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Cummins Inc. (CMI) Nov 14, 2019 Industrials – Construction Machinery and Heavy Trucks Stock Rating: HOLD

Krause Fund Research Fall 2019

Analysts

Shiyan Chen shiyan-chen@uiowa.edu Lingfeng Yu lingfeng-yu@uiowa.edu

Chen Feng chen-feng@uiowa.edu

Hao Ban hao-ban@uiowa.edu

Investment Thesis

Earnings Estimates

12 Month Performance

Target Price: $190-210

We recommend a HOLD rating for Cummins Inc. due to its dividend payout, substantial cash balance, positive outlook of heavy truck industry as well as risks. Drivers of Thesis • Cummins added significant value to its shareholders through dividends

payout. Cummins has generated substantial cash flows that have been distributed to investors through dividends and share repurchases.

• Substantial cash balance makes Cummins has strong financial flexibility, face less pressure from indebtedness, and not exposed to interest rate risk.

• The popularity of e-commerce boosts a positive outlook of heavy truck industry. The demand for heavy truck could significantly increase since the e-commerce drives the need for the delivery service.

Risks to Thesis • The increasing price of crude oil would negatively impact demand for

Cummins’ products. Customer will find substitute products with lower costs. • Lower demand from foreign markets due to trade war and other

miscellaneous reasons will impact sales. Total revenues come from China have declined by 6.2% and revenues from Japan declined by 20% since 2018.

• The foreign countries have implemented new standards for emissions, which could drive the company’s operating costs up.

DCF Model $213 DDM Model $207 Relative P/E $195

Price Data Current Price $180.84 52 Week High $186.73 52 Week Low $124.40

Key Statistics Market Cap (B) 28.11 Shares Outstanding (M) 153 Beta 1.17 Dividend Yield (%) 2.8 P/E (TTM) 11.4 EPS (TTM) 16.1 Profitability Operating Margin (%) 10.00 Profit Margin (%) 9.01 Return on Assets (%) 11.53 Return on Equity (%) 29.31

Company Description

Cummins, headquartered in Columbus, Indiana, USA, is the world's leading manufacturer of power equipment, designing, manufacturing and distributing engines and related technologies including fuel systems, control systems, air handling, filtration systems, and exhaust gas services. Cummins operates through its five business segments: Engine, Distribution, Components and Power Systems, and Electrified Power.10

(Source: Yahoo!Finance) 24

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Executive Summary We recommend a “Hold” rating for Cummins Inc. (CMI) for the University of Iowa Krause Fund Portfolio. We suggest this rating after carefully considering both positive and negative outlook documented in this report and conclude that Cummins would not only offer a good investment opportunity to investors but has some risk.

Our valuation models predicted an intrinsic value of $188 - $213 per share. Suggested target price ranges from $190-$210, 5% to 16% higher than the current stock price.

Economic Outlook Real GDP

（Source: FRED21)

As the graph above shows the U.S real GDP has grown steadily over the previous years. The U.S. economy is expected to grow at a slower rate in 2019. Over the next 6 months, real GDP is expected to grow at 2.2% and is expected to grow at 2.7% over the next five years. As real GDP will continue to grow moderately in the future, Cummins could take advantage of its strengths to achieve a stable growth. A healthy economic condition motivates the executives to make strategic financial planning to achieve organic growth over the next several years.

Consumer Confidence

Consumer confidence has been increasing over the previous ten years. The consumer confidence is currently at a relatively higher level. However, the

consumer confidence index was 125.9 as of October 31, 2019, 10 points lower compared to July 31, 2019. If the declining trend continues, sales will be hurt by consumers’ preferences of saving more and spending less.

(Source: Bloomberg22)

Consumer Confidence Index is expected to decrease in the near future due to impacts of the trade war and moderately increase moving forward. The positive outlook of consumer confidence has alleviated some of the economic pessimism brought about by the weak performance of the manufacturing industry.

Strong consumer confidence indicates consumers’ optimistic attitudes toward the whole economy. Cummins could benefit from increasing demand for the company’s products and services and potential growth in sales because consumers have positive expectations in disposable income and therefore are more likely to consume.

Industrial Production Index

The industrial production index (IPI) is a measure of real production output of manufacturing, mining, and utilities relative to the base year 2012 and reflects a country’s industrial performance. The U.S. industrial production index had a positive trend since 2017, implying industrial and economic growth. The increased IPI implies that there was low capacity utilization in previous years and that there were improvements in the production efficiency in recent years.

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(Source: FRED21)

IPI is expected to decline to 104 in the next 6 months due to the trade war and increase to around 110 over the next 5 years. In the short term, lower IPI indicates a falling industry and is not favorable for stockholders. However, this could offer opportunities for Cummins to differentiate itself in the industry by improving operating efficiency and production management.

Crude Oil

(Source: IBIS World15)

Crude oil prices decreased until 2016 and increased in recent years. The price is expected to decrease to $60 per barrel in the next 6 months and increase to $69 per barrel in 2025. Rising oil prices will have negative impacts on the machinery and heavy truck industry because the cost for transportation will increase and the rising costs will result in declines in oil demand.

Therefore, companies in the industry such as Cummins, an engine manufacturer, are exposed to the risk of sales declines because oil and engines

are complementary goods. Demand for engines decreases as the oil price increases.

Currency Exchange Rates

(Source: Macrotends23)

China is the most important foreign market of Cummins, which accounts for 9.5% of Cummins’ total sales. Because of the trade war, the USD/CNY exchange rate significantly increased. On January 1, 2019, the Chinese yuan was 6.88 per U.S. dollar, and on Nov 14, 2019, the Chinese yuan was 7.02 per U.S. dollar. Uncertain changes for Chinese RMB will increase the risk of losing sales because export demand will decrease when the U.S. dollar appreciates.20

European markets, which account for more than 10% of total sales, are also important for Cummins. On Nov 18, 2018, the currency rate was 0.88 euros per dollar; and on Nov 14, 2019, the currency rate was 0.91 euros per dollar. The depreciating euro adversely impacts on the revenue because of the currency translation.

Cummins uses derivatives to hedge the risks related to volatility of currencies. The company reported a $34 million increase in other income, driven primarily by $35 million of gains related to closing specific derivative contracts associated with the company’s foreign exchange hedging program in the third quarter of 2019. 28

We expected to see softer U.S. dollar moving forward. The weakening USD will benefit the company in terms of currency translation and potential increase in sales because foreign

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customers can purchase the same amount of products and services at lower prices.

Capital Market

(Source: Yahoo Finance24)

The U.S. stock market has successively set a new record. The Dow Jones Industrial Average hit a record high on July 16, with the S&P 500 and Nasdaq Composite hitting historical highs on July 24 and 26. The Dow Jones Industrial Average has risen by 17% this year, and the S&P 500 and Nasdaq Composites have raised more than 20%.21

Despite the signs of slowdowns in the U.S. and global economies, investors show rising confidence in the stock market. We estimate that the stock market will continue growing over the next several years but at a slower rate. To sustain or improve future growth, Cummins is required to maintain its leading position in the market.

Industry Analysis Industry Overview

Cummins Inc. is in the Construction Machinery and Heavy Trucks industry under the industrials sector. The Construction Machinery industry produces equipment for the residential, nonresidential, highway and other infrastructure construction. The Heavy Trucks industry either selling whole vehicles or producing components that are used in those vehicles. These two industries are both highly globalized and global economic conditions will affect industry imports and exports. These two industries belong to the machinery industry under the S&P 500. They have very

similar characteristics and revenue drivers. Revenues in this industry are highly correlated to countries’ economic performance such as GDP growth.

The industry is highly globalized and concentrated. Over the previous five years, many players have expanded their global footprints with a particular focus on Asian and South American markets. In addition, some big companies control and lead the industry and control some important technologies.

Life Cycle

The Construction Machinery and Heavy Trucks industry are at the mature stage of its life cycle. Increased external competition negatively affected the domestic market. Increasing imports hurt the revenue for domestic companies. The average industry profit margin is expected to decline as well, falling from 7.8% of revenue in 2014 to 5.3% in 2019 due to competition (price competition and product competition), which is an indication of a declining stage of business.

Secondly, the total revenue of Construction Machinery industry is expected to decline at an annualized rate of 3.5% over the five years to 2019, and total revenue for Heavy Trucks industry is expected to increase an annualized rate of 1.7% over the five years to 2019.

The declining industry and increasing competition leave Cummins with fewer opportunities to achieve high growth. Therefore, Cummins is also considered at the mature stage of its life cycle.15

Industry Trends

Industry Regulations

The government regulations on Heavy Truck manufacturers significantly impact the standard of truck weight and emissions. Changes in regulation would not only increase cost of redesigning products but restrict total demand in the market. For example, after the Chinese government published a new Emissions Act in 2018, truck

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engine companies like Cummins need to redesign their engines to meet requirements in local markets. This new Emissions also decrease the demand for regular engine trucks because consumer would consider that the future regulations would continue to restrict regular engine vehicle. Industry is expected to increase slowly in 2019 and the government regulations are a potential threat to the industry in the future.16

Average Age of Vehicle Fleet

Heavy trucks have a limited life and need to be replaced when it is deteriorated. According to IBIS World, the number of trucks that need to be replaced or repaired increases in recent years. Demand for trucks will increase as replacement of trucks increase.1

Supply Chain Globalization

In recent years, large companies in the market acquired many suppliers in their supply chain in many different countries like China. These acquisitions help companies decrease their products expenses because labor and material expenses are lower compared to the U.S. In the short term, it would add pressure on the company cash capability; however, companies would be benefited in the long run. Moreover, Cummins can assure suppliers comply with its prohibited and restricted materials policy.

The other advantage of supply chain globalization is that they can control the risk. Companies have limited choice due to the limited number of suppliers available in one country. Establishing its global supply chain through acquisitions enable the company to reduce the risk of discontinued relationships with certain suppliers.

Competitive Analysis

Caterpillar (CAT), Cummins Inc, Deere & Company (DE), PACCAR (PCAR) and Westinghouse Air Brake Technologies Corporation (WAB) are five major players in the construction machinery and heavy trucks industry.

Caterpillar (CAT)11: Caterpillar, Inc. engages in the manufacture of construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. It is the biggest company which has the highest sales in the markets. In 2018, the total revenue is $54,722 million and net income is $6,147 million.

