwide revenues declined 1 percent in 2015 compared to 2014, primarily due to unfavorable foreign currency fluctuations, lower global demand in most industrial markets and lower on-highway demand in international markets, especially in Brazil, mostly offset by the consolidation of our partially-owned North American distributors since December 31, 2013 and higher demand in North American on-highway markets. Continued international economic weakness in 2015 negatively impacted our

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international revenues, which declined by 11 percent with sales down in most of our markets, especially in Brazil and Europe as a result of their challenging economic conditions and slower growth in China. The decline in international sales was primarily due to unfavorable foreign currency impacts of 4 percent (primarily in the euro, Brazilian real, Australian dollar, Canadian dollar, British pound and Indian rupee), declines in international industrial markets led by declines in the commercial marine market and the construction market (primarily in Europe) and lower demand in on-highway markets (primarily in Brazil and China). Revenue in the U.S. and Canada improved by 7 percent primarily due to increased Distribution segment sales related to the consolidation of North American distributors and higher demand in North American on-highway markets, partially offset by lower demand in construction and mining markets.

The following table contains sales and earnings before interest expense, income tax expense and noncontrolling interests (EBIT) results by operating segment for the years ended December 31, 2015 and 2014. Refer to the section titled "Operating Segment Results" for a more detailed discussion of net sales and EBIT by operating segment including the reconciliation of segment EBIT to income before income taxes.

Operating Segments



	2015									2014								Percent change
				Percent of Total									Percent of Total					2015 vs. 2014
In millions	Sales			Percent of Total		EBIT				Sales			Percent of Total		EBIT			Sales		EBIT
Engine	$	10,449		55	%	$	807		^(1)(2)(3)	$	10,962		57	%	$	1,225		(5	)%	(34	)%
Distribution	6,229			33	%	412			⁽²⁾	5,174			27	%	491			20	%	(16	)%
Components	5,172			27	%	727			⁽¹⁾⁽²⁾	5,118			27	%	684			1	%	6	%
Power Generation	2,740			14	%	156			⁽²⁾	2,896			15	%	168			(5	)%	(7	)%
Intersegment eliminations	(5,480		)	(29	)%	—				(4,929		)	(26	)%	—			11	%	—
Non-segment	—			—		(12		)	⁽²⁾	—			—		(70		)	—		(83	)%
Total	$	19,110		100	%	$	2,090			$	19,221		100	%	$	2,498		(1	)%	(16	)%

_____________________________________________________

⁽¹⁾The year ended December 31, 2015, included an impairment of light-duty diesel assets for the Engine and Components segments of $202 million and $9 million, respectively.

⁽²⁾The year ended December 31, 2015, included $90 million of restructuring actions and other charges. Restructuring actions and other charges for the Engine, Distribution, Components, Power Generation and Non-segment segments were $26 million, $23 million, $13 million, $19 million and $9 million, respectively. See Results of Operations for additional information.

⁽³⁾ The year ended December 31, 2015, included a $60 million accrual for a loss contingency. See Note 14, "COMMITMENTS AND CONTINGENCIES," to the Consolidated Financial Statements for additional information.

Net income attributable to Cummins Inc. for 2015 was $1,399 million, or $7.84 per diluted share, on sales of $19.1 billion, compared to 2014 net income attributable to Cummins Inc. of $1,651 million, or $9.02 per diluted share, on sales of $19.2 billion. The decrease in net income and earnings per share was driven by our impairment of light-duty diesel assets, unfavorable foreign currency fluctuations, restructuring actions, loss contingency, lower other income as a result of larger gains recognized in 2014 from the acquisition of North American distributors and lower equity, royalty and interest income from investees. These decreases were partially offset by improved gross margin, lower research, development and engineering expenses and a lower effective tax rate of 27.4 percent in 2015 versus 28.7 percent in 2014. The increase in gross margin was primarily due to improved Distribution segment sales from the consolidation of partially-owned North American distributors since December 31, 2013 and lower material and commodity costs, partially offset by unfavorable foreign currency fluctuations (primarily in the Australian dollar, Canadian dollar, Brazilian real and euro), unfavorable pricing, unfavorable mix and lower volumes. Diluted earnings per share for 2015 benefited $0.14 per share from lower shares outstanding, primarily due to purchases under the stock repurchase program.