Cummins Inc. (CMI)9: Cummins, Inc. engages in the design, manufacture, sale, and service of diesel and natural gas engines and powertrain-related technologies, including fuel systems, controls, air handling, filtration, emission solutions and electrical power generation systems. It is a main player in the market. In 2018, the total revenue is $23,771 million and net income is $2,141 million.

Deere & Company (DE)12: Deere & Co. engages in the manufacturing and distribution of equipment used in agriculture, construction, forestry, and turf care. It is one of the main players in the market. In 2018, the total revenue is $37,342 million and net income is $2,368 million.

PACCAR Inc (PCAR)13: PACCAR, Inc. is a global technology company, which engages in the design and manufacture of light, medium, and heavy-duty trucks. It has a high market share in the heavy truck industry. In 2018, total revenue is $23,501 million and net income is $2,195 million.

Westinghouse Air Brake Technologies Corporation (WAB)14: Westinghouse Air Brake Technologies Corp. engages in the provision of equipment, systems, and value-added services for the rail industry. In 2018, its total revenue is $4,363.5 and net income is $294.1 million.

Profitability Comparison

Cummins’ average ROA, ROE, and CROIC over the last 5 years are higher than the average ratio of five significant players. Higher ROE and ROA mean strong abilities to use investments to generate earnings growth and using assets to generate revenue. Higher CROIC means that when the

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company invests one dollar of cash, they can get more cash return than industry average. In addition, Cummins and PACCAR are the only two companies that all three ratios are above average.

(Source: Factset10)

The plot below shows the net income growth rate for Cummins and the industry.

(Source: Factset10)

As the trendline in this graph above shows, the industry’s net income has been growing at a negative rate (-0.0176) throughout the previous 10 years. Growing at a negative rate means that this market would decrease in the long-term and would be a negative effect on all companies in this market. The graph above also shows that the net income growth of Cummins is higher than the market in 2018, and the company recovered at a very fast pace after a 6-year recession.

Through data analysis, we observed that the correlation between the growth rates of net income of industry and Cummins is 0.825. This indicates that Cummins’ net income growth performance is very similar to the market. Therefore, when industry’s net income decrease, Cummins’s net income would decrease in the long-term.

Financial Comparison

Net debt represents the ability of a company to repay its debts when due. Net debt is significant for most investors when deciding to buy or sell a company’s stock. The plot below shows the net debt divided by total capital for five companies over the previous five years.

(Source: Factset10)

Cummins had the lowest net debt ratio throughout the previous 5 years, and the ratio is much lower than the average ratio of these 5 companies in the industry. We believed that Cummins will continue to have a lower net debt ratio based on previous performance. A low net debt represents a strong financial capability of the company and allows Cummins to issue more debt and borrow more money to increase their cash since investors or banks are more willing to lend money to companies that have low net debt ratio.

The plot below shows the dividend growth rate for Cummins and industry over 2009-2018.

(Source: Factset10)

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The dividend growth rate of CMI and the industry have been decreasing in recent years. The regression indicates that Cummins’ dividend growth rate will decrease by 0.0278% each year. A decreasing growth rate of dividend would be a weakness for investors because the dividend is one of the primary revenue sources after they invest. Lower dividends would cause investors lose confidence and require a higher stock price to reach their expected returns.

In addition, the dividend growth rate between the industry and Cummins are highly correlated (0.71578). Therefore, in the future, when dividend growth rate of this industry decreases, so would Cummins’.

Trading Multiples Comparison

The P/E ratio is a very important index to determine the price and price level for companies. Higher P/E ratio represents a higher price over earning per share and investors are anticipating higher growth in the future.

(Source: Factset10)

The plot above shows that the P/E ratio of these five companies over the previous 5 years. Overall, the P/E ratio of Cummins is lower than the average P/E ratio during these years, which indicates that its stock price is underpriced compared to the other four companies. We thought this would be a positive to investors because they could realize gains from the P/E expansion in the future when stock price increases.

Research and Development Comparison

To compare investment in research and development for each company, we divide total R&D expenses by total revenues.

(Source: Companies’ 10-K9 11 12 13 14)

In this table, we realized that large companies like Cummins, Deere & Co, and Caterpillar have a higher R&D as a percentage of sales. A high level of R&D investment could help these big companies operate in a good cycle and keep competitiveness of technologies in the industry.

Porter’s Five Force Analysis

Threats of New Entrants: Weak

The barriers for a new company to enter the construction machinery and heavy truck industry are very high due to high initial capital investments, high marketing expenses for brand recognition, and time required to build good relationships with long-term corporate partnerships and supply chain cooperation. The economies of scale of the industry give cost benefits to large companies. Many large companies such as Cummins, Caterpillar Inc., Komatsu, and PACCAR have dominated the industry for many years due to their mature supply chains. Strong supply chain capabilities and efficient distribution networks result in lower costs.

Large companies in the markets already spent lots of investments in research and technology development and conducted intense product testings. In the previous three years, Cummins spent an average of $764 million on R&D, 3.71%

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of total revenue, which is higher than average in the market. High spending on mechanical expertise, patents, and technological levels also discourage new companies from entering the market. Small companies in the industry are price takers and are less accessible to advance technologies.9

Bargaining Power of Supplier: Weak

Since large companies dominate the markets, they have more flexibility in choosing suppliers for raw materials. As a large customer with a stable demand for materials, the company will have more power in the negotiation because it is difficult for a supplier to put pressure on large customers. Some large companies also acquire some main suppliers to control their risk when changing suppliers.

Cummins chooses and signs contracts with many suppliers that cooperate for a long time. They have approximately 80 percent of direct material spend with dual or parallel sources. They are also willing to sign contracts for an extensive period to minimize their expenses.9

The Intensity of Rivalry: Strong

Heavy machinery and truck engines contribute a significant amount of revenues for Cummins. There are many U.S. competitors in these markets, like Caterpillar, PACCAR, and global competitors like Volvo and Komatsu. In traditional markets (North American and European), companies try to sign long-term contracts with customers. Companies also fight for the market share in developing countries like India due to the growth potential in emerging markets. For Cummins, the Indian market contribution of total sales increase by 38.5% in 2018. To sustain competitive advantages, companies could build solid relationships with consumers and governments.

Cummins develops excellent relationships with many consumers and signs long-term selling contracts (more than 10 years). For example, Cummins have long-term supply agreements with PACCAR for our heavy-duty and

mid-range engines. While a significant number of our sales to PACCAR are under long-term supply agreements.

It is challenging for large companies to compete with prices because they all have the ability to efficiently manage their production and selling costs. So, they do not have price advantages for their products. Companies also need to invest more in developing new products to adapt to new standards (i.e. pollution protection laws and policies) and to capture more markets.

Bargaining Power of Customers: Moderate

Large companies dominate the market, leaving customers with fewer options when choosing their suppliers. It is an advantage to dominating companies because they can lead and control the price, and customers have less power to negotiate with these companies. The leading players can decide price discounts by themselves. Also, customers are willing to sign long-term contracts with those companies because they need a stable supply of products. For example, Cummins’ light-vehicle engines are exclusive to Dodge RAM pickup trucks. Dodge invest lots of expenses for their power system to make engine works better. They also spend lots of time on testing this system. Moreover, this engine has a good reputation and is a very important consideration when consumers choosing trucks. The cost of switching suppliers for customers is relatively high in the market.19

The Threat of Substitute Products: Moderate

The availability of substitutes in the markets is not high enough to threaten the current demand for products. New construction machines and massive engines require a long-time investment in research and development. Cummins has differentiated product lines, so the company is well-protected from loss from one segment. Cummins also make significant investments in R&D to improve their product. Cummins has a high R&D ratio comparing with other competitors.

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However, the uncertainty for government regulation for traditional machinery and trucks is one weakness and will force companies to design substitute products.

Potential substitutes are new energy machinery and engine. For example, Tesla (TSLA) already designed its new generation electrical truck, and according to their testing, the new electric vehicle is more efficient than traditional trucks. Cummins also heavily invests in developing new energy engines and the acquisition of some companies to design substitute products.18

Industry Summary

Large companies like Caterpillar, Cummins, PACCAR, and Komatsu are the leaders for the industry. They own a large market share and have integrated segments. These large companies already have a well-established point-of-sale system and have stable consumers. These big companies are also willing to use the newest technologies and have lower product costs. The smaller companies like Westinghouse Air Brake Technologies Corporation and Navistar International Corporation are followers in the market. These companies do not have enough investment for research and development to own the newest technologies. They sometimes need to follow the market leader’s technologies and decisions. These companies are price takers in the markets because they need to spend more investment on design same products and ROIC are at a lower level. They do not have price advantage due to high cost.

Company Analysis Company Overview

Cummins Inc. was founded in 1919 and is headquartered in Columbus, Indiana, USA. Cummins has 34,600 employees worldwide. The company is the world's leading manufacturer of power equipment, designing, manufacturing and distributing engines and related technologies

including fuel systems, control systems, air handling, filtration systems, exhaust gas treatment systems and electrified power systems, and providing corresponding after-sales services. 9

Business Segments

(Source: CMI 10-K9)

Cummins operates through its five business segments: Engine, Distribution, Components and Power Systems, and Electrified Power. The graph above demonstrates that the company’s net sales of each segment except for the Engine segment showed an upward trend over the previous ten years. The sales of Engine segment were volatile over the past ten years. Based on historical performance, we projected that net sales of the Engine segment will stabilize at its current level while net sales of other four segments gradually increase.

In 2018, Cummins launched a new segment, the Electrified Power segment. The net sales of the segment were $7 million, which are much lower than other segments. However, we believe this segment will have a high growth in the future compared to other segments. Cummins has been preparing for this segment through acquisitions since 2017. The Electrified Power segment currently offers electrified power systems ranging from fully electric to hybrid and are developing the Cummins Battery Electric System and the Cummins Hybrid Power Plug-In System for the urban bus market, which are expected to launch in 2019 and 2020, respectively9.

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Geographic Segments

(Source: FactSet10)

China, the largest buyer of Cummins' products, contributed 9.5% of its total revenues. The total revenues come from China has declined by 6.2% since last year. The net sales from India has been substantially increased by 38.5% since last year. From Earnings Call in Q3, 2019, top management mentioned that India is experiencing the financing challenge as Cummins made loans from non-bank credit institution, also known as shadow bank system. These loans increase Cummins’ incremental borrowing costs by taking higher interest rates. We believe this would become a potential threat for Cummins’ India business due to the higher financial burden from loans.

Profitability Ratio

ROE

(Source: FactSet10)

Cummins’ ROE showed similar trends as the industry average over the previous ten years. The company’s ROE remained higher than the industry average. After decreasing since 2011, the company increased its ROE to 29.3% in 2018, higher than the industry average, which was 11.6%, implying satisfactory return on shareholders' equity and high efficiency of capital utilization. The boost in ROE was due to the changes in the company's capital structure.

We projected the company’s ROE to decrease to a moderate level but still higher than the industry average because the financial leverage is not expected to remain high.

Operating Margin

(Source: FactSet10)

Cummins operating margin was higher than the industry average over the previous ten years, with a stable performance since 2011. The industry average operating margin started to increase back up since 2015, and consensus estimates suggest that the industry average operating margin will continue to rise for the next few years and will reach 10% by 2021.

If the increase in the industry average continues while Cummins’ operating margin stabilized at approximately 12%, the industry’s operating margin could exceed Cummins’ operating margin moving forward, meaning that the company will be less efficient in converting revenue to profits compared to the industry.

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Payout ratio

(Source: CMI 10-K9)

As the Q3 earnings call shows that Cummins has repurchased $706 million shares in the third quarter and has returned $1.4 billion through dividends and share repurchase activity in the previous nine months. Cummins plans to return 75% of operating cash flow to shareholders in 2019. We believe this is a strong signal which shows that the Cummins’ stock price is undervalued, and Cummins strategically utilize its ample cash available on its balance sheet to give cash back to shareholders, prepare for future stock options with a lower cost, and keep a strong outlook of balance sheet with the improved EPS.28

Recent Developments

Q3 2019 Earnings Call28

Cummins reported an unsatisfactory performance in the third quarter of 2019. Revenues for this quarter decreased by 3% to $5.8 billion, compared to the same quarter of 2018. Gross margin was down 20 basis points to $1.5 billion. The management pointed out that favorable pricing, lower variable compensation, reduced material cost, and lower warranty expenses partially offset the impact of lower sales volumes and increased research and engineering expenses. In addition, the net revenues from foreign countries have declined by 25% mainly due to the decreasing demand from Chinese markets.

Cummins experienced declines in several segments' Q3 2019 revenues. Engine Business revenues reported net sales of $1,822 million, a decrease of 11% compared to $2,082 million in Q3 2018. The decrease is mainly impacted by the OEMs’ lower production of heavy trucks in North America and declines in shipments to construction markets. Management expected full year revenues of the Engine segment will be down between 5% and 6%. The Components segment revenues decreased by 6%. Positive impact of rising demand in the U.S. truck markets was offset by the decreasing demand in foreign markets. The Electrified Power segment lost $36 million in Q3 EBITDA, including $2 million loss associated with the completed acquisition of Hydrogenics.

The Distribution segment revenues grew by 4% because of increasing demand for power generation equipment in North American markets. The Power Systems segment also has an increase of 2% in sales in the third quarter of 2019, driven by higher demand in industrial markets.

Net cash provided from operating activities was a record inflow of $ 1.1 billion, which is $208 million higher than last year. This year, Cummins was facing higher earnings and a much slower pace of working capital expansion. However, the company increased $955 million in operating cash. Strong cash enables Cummins to seize the opportunities of latest development and become a reliable guarantee for future business growth.

Cummins experienced declines in net earnings. In the third quarter, diluted EPS was $3.97, compared to $4.28 from a year ago. Our model suggests diluted per share of $4.80 for fiscal year 2019, primarily due to the increase in net income for the full year. However, Cummins is exposed to risks in decreasing demand and sales and the downturn is expected to continue moving forward. Therefore, Cummins does not offer a good opportunity for investments.

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Acquisition of Hydrogenics Corporation

Cummins has been actively participated in mergers and acquisitions in recent years. On September 9, 2019, Cummins completed the acquisition of Hydrogenics Corporation for $285.4 million in cash.10 Hydrogenics Corporation, headquartered in Canada, designs, develops, and manufactures hydrogen generation and fuel cell products.

Cummins has been investing in fuel cell capabilities for more than 20 years for the purpose of shifting the focus to a more sustainable and renewable solution. The acquisition strengthens Cummins’ ability to further innovate and develop its hydrogen fuel cell technologies and to provide a full, differentiated hydrogen solution for a broader range of customers.25

Significant Customers

Among thousands of CMI’s customers, PACCAR, the largest customer of the company’s heavy-duty truck engines, accounts for 15 % of the company’s consolidated net sales in 2018, 14 % in 2017 and 13 % in 2016.10 Cummins has been a supplier to PACCAR for 74 years. The long-term supply agreements with PACCAR enable Cummins to generate considerable sales of particular engine required for specific vehicle models.

CMI also has long-term engine supply agreements with Navistar, Daimler, and Fiat Chrysler. These four major customers (PACCAR, Navistar, Daimler, and Fiat Chrysler) contribute 35% of consolidated net sales in 2018, 33% in 2017 and 33 percent in 20169. Long-term relationships with customers benefit the company in various aspects. Customers' long-term loyalty results in stable demand for the company’s products and services and reduced marketing costs associated with earning new customers. Solid customer relationships also offer Cummins with potential network opportunities to establish new connections.

SWOT Analysis

Strengths

(Source: CMI 10-K9)

Risk Diversification: Cummins spreads its business risk through product diversification. Cummins provides a wide range of products and services under Engine, Distribution, Components, Power Systems, and Electrified Power segment. As the graph shows, almost each segment contributes a comparable proportion of total revenue in FY2018. The Electrified Power segment contributed only 0.025% of total revenues because it was newly introduced in 2018 and is still under development. Product diversification reduces the dependency of single segments, risks of significant brand damage due to failures in one segment, and expands the company’s exposure in various end markets.

Global Presence: Wide presence around the globe enables Cummins to gain competitive advantages and additional opportunities. Cummins provides products and services through a network of approximately 600 wholly-owned and independent distributor locations and over 7,600 dealer locations in more than 190 countries and territories9. Worldwide presence implies access to a larger customer base, increased brand recognition, better diversification of the company’s markets, and greater exposure to foreign investment opportunities.

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Strong Liquidity: Cummins' strong liquidity indicates its capabilities of paying its short-term obligations. The current ratio of Cummins was 1.57 and 1.54 in 2017 and 2018, respectively. The current ratio of Caterpillar, one major competitor of the company, was 1.35 in 2017, and 1.37 in 2018, respectively. High current ratio makes it easier for Cummins to borrow more money due to its low default probability. From the cash conversion perspective, Cummins' cash conversion operating cycle was 76.66 in 2018; the Caterpillar cash conversion operating cycle was 152.74 in 2018. The shorter cash conversion cycle means the longer payable period, which provides opportunities for Cummins to use cash on hand for other investments to enhance its performance.

Weaknesses

Product Recall: Product recalls have negative impacts on the company’s financial and reputation. In July 2018, Cummins agreed to recall about 500,000 medium- and heavy-duty trucks in the United States to correct a faulty emissions control system in the engines it made for trucks. Product recalls will add both direct and indirect costs to the company, including replacement costs, government sanctions, lawsuits fees, and potential losses in sales. Moreover, defective products will also damage the brand value and reduce customers’ trust in product quality.

Opportunities

Positive Outlook for Commercial Vehicles Market: The positive outlook of commercial vehicles market provides growth opportunities to the company. According to the European Automobile Manufacturing Association, North America's commercial vehicle output is projected to expand by 5.1% in 2019, primarily driven by high volumes of pickup trucks6. The commercial vehicles market is estimated to have a CAGR of over 5% during the forecast period, 2019-2024 and will exceed $1,300 billion by 2024.26The expansion of the commercial vehicles market and

increasing demand for electric vehicles provides growth opportunities for the company in the near future.

Positive Outlook of Construction Heavy Trucks Industry: Growth in the Heavy Truck industry offers opportunities for the company to increase sales and profits. The main segment of CMI is the engine segment, including heavy trucks. The heavy-duty truck market is expected to increase from $120 billion in 2018 to $160 billion by 2025.27 The demand for heavy trucks will increase also due to the growing E-commerce. When more and more people or companies choose to purchase online, the demand for express delivery will increase in the future. This directly increases the need for heavy trucks.

Threats

Fluctuations in Raw Material Prices: Future raw materials price volatility could increase Cummins and operating costs and have adverse impacts on the company’s profitability. The fluctuations in raw material prices cannot be immediately passed to customers by increasing produce price. Cummins uses derivative contracts to hedge the risk. As of December 31, 2018, the potential gain related to the outstanding commodity contracts, assuming a 10% fluctuation in the commodity price, would be approximately $2 million10. However, the company is still exposed to the raw material price risks because it only limits exposure to risks of certain types of raw materials.

Environmental Compliances: Environmental regulations add costs to the company and adversely impacts its profitability. Cummins' engines are subject to a wide range of legal and regulatory requirements regarding emissions and noise. These standards include standards set by the US Environmental Protection Agency (EPA), the European Union, the California Air Resources Board (CARB), and other regulatory agencies around the world. The company's ability to comply with these and future emission standards is

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essential in maintaining its leadership in the regulated market. In order to comply with regulations, the company invests in monitoring and controlling production pollution. The compliance costs shift the company's capital allocation and hurt its profit margin.

Valuation Summary We have arrived at a “Hold” recommendation for Cummins Inc. by applying the Discounted Cash Flow (DCF), Economic Profit (EP), Discounted Dividends Model (DDM), and Relative Valuation Models. We decide that the target price range is $190- $210. We focus on DCF, DDM, and EP approaches because they provide us insights on how revenue, capital expenditure, share outstanding, and WACC affect the future profitability of our company. We also pay attention to the relative P/E valuation method because we want to compare company price with competitor price, which help us to understand our price position in the market.