We generated $2.1 billion of operating cash flows in 2015, compared to $2.3 billion in 2014. Refer to the section titled "Cash Flows" in the "Liquidity and Capital Resources" section for a discussion of items impacting cash flows.

During 2015, we repurchased $900 million of common stock under our authorized repurchase plans. In November 2015, our Board of Directors authorized the acquisition of up to $1 billion of additional common stock upon the completion of the 2014 repurchase plan.

During 2015, we paid $120 million to acquire the remaining interest in three North American distributors, including the related debt retirements, and recognized a total gain of $18 million on the fair value adjustment resulting from the acquisition of the controlling interests in two of these previously unconsolidated entities. We plan to spend an additional $85 million to $110 million on North American distributor acquisitions and the related debt retirements in 2016. Refer to Note 20, "ACQUISITIONS," to the Consolidated Financial Statements for additional information.

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On November 13, 2015, we entered into an amended and restated five-year revolving credit agreement with a syndicate of lenders. The credit agreement provides us with a $1.75 billion senior unsecured revolving credit facility, the proceeds of which are to be used for working capital or other general corporate purposes.

Our debt to capital ratio (total capital defined as debt plus equity) at December 31, 2015, was 17.5 percent, compared to 17.2 percent at December 31, 2014. At December 31, 2015, we had $1.8 billion in cash and marketable securities on hand and access to our credit facilities, if necessary, to meet currently anticipated investment and funding needs. As of the date of filing this Annual Report on Form 10-K, our credit ratings were as follows:



Credit Rating Agency	Senior L-T Debt Rating	Outlook	Last Updated
Standard & Poor’s Rating Services	A+	Stable	August 2014
Fitch Ratings	A	Stable	October 2015
Moody’s Investors Service, Inc.	A2	Stable	December 2014

In July 2015, our Board of Directors authorized an increase to our quarterly dividend of 25 percent from $0.78 per share to $0.975 per share.

Our global pension plans, including our unfunded and non-qualified plans, were 111 percent funded at December 31, 2015. Our U.S. qualified plan, which represents approximately 57 percent of the worldwide pension obligation, was 119 percent funded and our U.K. plan was 123 percent funded. We expect to contribute approximately $150 million to our global pension plans in 2016. Refer to application of critical accounting estimates within MD&A and Note 10, "PENSION AND OTHER POSTRETIREMENT BENEFITS," to the Consolidated Financial Statements, for additional information concerning our pension and other post-retirement benefit plans.

In the fourth quarter of 2015, we recorded an impairment charge of $211 million related to our light-duty diesel manufacturing assets ($202 million in our Engine segment and $9 million in our Components segment) to adjust the assets to their fair value of $35 million ($33 million for the Engine segment and $2 million for the Components segment). See Note 3, "IMPAIRMENT OF LIGHT-DUTY DIESEL ASSETS," to the Consolidated Financial Statements, for additional information.

In the fourth quarter of 2015, we initiated a reduction in our worldwide work force of approximately 1,900 employees in response to lower demand for our products in the U.S. and key markets around the world. The employee reductions occurred across all parts of the company. We incurred a fourth quarter charge of $90 million ($61 million after-tax) for the headcount reductions, of which $86 million will be settled in cash and an additional $4 million for impairment and other related charges. We will continue to evaluate our manufacturing facilities and make adjustments as necessary to align with changing demand and drive efficiencies in our business. See Note 4, "RESTRUCTURING ACTIONS AND OTHER CHARGES," to the Consolidated Financial Statements, for additional information.

In the fourth quarter of 2015, we incurred a loss contingency of $60 million in Other operating expense, net in our Consolidated Statements of Income. See Note 14, "COMMITMENTS AND CONTINGENCIES," to the Consolidated Financial Statements, for additional information. This charge was included in our Engine segment results.

On February 9, 2016, we entered into an accelerated share repurchase (ASR) agreement with Goldman, Sachs & Co. to purchase $500 million of our common stock. This ASR agreement is part of our previously announced share repurchase plans authorized by the Board of Directors. Pursuant to the terms of the agreement, there will be an initial delivery of approximately 4 million shares. The final number of shares to be repurchased will be based on our volume-weighted average stock price during the terms of the transaction, less a discount. The ASR is expected to be completed by the end of the second quarter of 2016.