Revenue Decomposition

Cummins Inc has five business segments: Engine, Distribution, Components, Power Systems, and Electrified Power. We also include Intersegment Elimination to avoid recalculation. We forecast the revenue growth for the company with weighted average method by allocating percentage on the facts that we thought could affect Cummins’ net revenue. We include economic condition (Real GDP), historical performance, tariff & regulation, and currency in our weighted predicting system. After we forecast the total revenue for Cummins, we adjust segment revenue based on our prediction and their different historical performance. We think distribution and components will have higher growth rate than other segments. Electrified power will have a very stable growth between 3% to 6% because it is a new segment and Cummins emphasize this segment.

Economic condition (Real GDP)

We used real GDP for economic condition prediction. A growing Real GDP represents a healthy economic and it will also positive influence on the industry performance. We considered the real GDP would account for 10% of all the factors that affect net revenues in the weighted average calculation. By comparing historical data and trendline, we forecasted our real GDP growth rate would maintain at 2% per year through 2022 and then decrease to 1% for 2023 and 2024.10

Historical Performance

The historical performance effect is one of the most important factors when forecasting the growth rate of net revenues. We used historical data in our prediction because Cummins has had stable performance over the previous years. We applied a weight of 60% of historical performance in the forecast model. We used the average revenue growth rate from 2012 to 2018 to get the historical growth rate of net revenues. In addition, we added 2% to the historical growth rate of net revenues as adjustment because the growth rates in 2010 and 2011 are outliers in the whole data set. Eventually, we calculated a historical growth rate of net revenues of 6% for 2019. For 2020 and 2021, we estimated that the historical growth rate of net revenues would decrease to 4% and 2% because of the pattern of Cummins’ historical net revenues. For 2022, 2023, and 2024, we forecast this growth rate would be 4%, 6%, and 5%, respectively, as Cummins has steadily grown at 5% based on previous years’ performance.9

Tariff & Regulation

Cummins’ sales performance is associated with the regulation changes because it is in the Construction Machinery and Heavy Trucks industry and 44.4% of Cummins’ revenues come from the overseas market. The uncertainty tariff acts of China and Europe would directly affect Cummins’s net revenues. These tariffs would also increase Cummins’ operating expenses because some

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leading suppliers in our supply chain are from China. We predicted the tariff and regulation uncertainty would negatively impact its performance by 4% in 2019, and this impact will decrease by 1% each year through 2023. After 2023, we estimated the tariff and regulation will not affect Cummins’s net revenues because they have enough time to redesign their products. We also believed that the government will not implement new tariffs in five years. Eventually, in our net revenues forecasting model, the weight of tariffs and regulations is 15%.

Currency

The other important factor that will influence Cummins’s net revenues is the currency rate change as 9.5% of its total revenues are from the Chinese market and approximately 10% of its net revenues are from the European market, including the United Kingdom. In our forecasting model, the weight of the currency effect is 15%. We predicted the currency will negatively impact the net revenue growth by 5% in 2019 because the value of Chinese currency has decreased due to the trade war and the Brexit (United Kingdom withdrawal from the European Union) will have negative influences for both EURO and Pound. After 2019, we forecasted this negative effect will decrease to 2% in each year.

Assumptions Analysis Cost of Goods Sold

Over the previous years from 2010 to 2018, Cost of Goods Sold has been stably accounted for 72.4% of net revenues on average. We anticipated this ratio would stay constant over the next several years. Therefore, we forecasted the Cost of Goods Sold will be 72.4% of net sales since 2019.

Depreciation Rate

Cummins had a steady depreciation rate since 2012, with an average of 14.7%. Depreciation rate is defined as the ratio of the depreciation expense

occurred during this year to the beginning gross PPE balance. We forecasted the depreciation rate will stay at 14.71% since 2019 because depreciation rate has been steady for a long period of time.

Research, development & Engineering expense

Cummins had a steady spending rate for R&D expenses since 2009, with an average of 3.7% of total net sales. We forecasted this ratio will stay constant over the next several years, as such, we forecasted the R&D expenses will be 3.7% of net sales since 2019.

Capital Expenditures

Since 2014, the Cummins’s gross PPE tended to increase at a low growth rate. As we observed, the average gross PPE growth rate is 6.44% over the previous 10 years. We anticipated that Cummins will occur a significant amount of capital expenditure to catch up deterioration of gross PPE over the next several years. We decided to use the capital expenditures that have already occurred in 2019 as the annual capital expenditures for the years after 2019.

Shares Outstanding

As of December 31, 2018, the number of securities to be issued upon exercise of outstanding options, warrants and rights are 3,659,405 thousand, and the average maturity of these securities are 10 years. We got the expected annual number of options exercised of 365,941 by dividing the number of options outstanding to the average time to maturity. We expected the number of stock options exercised to be 365,941 shares per year and the annual shares repurchase to be $7.695 million per year through 2024 (CV year).

Cost of Debt

According to the Finra, Cummins issued 6 bonds publicly. We calculated the cost of debt based on the yield of bond which has the maturity close to

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10 years from now. Therefore, we determined the cost of debt of Cummins is 2.7%.

Cost of Equity

We used the Capital Asset Pricing Model (CAPM) to calculate the cost of equity of Cummins. The risk free rate is determined by the 10-year treasury bond’s yield of 1.84%. The 5-year weekly raw beta of 1.17 is derived from Bloomberg. According to Damodaran, the market risk premium is 5.96%. By applying risk free rate, beta, and market risk premium to the CAPM’s formula, we determined the cost of equity of Cummins is 8.81%.

Weighted Average Cost of Capital (WACC)

Cummins does not have any preferred stock outstanding. Cummins has a debt (book value) of $3,100.06 million, which accounts for 10.28% of its total capital. Cummins’ equity value is determined by the market value of equity which is calculated by the product of basic shares outstanding and the price per share. We got the market value of Cummins’ equity of $27,051 million, which accounts for 81% of its total capital. The WACC is calculated by the sum of the product of debt and debt’s weight and product of equity and equity’s weight, and we got the WACC of 8.12%.

Valuation Model Discounted Cash Flows (DCF)

The DCF model used the estimates of free cash flows (FCF), which are calculated by the difference between the net operating profit less adjusted taxes (NOPLAT) and the capital expenditures to determine the intrinsic value of stock. We calculated FCF for each forecasting year from 2019 through 2024 (CV year), and the terminal value of the company’s free cash flow. Then, we discounted these free cash flows (except the CV year’s free cash flow) and the terminal value back to the end of 2018 by the WACC. The sum of the discounted free cash flows is the value of operating assets. After adjusting the non-operating Assets and non-

equity claims, we got the total equity value. The price as of December 31, 2018 ($202.51) is calculated by dividing the total equity value by the number of shares outstanding. The intrinsic value of the stock as of November ($212.95) is determined by adjusting partial year value at the capital gain rate (cost of equity minus dividend yield).

Economic Profit (EP)

The EP model used the estimated economic profits which are calculated as the difference of NOPLAT and the beginning invested capital multiplied by WACC to determine the intrinsic value of stock. We calculated EP for each forecasting year from 2019 through 2024 (CV year), and the terminal value of the company’s economic profits. Then, we discounted these economic profits (except the CV year’s EP) and the terminal value back to the end of 2018 by the WACC. The sum of the beginning invested capital and all discounted economic profits is the value of operating assets. After adjusting the non-operating Assets and non-equity claims, we got the total equity value. The price as of December 31, 2018 ($202.51) is calculated by dividing the total equity value by the number of shares outstanding. The intrinsic value of the stock as of November ($212.95) is determined by adjusting partial year value at the capital gain rate (cost of equity minus dividend yield).

We believed that the DCF and EP models are the reasonable valuation approaches to get the intrinsic value of Cummins’s stock. These models are constructed on the estimated free cash flows and estimated operating profits, both of which are derived from the forecasted net revenues that are forecasted based on our comprehensive analysis.

However, we thought these two models resulted in an overvalued price. Cummins is a company that has a great financial condition and ample cash available on balance, and these two models are very sensitive to cash and revenues. Therefore,

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they probably gave a higher price compared to other models.

The intrinsic value of Cummins’ stock using DCF and EP models is $212.95. Since we considered that the model could overvalue the company, we adjusted $2.95 to decide the highest price in our target price range to be $210.

Dividend Discount Model (DDM)

The DDM is an accurate model to get the intrinsic value of Cummins’s stock because the dividend per share forecasted based on historical performance ($5.92) in 2024 (CV year). This is reasonable for Cummins because it follows the Cummins’s growth rate. The price as of December 31, 2018 is $196.85. The intrinsic value of the stock as of November ($206.99) is determined by adjusting partial year value at the capital gain rate (cost of equity minus dividend yield). This predicting price is in our forecast price range for Cummins.

Relative Valuation

Our relative valuation model consists of eight comparable companies in the Heavy Truck and Construction Machinery industry. We focused on the comparative P/E valuation method because some of the comparable companies’ multiples such as BV/Equity, and P/B ratio are based on book value rather than market value. Book value is not an appropriate approach for companies with high debt levels or heavy intangible assets.

The P/E multiple used in the price prediction is the average of the peer companies’ P/E ratios. We believed that as a large company in this industry, Cummins’s P/E ratio should be inclined to the industry average. Therefore, relative P/E is a great approach for Cummins’ price valuation.

In addition, we used the price calculated by the industry average P/E multiple and the Cummins’ EPS2020 as the lowest price ($190) in our target price range.

Sensitivity Analysis To examine the impacts of key assumptions on the company’s intrinsic value, we ran sensitivity analysis using different sets of core value drivers and operating assumptions.

CV NOPLAT vs WACC

We examined changes in CV NOPLAT against changes in the weighted average cost of capital in order to identify how operating profits and capital structure impact the intrinsic value.

The DCF model assumed that the capital structure remained the same for the projection period, which is a weakness of the model. In addition, NOPLAT projected in the model is also relatively positive. These two assumptions are very subject to change and will have significant impacts on intrinsic value.

When WACC remains constant, higher NOPLAT, which implies a higher operational efficiency, results in a higher stock price. For example, when WACC remains at 8.12%, stock price is expected to increase by $8.06 for each $100 increase in NOPLAT.

In contrast, higher WACC, which implies higher risk associated with operations, results in a lower stock price. The price is expected to decrease by $4-6 for each 10 basis points increase in WACC.

This sensitivity model shows us when Cummins’ net operating income increases or risk decreases, investors should buy the stock; otherwise, investors should sell them.

CV ROIC vs CV Growth

We tested changes in CV growth rate for NOPLAT against changes in CV return on invested capital in

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order to identify how operating profits and efficiency of capital allocation impact the intrinsic value.

Higher CV growth rate of NOPLAT results in a higher stock price, holding CV ROIC constant. The price is expected to increase by $2-3.5 for each 10 basis points increase in the CV Growth. Higher CV ROIC, which represents a sustainable and growing business, results in slightly higher stock prices holding CV growth rate of NOPLAT constant. The price is expected to increase by approximately $1 for each 100 basis points increase in CV ROIC.

This sensitive model gives direct suggestions for investors. Stock price increases as Cummins’s net operating revenue increases. Investors can buy the company’s stock to make profit. If investors detect that the Cummins’s performance is lower than expected, they can sell the stock to generate profit.

Marginal Tax Rate vs Pre-Tax Cost of Debt

We used the company’s marginal tax rate against its pre-tax cost of debt in the sensitivity analysis for the purpose of identifying impacts of both external and internal factors on the company’s stock price.

Lower marginal tax rate leads to lower tax expenses and increases the company's net income. When the pre-tax cost of debt remained constant, the price will increase by $1.61 per 0.5 basis points decrease. Similarly, higher pre-tax cost of debt results in lower stock prices because the increase in WACC leads to lower intrinsic value.

This model helps investors to forecast price base on tax rate changing. Cummins is in the

Construction Machinery and Heavy Trucks industry in which tax rate is usually strongly related to government policies. Investors can utilize this sensitivity model to decide to buy or sell stock after new government tax law.

Beta vs ERP

We analyzed impacts on stock prices by conducting a sensitivity analysis using equity risk premium and equity beta. The current risk free rate (i.e. 10-year U.S. Treasury yield) is nearly at its lowest level, which led to a high equity risk premium. The current equity beta for Cummins is 1.17, implying that the company’s price is more volatile than the market. By examining equity risk premium and beta together, we analyzed how they impact weighted average cost of capital, a critical factor in the DCF model, as well as intrinsic value.

The geometric average of historical ERP from 1928-2018 is 4.69%, and the implied equity risk premium derived from Damodaran is 5.96%. Unexpected changes in ERP could significantly impact the company’s stock price. The price is expected to increase by more than $10 for each 15 basis points increase in the ERP. Equity beta is inversely correlated with stock price. Companies that are riskier and have poor financial performance will have high beta, and their stock price will decrease.

Cost of Goods Sold vs PPE, Gross

We forecasted cost of goods sold (excluding depreciation and amortization) as the percentage of sales and forecasted gross PPE by annual growth

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rate. These assumptions are mainly based on historical performance, so these two factors are subject to changes occurred in future years.

As a leading company in the industry, Cummins could decrease the cost of goods sold by reducing material costs and transportation costs through production automation and supply chain enhancement. Cummins can also lower costs by using the newest technologies since the company has a large amount of investment in R&D. As demonstrated in the sensitivity table, for each 100 basis points decrease in COGS as a percentage of sales, the company's stock price increases by more than $20.

Property, plant, and equipment are of vital importance to business operations. These long-term assets are important resources for the company’s production. Stock prices only change by approximately $10 when the growth rate of gross PPE changes from 5.84% to 7.04%. According to this model, investors can decide to buy or sell stock based on Cummins’ operational expenses and capital expenditures. Investors are willing to buy Cummins’s stock if Cummins would have access to decrease the cost of goods sold.

Disclaimer This report was created by students enrolled in the Applied Equity Valuation (FIN:4250) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly

available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report.

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Cummins Inc.Revenue DecompositionIn MillionFiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023E CV-2024E

Engine 7,804.00 8,953.00 10,566.00 10,133.31 10,538.64 10,342.61 10,610.24 10,928.54 11,151.45 Growth rate (%) -9.99% 14.72% 18.02% -4.10% 4.00% -1.86% 2.59% 3.00% 2.04%Distribution 6,181.00 7,058.00 7,828.00 7,984.56 8,224.10 8,347.46 8,514.41 8,854.98 9,102.92 Growth rate (%) -0.77% 14.19% 10.91% 2.00% 3.00% 1.50% 2.00% 4.00% 2.80%Components 4,836.00 5,889.00 7,166.00 7,882.60 7,961.43 8,152.50 8,250.33 8,461.92 8,758.08 Growth rate (%) -6.50% 21.77% 21.68% 10.00% 1.00% 2.40% 1.20% 2.56% 3.50%Power Systems 3,517.00 4,058.00 4,626.00 5,088.60 4,949.86 5,098.36 5,276.80 5,487.87 5,679.94 Growth rate (%) -13.52% 15.38% 14.00% 10.00% -2.73% 3.00% 3.50% 4.00% 3.50%Electrified Power - - 7.00 7.42 7.87 8.18 8.55 8.98 9.33 Growth rate (%) 6.00% 6.00% 4.00% 4.50% 5.00% 4.00%Intersegment Elimination (4,829.00) (5,530.00) (6,422.00) (6,743.10) (6,877.96) (6,946.74) (7,120.41) (7,334.02) (7,554.04)Growth rate (%) -3.96% 14.52% 16.13% 5.00% 2.00% 1.00% 2.50% 3.00% 3.00%Total 17,509.00 20,428.00 23,771.00 24,353.39 24,803.93 25,002.36 25,539.91 26,408.27 27,147.70 Growth rate (%) -8.38% 16.67% 16.36% 2.45% 1.85% 0.80% 2.15% 3.40% 2.80%

Cummins Inc.Balance SheetIn MillionFiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023E CV-2024E

Total assets 15,011.0 18,075.0 19,062.0 19,900.1 20,918.4 21,849.3 22,982.3 24,334.8 25,686.6 Total current assets 7,707.0 8,928.0 9,818.0 10,208.3 11,215.8 12,117.9 13,152.8 14,341.5 15,508.8

Total cash, cash equivalents and marketable securities 1,380.0 1,567.0 1,525.0 1,543.1 2,390.4 3,221.9 4,065.5 4,945.2 5,849.5 Cash and cash equivalents 1,120.0 1,369.0 1,303.0 1,317.5 2,161.0 2,988.8 3,828.6 4,704.4 5,604.7 Marketable securities 260.0 198.0 222.0 225.6 229.3 233.1 236.9 240.8 244.8

Accounts and notes receivable, net 3,025.0 3,618.0 3,866.0 4,160.5 4,237.4 4,271.3 4,363.2 4,511.5 4,637.9 Inventories 2,675.0 3,166.0 3,759.0 3,685.4 3,753.6 3,783.6 3,865.0 3,996.4 4,108.3

Prepaid expenses and other current assets 627.0 577.0 668.0 819.2 834.4 841.1 859.1 888.4 913.2 Long-term assets 7,304.0 9,147.0 9,244.0 9,691.9 9,702.6 9,731.4 9,829.5 9,993.3 10,177.8

Property, plant and equipment, net 3,800.0 3,927.0 4,096.0 4,028.9 4,006.1 4,023.4 4,077.2 4,164.6 4,283.5 Property, plant and equipment, gross 7,635.0 8,058.0 8,319.0 8,854.6 9,424.7 10,031.4 10,677.3 11,364.7 12,096.4 Accumulated depreciation (3,835.0) (4,131.0) (4,223.0) (4,825.7) (5,418.6) (6,008.1) (6,600.1) (7,200.1) (7,812.9)

Investments and advances related to equity method investees 946.0 1,156.0 1,222.0 1,243.4 1,265.1 1,287.3 1,309.8 1,332.7 1,356.1 Goodwill and other intangible assets, net 812.0 2,055.0 2,035.0 2,166.0 2,136.0 2,107.1 2,079.1 2,052.1 2,026.0

Goodwill 480.0 1,082.0 1,126.0 1,288.0 1,288.0 1,288.0 1,288.0 1,288.0 1,288.0 Other intangible assets, net 332.0 973.0 909.0 878.0 848.0 819.1 791.1 764.1 738.0

Other assets 1,746.0 2,009.0 1,891.0 2,253.6 2,295.3 2,313.7 2,363.4 2,443.8 2,512.2 Deferred income taxes - - - - - - - - -

Pension assets 731.0 1,043.0 929.0 1,070.6 1,090.5 1,099.2 1,122.8 1,161.0 1,193.5 Other assets excluding deferred income taxes and pension assets 1,015.0 966.0 962.0 1,183.0 1,204.9 1,214.5 1,240.6 1,282.8 1,318.7

Total liabilities and equity 15,011.0 18,075.0 19,062.0 19,900.1 20,918.4 21,849.3 22,982.3 24,334.8 25,686.6 Total liabilities 7,837.0 9,911.0 10,803.0 10,929.4 11,116.3 11,200.7 11,431.4 11,804.6 12,126.4

Total current liabilities 4,325.0 5,677.0 6,384.0 6,362.0 6,479.7 6,531.5 6,671.9 6,898.8 7,092.0 Accounts payable (principally trade) 1,854.0 2,579.0 2,822.0 2,848.2 2,900.8 2,924.0 2,986.9 3,088.5 3,174.9 Loans payable 41.0 57.0 54.0 54.0 55.0 55.4 56.6 58.6 60.2 Commercial paper 212.0 298.0 780.0 485.4 494.4 498.3 509.0 526.3 541.1

Accrued expenses 2,218.0 2,743.0 2,728.0 2,974.4 3,029.5 3,053.7 3,119.4 3,225.4 3,315.7 Accrued compensation, benefits and retirement costs 412.0 811.0 679.0 745.2 759.0 765.0 781.5 808.1 830.7 Current portion of accrued product warranty 333.0 454.0 654.0 558.1 568.5 573.0 585.3 605.2 622.2 Current portion of deferred revenue 468.0 500.0 498.0 510.2 519.6 523.8 535.1 553.3 568.7 Taxes payable including taxes on income - - - - - - - - - Other accrued expenses excluding taxes payable including taxes on income1,005.0 978.0 897.0 1,160.9 1,182.4 1,191.9 1,217.5 1,258.9 1,294.1