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2016 OUTLOOK

Near-Term

Our outlook reflects the following positive trends in 2016:


•	We expect demand in the North American medium-duty truck market to remain strong.


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


•	We expect demand in India to improve in some end-markets as its economy continues to improve.


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

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


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


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


•	We expect power generation markets to remain weak.


•	Weak economic conditions in Brazil will continue to negatively impact demand across our businesses.


•	We anticipate end-markets in China to remain weak.


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


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


•	Demand for equipment in global mining markets is expected to remain weak and could continue to decline if commodity prices continue to weaken.

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RESULTS OF OPERATIONS



										Favorable/(Unfavorable)
	Years ended December 31,									2015 vs. 2014					2014 vs. 2013
In millions (except per share amounts)	2015			2014			2013			Amount			Percent		Amount			Percent
NET SALES	$	19,110		$	19,221		$	17,301		$	(111	)	(1	)%	$	1,920		11	%
Cost of sales	14,163			14,360			13,021			197			1	%	(1,339		)	(10	)%
GROSS MARGIN	4,947			4,861			4,280			86			2	%	581			14	%
OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses	2,092			2,095			1,817			3			—	%	(278		)	(15	)%
Research, development and engineering expenses	735			754			713			19			3	%	(41		)	(6	)%
Equity, royalty and interest income from investees	315			370			361			(55		)	(15	)%	9			2	%
Impairment of light-duty diesel assets	211			—			—			(211		)	NM		—			NM
Restructuring actions and other charges	90			—			—			(90		)	NM		—			NM
Other operating expense, net	(77		)	(17		)	(10		)	(60		)	NM		(7		)	70	%
OPERATING INCOME	2,057			2,365			2,101			(308		)	(13	)%	264			13	%
Interest income	24			23			27			1			4	%	(4		)	(15	)%
Interest expense	65			64			41			(1		)	(2	)%	(23		)	(56	)%
Other income, net	9			110			32			(101		)	(92	)%	78			NM
INCOME BEFORE INCOME TAXES	2,025			2,434			2,119			(409		)	(17	)%	315			15	%
Income tax expense	555			698			531			143			20	%	(167		)	(31	)%
CONSOLIDATED NET INCOME	1,470			1,736			1,588			(266		)	(15	)%	148			9	%
Less: Net income attributable to noncontrolling interests	71			85			105			14			16	%	20			19	%
NET INCOME ATTRIBUTABLE TO CUMMINS INC.	$	1,399		$	1,651		$	1,483		$	(252	)	(15	)%	$	168		11	%
Diluted earnings per common share attributable to Cummins Inc.	$	7.84		$	9.02		$	7.91		$	(1.18	)	(13	)%	$	1.11		14	%

______________________________________

"NM" - not meaningful information



							Favorable/(Unfavorable) Percentage Points
Percent of sales	2015		2014		2013		2015 vs. 2014	2014 vs. 2013
Gross margin	25.9	%	25.3	%	24.7	%	0.6	0.6
Selling, general and administrative expenses	10.9	%	10.9	%	10.5	%	—	(0.4	)
Research, development and engineering expenses	3.8	%	3.9	%	4.1	%	0.1	0.2

2015 vs. 2014

Net Sales

Net sales decreased $111 million versus 2014, primarily driven by the following:


•	Foreign currency fluctuations unfavorably impacted sales approximately 4 percent (primarily in the euro, Brazilian real, Australian dollar, Canadian dollar, British pound and Indian rupee).


•	Engine segment sales decreased 5 percent, primarily due to lower global demand in most industrial markets and lower on-highway demand in international markets, especially Brazil, partially offset by higher demand in most North American on-highway markets.


•	Power Generation segment sales decreased 5 percent, due to lower demand in all lines of business and across most markets.

The decreases above were partially offset by the following:


•	Distribution segment sales increased 20 percent, principally related to the acquisitions of North American distributors since December 31, 2013.

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•	Components segment sales increased 1 percent, primarily due to higher demand in the emission solutions and fuel systems businesses, partially offset by lower demand in the turbo technologies and filtration businesses.