Other accrued expenses excluding current maturities of long-term debt970.0 915.0 852.0 1,104.3 1,124.7 1,133.7 1,158.1 1,197.5 1,231.0 Current maturities of long-term debt 35.0 63.0 45.0 56.6 57.7 58.1 59.4 61.4 63.1

Long-term liabilities 3,512.0 4,234.0 4,419.0 4,567.4 4,636.6 4,669.2 4,759.5 4,905.8 5,034.5 Long-term debt 1,568.0 1,588.0 1,597.0 1,671.7 1,687.2 1,696.3 1,722.7 1,765.7 1,806.5 Pensions and other postretirement benefits 655.0 619.0 532.0 549.7 559.8 564.3 576.4 596.0 612.7

Pensions 326.0 330.0 - 282.3 287.5 289.8 296.0 306.1 314.7 Postretirement benefits other than pensions 329.0 289.0 - 267.4 272.3 274.5 280.4 289.9 298.1

Other liabilities and deferred revenue 1,289.0 2,027.0 2,290.0 2,346.1 2,389.5 2,408.6 2,460.4 2,544.1 2,615.3 Accrued product warranty - - 740.0 758.1 772.2 778.3 795.1 822.1 845.1 Deferred revenue - - 658.0 674.1 686.6 692.1 707.0 731.0 751.5 Other liabilities - - 892.0 913.9 930.8 938.2 958.4 991.0 1,018.7

Total equity 7,174.0 8,164.0 8,259.0 8,970.7 9,802.1 10,648.6 11,550.9 12,530.2 13,560.2 Total Cummins Inc. shareholders' equity 6,875.0 7,259.0 7,348.0 8,161.3 8,977.8 9,817.7 10,702.1 11,652.5 12,658.0

Common stock & Additional paid-in capital 2,145.0 2,203.0 2,266.0 2,313.8 2,361.5 2,409.3 2,457.1 2,504.9 2,552.6 Retained earnings 11,040.0 11,464.0 12,917.0 14,452.1 15,990.2 17,551.8 19,158.0 20,830.2 22,557.3 Treasury stock, at cost (4,489.0) (4,905.0) (6,028.0) (6,797.5) (7,567.0) (8,336.5) (9,106.0) (9,875.5) (10,645.0) Unearned compensation - - - - - - - - -

Accumulated other comprehensive loss (1,821.0) (1,503.0) (1,807.0) (1,807.0) (1,807.0) (1,807.0) (1,807.0) (1,807.0) (1,807.0) Noncontrolling interests 299.0 905.0 911.0 809.4 824.3 830.9 848.8 877.7 902.2

Cummins Inc.Income Statement

Fiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023E CV-2024E

Net sales 17,509.00 20,428.00 23,771.00 24,353.39 24,803.93 25,002.36 25,539.91 26,408.27 27,147.70 Cost of Sales 13,057.00 15,338.00 18,034.00 18,244.31 18,560.80 18,701.19 19,093.14 19,730.09 20,278.61

COGS excluding D&A 12,540.00 14,771.00 17,446.00 17,641.59 17,967.95 18,111.70 18,501.10 19,130.14 19,665.78 Depreciation & Amortization Expense 526.00 579.00 608.00 602.72 592.84 589.49 592.04 599.95 612.82

Gross margin 4,452.00 5,090.00 5,737.00 6,109.08 6,243.13 6,301.17 6,446.77 6,678.18 6,869.09 Operating Expense and Income

Selling, General & Administrative Expenses (2,046.00) (2,390.00) (2,437.00) (2,730.59) (2,781.10) (2,803.35) (2,863.62) (2,960.99) (3,043.89)Research, Development & Engineering Expenses (636.00) (752.00) (902.00) (901.74) (918.42) (925.77) (945.67) (977.83) (1,005.20)Equity, Royalty & Interest Income from Investees 301.00 357.00 394.00 415.97 423.67 427.06 436.24 451.07 463.70 Other operating (expense)/ income, net (143.00) 60.00 (6.00) - - - - - -

Loss contingency (138.00) (5.00) - - - - - - - Gain on sale of businesses - - - - - - - - - Other Operating Expense/Income, Net Exclude Loss Contingency and Gain on Sale of Business (5.00) 65.00 (6.00) - - - - - -

Restructuring actions & other charges - - - - - - - - - Impairment of light-duty diesel assets - - - - - - - - -

Operating income 1,928.00 2,365.00 2,786.00 2,892.73 2,967.27 2,999.10 3,073.72 3,190.43 3,283.69 Interest income 23.00 18.00 35.00 45.05 45.70 59.95 73.95 88.15 102.96 Interest expense (69.00) (81.00) (114.00) (65.59) (59.65) (60.34) (60.71) (61.74) (63.42) Other income / expense, net 48.00 63.00 46.00 63.00 - - - - - Income before income taxes 1,930.00 2,365.00 2,753.00 3,066.37 3,072.63 3,119.40 3,208.37 3,340.33 3,450.07 Income tax expense / benefit (474.00) (1,371.00) (566.00) (665.40) (666.76) (676.91) (696.22) (724.85) (748.67) Minority interests in income of consolidated subsidiaries - - - - - - - - -

Consolidated net income 1,456.00 994.00 2,187.00 2,400.96 2,405.87 2,442.49 2,512.16 2,615.48 2,701.41 Net income / loss attributable to noncontrolling interests (62.00) 5.00 (46.00) (127.07) (127.33) (129.27) (132.96) (138.43) (142.97) Net income attributable to Cummins Inc. 1,394.00 999.00 2,141.00 2,273.89 2,278.53 2,313.22 2,379.20 2,477.05 2,558.43 Per share

Basic 8.25 5.99 13.20 14.75 15.13 15.70 16.48 17.48 18.37 Weighted average shares

Basic 169.04 166.63 162.17 154.11 150.57 147.34 144.40 141.73 139.31Cash dividends per common share 2.68 1.95 4.29 4.79 4.92 5.10 5.35 5.68 5.97

Cummins Inc.Cash Flow Statementin MillionsFiscal Years Ending Dec. 31 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Net cash provided by operating activities 1,137 1,006 2,073 1,532 2,089 2,266 2,059 1,935 2,277 2,378

Consolidated net income 484 1,140 1,946 1,738 1,588 1,736 1,470 1,456 994 2,187

Adjustments to reconcile consolidated net income to net cash provided by operating activities 653 (134) 127 (206) 501 530 589 479 1,283 191

Impact of tax legislation, net - - - - - - - - 820 15

Depreciation and amortization 326 320 325 361 407 455 514 530 583 611

Gain on fair value adjustment for consolidated investees - (12) - (7) (12) (73) (18) (15) - -

Deferred income taxes provision / benefit 5 56 85 116 100 31 (108) 50 (54) (97)

Net gain / loss on disposal of property, plant and equipment - - - - - - - - - -

Gain / loss on investments - (18) - - - - - - - -

Gain on sale of businesses - - (121) (6) - - - - - -

Gain on sale of equity investment - - - (13) - - - - - -

Equity in income of investees, net of dividends 23 (147) - (15) (62) (100) (36) (46) (123) (93)

Minority interests in income of consolidated subsidiaries - - - - - - - - - -

Pension contributions in excess of expense (36) (151) (131) (68) (82) (148) (127) (92) (161) 49

Pension expense - - - - - - - - - -

Pension contributions - - - - - - - - - -

Other post-retirement benefits payments in excess of expense (24) (35) (31) (21) (25) (28) (23) (25) (5) (19)

Stock-based compensation expense 20 22 42 36 37 36 24 32 41 53

Excess tax benefits / deficiencies on stock-based awards 1 (10) (5) (14) (13) - - - - -

Amortization of gain on terminated interest rate swaps - - - - - - - - - -

Loss contingency - - - - - - 60 122 5 (62)

Impairment of light-duty diesel assets - - - - - - 211 - - -

Restructuring actions and other charges, net of cash payments 16 - - 27 (25) - 64 (59) - -

Proceeds from corporate owned life insurance - - - - - - - - (52) 26

Foreign currency remeasurement and transaction exposure 41 13 4 - - (13) 26 (55) 71 (46)

Changes in current assets and liabilities, net of acquisitions 127 (245) (154) (775) (65) 68 (260) (266) 90 (485)

Accounts and notes receivable - - - - - (89) 103 (265) (508) (363)

Inventories - - - - - (256) 150 (4) (407) (695)

Other current assets - - - - - 1 (151) 14 (12) (162)

Accounts payable - - - - - 244 (136) 184 639 302

Accrued expenses - - - - - 168 (226) (195) 378 433

Changes in current assets and liabilities, net of acquisitions and divestitures 127 (245) (154) (775) (65) - - - - -

Changes in other liabilities and deferred revenue 155 133 139 214 211 282 292 200 241 75

Other, net (1) (60) (3) (41) 13 20 (30) 103 (173) 164

Net cash used in investing activities (509) (651) (552) (982) (846) (1,234) (918) (917) (1,052) (974)

Capital expenditures (310) (364) (622) (690) (676) (743) (744) (531) (506) (709)

Investments in internal use software (35) (43) (60) (87) (64) (55) (55) (63) (81) (75)

Investments in and advances to / from equity investees (3) (2) (81) (70) (42) (60) (7) (41) (66) (37)

Acquisitions of businesses, net of cash acquired (2) (104) - (215) (147) (436) (117) (94) (662) (70)

Proceeds from sale of businesses, net of cash sold - - 199 10 - - - - - -

Investments in marketable securities—acquisitions (431) (823) (729) (561) (418) (275) (282) (478) (194) (368)

Investments in marketable securities—liquidations 335 690 750 585 525 336 270 306 266 331

Purchases of other investments (62) (62) - - (40) - - - - -

Cash flows from derivatives not designated as hedges (18) 2 (18) 12 1 (14) 8 (102) 76 (102)

Other, net 17 55 9 34 15 13 9 86 115 56

Other, net excluding proceeds from sale of equity investment 17 55 9 11 15 - - 26 115 56

Proceeds from disposals of property, plant and equipment 10 55 8 11 14 - - - 110 20

Other, net excluding proceeds from disposals of property, plant and equipment 7 - 1 - 1 - - - 5 36

Proceeds from sale of equity investment - - - 23 - - - 60 - -

Net cash used in / provided by financing activities (141) (267) (1,025) (694) 52 (1,343) (1,644) (1,409) (1,074) (1,400)