Sales to international markets (excluding the U.S. and Canada), based on location of customers, were 39 percent of total net sales in 2015, compared with 44 percent of total net sales in 2014.

A more detailed discussion of sales by segment is presented in the “OPERATING SEGMENT RESULTS” section.

Gross Margin

Gross margin increased $86 million and 0.6 points as a percentage of sales, primarily due to improved Distribution segment sales from the consolidation of partially-owned North American distributors since December 31, 2013 and lower material and commodity costs, partially offset by unfavorable foreign currency fluctuations (primarily in the Australian dollar, Canadian dollar, Brazilian real and euro), unfavorable pricing, unfavorable mix and lower volumes.

The provision for warranties issued, excluding campaigns, as a percentage of sales was 1.8 percent in 2015 and 2.0 percent in 2014. A more detailed discussion of margin by segment is presented in the "OPERATING SEGMENT RESULTS" section.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $3 million, primarily due to lower consulting expenses of $41 million, partially offset by higher compensation and related expenses of $19 million (largely due to the acquisition of partially-owned North American distributors since December 31, 2013). Compensation and related expenses include salaries, fringe benefits and variable compensation. Overall, selling, general and administrative expenses, as a percentage of sales, was 10.9 percent in 2015 and 2014.

Research, Development and Engineering Expenses

Research, development and engineering expenses decreased $19 million, primarily due to higher expense recovery of $12 million, partially offset by higher consulting expenses of $8 million. Overall, research, development and engineering expenses, as a percentage of sales, decreased to 3.8 percent in 2015 from 3.9 percent in 2014. Research activities continue to focus on development of new products to meet future emission standards around the world and improvements in fuel economy performance.

Equity, Royalty and Interest Income From Investees

Equity, royalty and interest income from investees decreased $55 million, primarily due to the consolidation of partially-owned North American distributors since December 31, 2013, of $74 million, lower earnings at Dongfeng Cummins Engine Company, Ltd. of $16 million and Chongqing Cummins Engine Company, Ltd. of $10 million. These decreases were partially offset by higher earnings at Beijing Foton Cummins Engine Co., Ltd. of $64 million as it continues to increase market share with the new heavy-duty engine platform introduced in 2014.

Impairment of Light-duty Diesel Assets

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. Since that time, and as of December 31, 2015, we capitalized investments of approximately $279 million, with a net book value prior to the impairment of $246 million ($235 million of which is in our Engine segment and $11 million of which is 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 recent deterioration in global economic conditions and excess manufacturing capacity in other markets make it unlikely that we will 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 fourth quarter results included an impairment charge of $211 million ($133 million after-tax), of which $202 million is in the Engine segment and $9 million is 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.

The fair value of the asset group was estimated to be $35 million ($33 million for the Engine segment and $2 million for the Components segment) and was calculated primarily using a cost approach with consideration of a market approach where

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secondary market information was available for the type and age of these assets. In the application of the market approach, we determined that the liquidation value in-place reflected the best estimate of fair value. In the application of the cost approach we considered the current cost of replacing the assets with a reduction for physical deterioration given the age of the assets and a reduction for functional and economic obsolescence in the form of a discount reflecting the current and projected under-utilization of the assets. The fair value of these assets are considered Level 3 under the fair value hierarchy as they are either derived from unobservable inputs or have significant adjustments to the observable inputs.

Restructuring Actions and Other Charges

In the fourth quarter of 2015, we announced and executed restructuring actions primarily in the form of professional voluntary and involuntary employee separation programs 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, which included $86 million for the severance costs related to both voluntary and involuntary terminations and $4 million for asset impairments and other charges.

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

Restructuring actions during 2015 included:



In millions	Year ended December 31, 2015
Workforce reductions	$	86
Impairments and other charges	4
Restructuring actions and other charges	$	90

We expect to realize annualized savings from the restructuring actions of approximately $160 million. Approximately 40 percent of the savings from our restructuring actions will be realized in cost of sales, 40 percent in selling, general and administrative expenses and 20 percent in research, development and engineering expenses. We expect the severance to be paid in cash which will be funded from operations.

At December 31, 2015, approximately 1,700 of the 1,900 employees affected by this plan were terminated. We expect to complete the substantial majority of this program by April of 2016.

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



In millions	Year ended December 31, 2015
Engine	$	26
Distribution	23
Power Generation	19
Components	13
Non-segment	9
Restructuring actions and other charges	$	90

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Other Operating Expense, Net

Other operating expense, net was as follows:



	Years ended December 31,
In millions	2015			2014
Loss contingency ⁽¹⁾	$	(60	)	$	—
Amortization of intangible assets	(18		)	(16		)
Loss on write off of assets	(15		)	(23		)
Royalty income, net	20			27
Other, net	(4		)	(5		)
Total other operating expense, net	$	(77	)	$	(17	)

____________________________________________________________

⁽¹⁾ See Note 14, "COMMITMENTS AND CONTINGENCIES," to the Consolidated Financial Statements for additional information.

Interest Income

Interest income was relatively flat compared to 2014.

Interest Expense

Interest expense was relatively flat compared to 2014.

Other Income, Net

Other income, net was as follows:



	Years ended December 31,
In millions	2015			2014
Gain on fair value adjustment for consolidated investees ⁽¹⁾	$	18		$	73
Dividend income	3			3
Gain on marketable securities, net	1			14
Change in cash surrender value of corporate owned life insurance	(3		)	24
Bank charges	(9		)	(12		)
Foreign currency loss, net	(18		)	(6		)
Other, net	17			14
Total other income, net	$	9		$	110

____________________________________________________________

⁽¹⁾ See Note 20, "ACQUISITIONS," to the Consolidated Financial Statements for additional information.

Income Tax Expense

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. At December 31, 2015, we recorded net deferred tax assets of $356 million. These assets included $236 million for the value of tax loss and credit carryforwards. A valuation allowance of $209 million was recorded to reduce the tax assets to the net value management believed was more likely than not to be realized. In the event our operating performance deteriorates, future assessments could conclude that a larger valuation allowance will be needed to further reduce the deferred tax assets.

We expect our 2016 effective tax rate to be 28.5 percent, excluding any discrete items that may arise.

Noncontrolling Interests

Noncontrolling interests eliminate the income or loss attributable to non-Cummins ownership interests in our consolidated entities. Noncontrolling interests in income of consolidated subsidiaries decreased $14 million, primarily due to lower earnings

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at Wuxi Cummins Turbo Technologies Co. Ltd. and a decline from the acquisition of the remaining interest in previously consolidated North American distributors since December 31, 2013.

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

Net income and diluted earnings per share attributable to Cummins Inc. decreased $252 million and $1.18 per share primarily due to our impairment of light-duty diesel assets, unfavorable foreign currency fluctuations, restructuring actions, loss contingency, lower other income as a result of larger gains recognized in 2014 from the acquisition of North American distributors and lower equity, royalty and interest income from investees. These decreases were partially offset by improved gross margin, lower research, development and engineering expenses and a lower effective tax rate of 27.4 percent in 2015 versus 28.7 percent in 2014. Diluted earnings per share for 2015 benefited $0.14 per share from lower shares outstanding, primarily due to purchases under the stock repurchase program.

2014 vs. 2013

Net Sales

Net sales increased $1,920 million versus 2013, primarily driven by the following:


•	Distribution segment sales increased 38 percent, primarily due to the acquisitions of North American distributors.


•	Engine segment sales increased 9 percent due to higher demand in the North American on-highway markets.


•	Components segment sales increased 18 percent, primarily due to higher demand in on-highway markets in North America, Europe and China.

The increases were partially offset by the following:


•	Power Generation segment sales decreased 4 percent, mainly due to lower volumes within power products, alternators and power systems.


•	Foreign currency fluctuations unfavorably impacted sales approximately 1 percent (primarily the Brazilian real and Indian rupee).

Sales to international markets (excluding the U.S. and Canada), based on location of customers, were 44 percent of total net sales in 2014, compared with 48 percent of total net sales in 2013.

A more detailed discussion of sales by segment is presented in the "OPERATING SEGMENT RESULTS" section.

Gross Margin

Gross margin increased $581 million and 0.6 points as a percentage of sales as higher volumes, improved Distribution segment sales related to the consolidation of partially-owned North American distributors since December 31, 2012, lower material and commodity costs and favorable mix, were partially offset by unfavorable foreign currency fluctuations (primarily the Australian dollar, euro and Canadian dollar).