Proceeds from borrowings 76 214 127 64 1,004 55 44 111 6 36

Net borrowings of commercial paper - - - - - - - 212 86 482

Payments on borrowings and capital lease obligations (97) (143) (237) (145) (90) (94) (76) (163) (60) (62)

Other, net 3 45 25 45 14 (39) (41) (50) 75 32

Net payments / borrowings under short-term credit agreements (2) 9 6 11 (3) - (41) 19 12 1

Other, net excluding net payments / borrowings under short-term credit agreements 5 36 19 34 17 - - (69) 63 31

Excess tax benefits / deficiencies on stock-based awards (1) 10 5 14 13 - - - - -

Acquisition of noncontrolling interests - - - - - - - (98) - -

Other, net excluding excess tax benefits / deficiencies on stock-based awards and acquisition of noncontrolling interests 6 26 14 20 4 - - 29 63 31

Distributions to noncontrolling interests (34) (28) (56) (62) (75) (83) (49) (65) (29) (30)

Dividend payments on common stock (141) (172) (255) (340) (420) (512) (622) (676) (701) (718)

Proceeds from issuing common stock - - - - - - - - - -

Repurchases of common stock (20) (241) (629) (256) (381) (670) (900) (778) (451) (1,140)

Proceeds from sale of common stock held by employee benefit trust 72 58 - - - - - - - -

Effect of exchange rate changes on cash and cash equivalents 17 5 (35) 29 35 (87) (87) (200) 98 (70)

Net decrease / increase in cash and cash equivalents 504 93 461 (115) 1,330 (398) (590) (591) 249 (66)

Cash and cash equivalents at beginning of period 426 930 1,023 1,484 1,369 2,699 2,301 1,711 1,120 1,369

Cash and cash equivalents at end of period 930 1,023 1,484 1,369 2,699 2,301 1,711 1,120 1,369 1,303

Cummins Inc.Cash Flow Statementin MillionsFiscal Years Ending Dec. 31 2019E 2020E 2021E 2022E 2023E 2024E

Net cash provided by operating activities

Consolidated net income 2,273.89 2,278.53 2,313.22 2,379.20 2,477.05 2,558.43

Adjustments to reconcile consolidated net income to net cash provided by operating activities

Depreciation and amortization 602.72 592.84 589.49 592.04 599.95 612.82 Accounts receivable (294.48) (76.97) (33.90) (91.83) (148.35) (126.32)Inventory 73.57 (68.18) (30.03) (81.35) (131.41) (111.90)Prepaid expenses and other current assets (151.23) (15.16) (6.68) (18.08) (29.21) (24.87) Pension assets (141.64) (19.81) (8.72) (23.63) (38.18) (32.51) Accounts payable (principally trade) 26.15 52.69 23.21 62.87 101.56 86.48 Accrued compensation, benefits and retirement costs 66.18 13.79 6.07 16.45 26.57 22.63 Current portion of accrued product warranty (95.86) 10.33 4.55 12.32 19.90 16.95 Current portion of deferred revenue 12.20 9.44 4.16 11.26 18.19 15.49 Taxes payable including taxes on income - - - - - - Other accrued expenses excluding current maturities of long-term debt 252.29 20.43 9.00 24.37 39.38 33.53 Other liabilities and deferred revenue 56.11 43.40 19.12 51.79 83.65 71.23

Net cash flows from operating activities 2,679.90 2,841.34 2,889.48 2,935.39 3,019.11 3,121.96

Cash flow from Investing Activities

Increase in short-term investments (3.64) (3.70) (3.76) (3.82) (3.89) (3.95) Increase in Long-term investments (21.39) (21.76) (22.14) (22.53) (22.92) (23.32) Capital expenditures (535.59) (570.07) (606.77) (645.84) (687.42) (731.68) Acquisitions of businesses (162.00) - - - - - Other assets (220.99) (21.89) (9.64) (26.11) (42.18) (35.92) Capital of intangible assets 31.03 29.97 28.94 27.96 27.00 26.08

Net cash flows from investing activities (912.58) (587.45) (613.37) (670.35) (729.41) (768.79)

Cash Flows from Financing ActivitiesCurrent maturities of long-term debt 11.63 1.05 0.46 1.25 2.02 1.72Pension liabilities 17.66 10.17 4.48 12.13 19.60 16.69Loans payable - 1.00 0.44 1.19 1.93 1.64 Commercial paper (294.62) 8.98 3.95 10.71 17.31 14.74 Issuance of long-term debt 74.67 15.57 9.06 26.35 43.05 40.76 Payment of dividends (738.84) (740.35) (751.62) (773.06) (804.85) (831.29) Payment of dividends to noncontrolling interest (101.63) 14.97 6.59 17.87 28.86 24.57 Exercise of Stock Options 47.77 47.77 47.77 47.77 47.77 47.77 Acquisition of common shares (769.50) (769.50) (769.50) (769.50) (769.50) (769.50)

Net cash flows from financing activities (1,752.85) (1,410.33) (1,448.36) (1,425.28) (1,413.82) (1,452.90)

Net Increase (decrease) in cash & cash equivalents 14.47 843.56 827.75 839.77 875.88 900.27 Cash & cash equivalents, beginning of year 1,303 1,317.47 2,161.03 2,988.78 3,828.55 4,704.43 Cash & cash equivalents, end of year 1,317.47 2,161.03 2,988.78 3,828.55 4,704.43 5,604.70

Cummins Inc.Common Size Income Statement

Fiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023E CV-2024E

Net sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Cost of Sales exclude depreciation & Amortization 71.62% 72.31% 73.39% 72.44% 72.44% 72.44% 72.44% 72.44% 72.44%Depreciation & Amortization Expense 3.00% 2.83% 2.56% 2.47% 2.39% 2.36% 2.32% 2.27% 2.26%Gross margin 25.43% 24.92% 24.13% 25.09% 25.17% 25.20% 25.24% 25.29% 25.30%Operating Expense and Income 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Selling, General & Administrative Expenses -11.69% -11.70% -10.25% -11.21% -11.21% -11.21% -11.21% -11.21% -11.21%Research, Development & Engineering Expenses -3.63% -3.68% -3.79% -3.70% -3.70% -3.70% -3.70% -3.70% -3.70%Equity, Royalty & Interest Income from Investees 1.72% 1.75% 1.66% 1.71% 1.71% 1.71% 1.71% 1.71% 1.71%Other operating (expense)/ income, net -0.82% 0.29% -0.03% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Loss contingency -0.79% -0.02% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Gain on sale of businesses 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other Operating Expense/Income, Net Exclude Loss Contingency and Gain on Sle of Business -0.03% 0.32% -0.03% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Restructuring actions & other charges 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Impairment of light-duty diesel assets 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Operating income 11.01% 11.58% 11.72% 11.88% 11.96% 12.00% 12.03% 12.08% 12.10%Interest income 0.13% 0.09% 0.15% 0.18% 0.18% 0.24% 0.29% 0.33% 0.38%Interest expense -0.39% -0.40% -0.48% -0.27% -0.24% -0.24% -0.24% -0.23% -0.23%Other income / expense, net 0.27% 0.31% 0.19% 0.26% 0.00% 0.00% 0.00% 0.00% 0.00%Income before income taxes 11.02% 11.58% 11.58% 12.59% 12.39% 12.48% 12.56% 12.65% 12.71%Income tax expense / benefit -2.71% -6.71% -2.38% -2.73% -2.69% -2.71% -2.73% -2.74% -2.76%Minority interests in income of consolidated subsidiaries 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Consolidated net income 8.32% 4.87% 9.20% 9.86% 9.70% 9.77% 9.84% 9.90% 9.95%Net income / loss attributable to noncontrolling interests -0.35% 0.02% -0.19% -0.52% -0.51% -0.52% -0.52% -0.52% -0.53%Net income attributable to Cummins Inc. 7.96% 4.89% 9.01% 9.34% 9.19% 9.25% 9.32% 9.38% 9.42%

Cummins Inc.Common Size Balance Sheet

Fiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023E CV-2024E

Total assets 85.73% 88.48% 80.19% 81.71% 84.33% 87.39% 89.99% 92.15% 94.62%Total current assets 44.02% 43.70% 41.30% 41.92% 45.22% 48.47% 51.50% 54.31% 57.13%

Total cash, cash equivalents and marketable securities 7.88% 7.67% 6.42% 6.34% 9.64% 12.89% 15.92% 18.73% 21.55%Cash and cash equivalents 6.40% 6.70% 5.48% 5.41% 8.71% 11.95% 14.99% 17.81% 20.65%Marketable securities 1.48% 0.97% 0.93% 0.93% 0.92% 0.93% 0.93% 0.91% 0.90%

Accounts and notes receivable, net 17.28% 17.71% 16.26% 17.08% 17.08% 17.08% 17.08% 17.08% 17.08%Inventories 15.28% 15.50% 15.81% 15.13% 15.13% 15.13% 15.13% 15.13% 15.13%

Prepaid expenses and other current assets 3.58% 2.82% 2.81% 3.36% 3.36% 3.36% 3.36% 3.36% 3.36%Deferred income taxes 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Prepaid expenses and other current assets excluding deferred income taxes 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Long-term assets 41.72% 44.78% 38.89% 39.80% 39.12% 38.92% 38.49% 37.84% 37.49%Property, plant and equipment, net 21.70% 19.22% 17.23% 16.54% 16.15% 16.09% 15.96% 15.77% 15.78%

Property, plant and equipment 43.61% 39.45% 35.00% 36.36% 38.00% 40.12% 41.81% 43.03% 44.56%Accumulated depreciation -21.90% -20.22% -17.77% -19.82% -21.85% -24.03% -25.84% -27.26% -28.78%

Investments and advances related to equity method investees 5.40% 5.66% 5.14% 5.11% 5.10% 5.15% 5.13% 5.05% 5.00%Goodwill and other intangible assets, net 4.64% 10.06% 8.56% 8.89% 8.61% 8.43% 8.14% 7.77% 7.46%

Goodwill 2.74% 5.30% 4.74% 5.29% 5.19% 5.15% 5.04% 4.88% 4.74%Other intangible assets, net 1.90% 4.76% 3.82% 3.61% 3.42% 3.28% 3.10% 2.89% 2.72%