The provision for warranties issued, excluding campaigns, as a percentage of sales was 2.0 percent in 2014 and 2.1 percent in 2013. A more detailed discussion of margin by segment is presented in the "OPERATING SEGMENT RESULTS" section.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $278 million, primarily due to higher compensation and related expenses of $118 million and increased consulting fees of $28 million. These increases were significantly impacted by the acquisition of our partially owned North American distributors since December 31, 2012. Compensation and related expenses include salaries, fringe benefits and variable compensation. Overall, selling, general and administrative expenses, as a percentage of sales, increased to 10.9 percent in 2014 from 10.5 percent in 2013.

Research, Development and Engineering Expenses

Research, development and engineering expenses increased $41 million, primarily due to higher compensation and related expenses of $44 million, partially offset by decreased consulting expenses of $7 million and increased expense recovery of $7 million. Compensation and related expenses include salaries, fringe benefits and variable compensation. Overall, research, development and engineering expenses, as a percentage of sales, decreased to 3.9 percent in 2014 from 4.1 percent in 2013.

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Equity, Royalty and Interest Income From Investees

Equity, royalty and interest income from investees increased $9 million as $27 million of increases spread broadly among our equity investees was partially offset by a $22 million decline due to the consolidation of the partially-owned North American distributors since December 31, 2012. The increases above were primarily due to higher earnings at Komatsu Cummins Chile, Ltda., Dongfeng Cummins Engine Company, Ltd. and Beijing Foton Cummins Engine Co., Ltd. Royalty and interest income increased $4 million compared to 2013.

Other Operating Expense, Net

Other operating expense, net was as follows:



	Years ended December 31,
In millions	2014			2013
Loss on write off of assets	$	(23	)	$	(14	)
Amortization of intangible assets	(16		)	(11		)
Legal matters	(3		)	(2		)
Royalty income, net	27			16
Other, net	(2		)	1
Total other operating expense, net	$	(17	)	$	(10	)

Interest Income

Interest income decreased in 2014, primarily due to an interest income recovery of a loan previously deemed unrecoverable in the second quarter of 2013.

Interest Expense

Interest expense increased as a result of the $1 billion debt issuance in September 2013.

Other Income, Net

Other income, net was as follows:



	Years ended December 31,
In millions	2014			2013
Gain on fair value adjustment for consolidated investees ⁽¹⁾	$	73		$	12
Change in cash surrender value of corporate owned life insurance	24			12
Gain on marketable securities, net	14			13
Dividend income	3			5
Foreign currency loss, net	(6		)	(27		)
Bank charges	(12		)	(10		)
Other, net	14			27
Total other income, net	$	110		$	32

____________________________________________________________

⁽¹⁾ See Note 20, "ACQUISITIONS," to the Consolidated Financial Statements for more details.

Income Tax Expense

Our income tax rates are generally less than the 35 percent U.S. statutory income tax rate, primarily because of lower taxes on foreign earnings and research tax credits. Our effective tax rate for 2014 was 28.7 percent compared to 25.1 percent for 2013. The 3.6 percent increase in the effective tax rate from 2013 to 2014 is partially due to a 1.2 percent net tax benefit for one-time items in 2013 that did not repeat in 2014. These 2013 one-time items consisted primarily of the 2012 federal research tax credit that was reinstated during 2013. The additional 2.4 percent increase in tax rate from 2013 to 2014 is attributable primarily to the following unfavorable items that occurred in 2014: a tax law change in the U.K. resulting in a higher limitation on the deductibility of interest; unfavorable changes in the jurisdictional mix of pretax income; and increases in state valuation allowances.

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recorded net deferred tax assets of $184 million. These assets included $190 million for the value of tax loss and credit carryforwards. A valuation allowance of $144 million was recorded to reduce the tax assets to the net value management believed was more likely than not to be realized.

Noncontrolling Interests

Noncontrolling interests in income of consolidated subsidiaries decreased $20 million, primarily due to a $23 million decline from the acquisition of the remaining interest in previously consolidated North American distributors since December 31, 2012.

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

Net income and diluted earnings per share attributable to Cummins Inc. increased $168 million and $1.11 per share primarily due to higher gross margin, mainly driven by improved volumes and higher Distribution segment sales related to the consolidation of partially-owned North American distributors since December 31, 2012. These increases were partially offset by higher selling, general and administrative expenses and a higher effective tax rate of 28.7 percent in 2014 versus 25.1 percent in 2013. Diluted earnings per share for 2014 benefited $0.16 per share from lower shares outstanding, primarily due to purchases under the stock repurchase program.

COMPREHENSIVE INCOME

Foreign Currency Translation Adjustment

The foreign currency translation adjustment was a net loss of $305 million, $234 million and $46 million for the years ended 2015, 2014 and 2013, respectively, and was driven by the following:



	Years ended December 31,
	2015				2014				2013
In millions	Translation adjustment			Primary currency driver vs. U.S. dollar	Translation adjustment			Primary currency driver vs. U.S. dollar	Translation adjustment			Primary currency driver vs. U.S. dollar
Wholly owned subsidiaries	$	(261	)	British pound, Brazilian real, Chinese renminbi	$	(208	)	British pound, Brazilian real	$	(11	)	Brazilian real, Indian rupee, partially offset by British pound, Chinese renminbi
Equity method investments	(29		)	Chinese renminbi, Indian rupee	(19		)	Russian rouble, Chinese renminbi	(7		)	Indian rupee, Canadian dollar, Japanese yen, partially offset by Chinese renminbi
Consolidated subsidiaries with a non-controlling interest	(15		)	Indian rupee, Chinese renminbi	(7		)	Indian rupee, Chinese renminbi	(28		)	Indian rupee
Total	$	(305	)		$	(234	)		$	(46	)

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OPERATING SEGMENT RESULTS

Our reportable operating segments consist of the Engine, Distribution, Components and Power Generation segments. This reporting structure is organized according to the products and markets each segment serves. We use EBIT as the primary basis for the chief operating decision-maker to evaluate the performance of each of our operating segments. Segment amounts exclude certain expenses not specifically identifiable to segments. See Note 21, "OPERATING SEGMENTS," to the Consolidated Financial Statements for additional information.

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

Engine Segment Results

Financial data for the Engine segment was as follows:



										Favorable/(Unfavorable)
	Years ended December 31,									2015 vs. 2014					2014 vs. 2013
In millions	2015			2014			2013			Amount			Percent		Amount			Percent
External sales ⁽¹⁾	$	7,540		$	8,437		$	8,270		$	(897	)	(11	)%	$	167		2	%
Intersegment sales ⁽¹⁾	2,909			2,525			1,743			384			15	%	782			45	%
Total sales	10,449			10,962			10,013			(513		)	(5	)%	949			9	%
Depreciation and amortization	239			207			205			(32		)	(15	)%	(2		)	(1	)%
Research, development and engineering expenses	428			438			416			10			2	%	(22		)	(5	)%
Equity, royalty and interest income from investees	171			147			136			24			16	%	11			8	%
Interest income	13			12			16			1			8	%	(4		)	(25	)%
Impairment of light-duty diesel assets ⁽²⁾	202			—			—			(202		)	NM		—			NM
Restructuring actions and other charges ⁽²⁾	26			—			—			(26		)	NM		—			NM
Segment EBIT	807			1,225			1,041			(418		)	(34	)%	184			18	%

										Percentage Points					Percentage Points
Segment EBIT as a percentage of total sales	7.7		%	11.2		%	10.4		%				(3.5	)				0.8

____________________________________

"NM" - not meaningful information

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

⁽²⁾ See respective sections of Results of Operations for additional information.

In the first quarter of 2015, our Engine segment reorganized its reporting structure to include the following markets:


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

•


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

•


•	Stationary Power - We provide mid-range, heavy-duty and high-horsepower engines that range from 60 to 5,100 horsepower to our power generation business for standby, mobile and distributed power generation solutions throughout the world.

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Engine segment sales by market (including 2014 and 2013 reorganized balances) were as follows:



							Favorable/(Unfavorable)
	Years ended December 31,						2015 vs. 2014				2014 vs. 2013
In millions	2015		2014		2013		Amount		Percent		Amount		Percent
Heavy-duty truck	$	3,116	$	3,072	$	2,618	$	44	1	%	$	454	17	%
Medium-duty truck and bus	2,507