Other assets 9.97% 9.83% 7.96% 9.25% 9.25% 9.25% 9.25% 9.25% 9.25%Deferred income taxes 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Pension assets 4.17% 5.11% 3.91% 4.40% 4.40% 4.40% 4.40% 4.40% 4.40%Other assets excluding deferred income taxes and pension assets 5.80% 4.73% 4.05% 4.86% 4.86% 4.86% 4.86% 4.86% 4.86%

Total liabilities and equity 85.73% 88.48% 80.19% 81.71% 84.33% 87.39% 89.99% 92.15% 94.62%Total liabilities 44.76% 48.52% 45.45% 44.88% 44.82% 44.80% 44.76% 44.70% 44.67%

Total current liabilities 24.70% 27.79% 26.86% 26.12% 26.12% 26.12% 26.12% 26.12% 26.12%Current portion of long-term debt and loans payable 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Accounts payable (principally trade) 10.59% 12.62% 11.87% 11.70% 11.70% 11.70% 11.70% 11.70% 11.70%Loans payable 0.23% 0.28% 0.23% 0.22% 0.22% 0.22% 0.22% 0.22% 0.22%Commercial paper 1.21% 1.46% 3.28% 1.99% 1.99% 1.99% 1.99% 1.99% 1.99%

Accrued expenses 12.67% 13.43% 11.48% 12.21% 12.21% 12.21% 12.21% 12.21% 12.21%Accrued compensation, benefits and retirement costs 2.35% 3.97% 2.86% 3.06% 3.06% 3.06% 3.06% 3.06% 3.06%Current portion of accrued product warranty 1.90% 2.22% 2.75% 2.29% 2.29% 2.29% 2.29% 2.29% 2.29%Current portion of deferred revenue 2.67% 2.45% 2.09% 2.09% 2.09% 2.09% 2.09% 2.09% 2.09%

Taxes payable including taxes on income 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other accrued expenses excluding taxes payable including taxes on income 5.74% 4.79% 3.77% 4.77% 4.77% 4.77% 4.77% 4.77% 4.77%

Other accrued expenses excluding current maturities of long-term debt 5.54% 4.48% 3.58% 4.53% 4.53% 4.53% 4.53% 4.53% 4.53%Current maturities of long-term debt 0.20% 0.31% 0.19% 0.23% 0.23% 0.23% 0.23% 0.23% 0.23%

Long-term liabilities 20.06% 20.73% 18.59% 18.75% 18.69% 18.68% 18.64% 18.58% 18.54%Long-term debt 8.96% 7.77% 6.72% 6.86% 6.80% 6.78% 6.74% 6.69% 6.65%

Pensions and other postretirement benefits 3.74% 3.03% 2.24% 2.26% 2.26% 2.26% 2.26% 2.26% 2.26%Pensions 1.86% 1.62% 0.00% 1.16% 1.16% 1.16% 1.16% 1.16% 1.16%Postretirement benefits other than pensions 1.88% 1.41% 0.00% 1.10% 1.10% 1.10% 1.10% 1.10% 1.10%

Other liabilities and deferred revenue 7.36% 9.92% 9.63% 9.63% 9.63% 9.63% 9.63% 9.63% 9.63%Accrued product warranty 0.00% 0.00% 3.11% 3.11% 3.11% 3.11% 3.11% 3.11% 3.11%Deferred revenue 0.00% 0.00% 2.77% 2.77% 2.77% 2.77% 2.77% 2.77% 2.77%Other liabilities 0.00% 0.00% 3.75% 3.75% 3.75% 3.75% 3.75% 3.75% 3.75%

Total equity 40.97% 39.96% 34.74% 36.84% 39.52% 42.59% 45.23% 47.45% 49.95%Total Cummins Inc. shareholders' equity 39.27% 35.53% 30.91% 33.51% 36.20% 39.27% 41.90% 44.12% 46.63%

Common stock & Additional paid-in capital 12.25% 10.78% 9.53% 9.50% 9.52% 9.64% 9.62% 9.49% 9.40%Retained earnings 63.05% 56.12% 54.34% 59.34% 64.47% 70.20% 75.01% 78.88% 83.09%Treasury stock, at cost -25.64% -24.01% -25.36% -27.91% -30.51% -33.34% -35.65% -37.40% -39.21%Unearned compensation 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Accumulated other comprehensive loss -10.40% -7.36% -7.60% -7.42% -7.29% -7.23% -7.08% -6.84% -6.66%Noncontrolling interests 1.71% 4.43% 3.83% 3.32% 3.32% 3.32% 3.32% 3.32% 3.32%

Cummins Inc.Common Size Balance Sheet

Fiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023E CV-2024E

Total assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Total current assets 51.34% 49.39% 51.51% 51.30% 53.62% 55.46% 57.23% 58.93% 60.38%

Total cash, cash equivalents and marketable securities 9.19% 8.67% 8.00% 7.75% 11.43% 14.75% 17.69% 20.32% 22.77%Cash and cash equivalents 7.46% 7.57% 6.84% 6.62% 10.33% 13.68% 16.66% 19.33% 21.82%Marketable securities 1.73% 1.10% 1.16% 1.13% 1.10% 1.07% 1.03% 0.99% 0.95%

Accounts and notes receivable, net 20.15% 20.02% 20.28% 20.91% 20.26% 19.55% 18.98% 18.54% 18.06%Inventories 17.82% 17.52% 19.72% 18.52% 17.94% 17.32% 16.82% 16.42% 15.99%

Prepaid expenses and other current assets 4.18% 3.19% 3.50% 4.12% 3.99% 3.85% 3.74% 3.65% 3.56%Deferred income taxes 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Prepaid expenses and other current assets excluding deferred income taxes 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Long-term assets 48.66% 50.61% 48.49% 48.70% 46.38% 44.54% 42.77% 41.07% 39.62%Property, plant and equipment, net 25.31% 21.73% 21.49% 20.25% 19.15% 18.41% 17.74% 17.11% 16.68%

Property, plant and equipment 50.86% 44.58% 43.64% 44.50% 45.05% 45.91% 46.46% 46.70% 47.09%Accumulated depreciation -25.55% -22.85% -22.15% -24.25% -25.90% -27.50% -28.72% -29.59% -30.42%

Investments and advances related to equity method investees 6.30% 6.40% 6.41% 6.25% 6.05% 5.89% 5.70% 5.48% 5.28%Goodwill and other intangible assets, net 5.41% 11.37% 10.68% 10.88% 10.21% 9.64% 9.05% 8.43% 7.89%

Goodwill 3.20% 5.99% 5.91% 6.47% 6.16% 5.89% 5.60% 5.29% 5.01%Other intangible assets, net 2.21% 5.38% 4.77% 4.41% 4.05% 3.75% 3.44% 3.14% 2.87%

Other assets 11.63% 11.11% 9.92% 11.32% 10.97% 10.59% 10.28% 10.04% 9.78%Deferred income taxes 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Pension assets 4.87% 5.77% 4.87% 5.38% 5.21% 5.03% 4.89% 4.77% 4.65%Other assets excluding deferred income taxes and pension assets 6.76% 5.34% 5.05% 5.94% 5.76% 5.56% 5.40% 5.27% 5.13%

Total liabilities and equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Total liabilities 52.21% 54.83% 56.67% 54.92% 53.14% 51.26% 49.74% 48.51% 47.21%

Total current liabilities 28.81% 31.41% 33.49% 31.97% 30.98% 29.89% 29.03% 28.35% 27.61%Current portion of long-term debt and loans payable 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Accounts payable (principally trade) 12.35% 14.27% 14.80% 14.31% 13.87% 13.38% 13.00% 12.69% 12.36%Loans payable 0.27% 0.32% 0.28% 0.27% 0.26% 0.25% 0.25% 0.24% 0.23%Commercial paper 1.41% 1.65% 4.09% 2.44% 2.36% 2.28% 2.21% 2.16% 2.11%

Accrued expenses 14.78% 15.18% 14.31% 14.95% 14.48% 13.98% 13.57% 13.25% 12.91%Accrued compensation, benefits and retirement costs 2.74% 4.49% 3.56% 3.74% 3.63% 3.50% 3.40% 3.32% 3.23%Current portion of accrued product warranty 2.22% 2.51% 3.43% 2.80% 2.72% 2.62% 2.55% 2.49% 2.42%Current portion of deferred revenue 3.12% 2.77% 2.61% 2.56% 2.48% 2.40% 2.33% 2.27% 2.21%

Taxes payable including taxes on income 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other accrued expenses excluding taxes payable including taxes on income6.70% 5.41% 4.71% 5.83% 5.65% 5.45% 5.30% 5.17% 5.04%

Other accrued expenses excluding current maturities of long-term debt6.46% 5.06% 4.47% 5.55% 5.38% 5.19% 5.04% 4.92% 4.79%Current maturities of long-term debt 0.23% 0.35% 0.24% 0.28% 0.28% 0.27% 0.26% 0.25% 0.25%

Long-term liabilities 23.40% 23.42% 23.18% 22.95% 22.17% 21.37% 20.71% 20.16% 19.60%Long-term debt 10.45% 8.79% 8.38% 8.40% 8.07% 7.76% 7.50% 7.26% 7.03%

Pensions and other postretirement benefits 4.36% 3.42% 2.79% 2.76% 2.68% 2.58% 2.51% 2.45% 2.39%Pensions 2.17% 1.83% 0.00% 1.42% 1.37% 1.33% 1.29% 1.26% 1.23%Postretirement benefits other than pensions 2.19% 1.60% 0.00% 1.34% 1.30% 1.26% 1.22% 1.19% 1.16%

Other liabilities and deferred revenue 8.59% 11.21% 12.01% 11.79% 11.42% 11.02% 10.71% 10.45% 10.18%Accrued product warranty 0.00% 0.00% 3.88% 3.81% 3.69% 3.56% 3.46% 3.38% 3.29%Deferred revenue 0.00% 0.00% 3.45% 3.39% 3.28% 3.17% 3.08% 3.00% 2.93%Other liabilities 0.00% 0.00% 4.68% 4.59% 4.45% 4.29% 4.17% 4.07% 3.97%

Total equity 47.79% 45.17% 43.33% 45.08% 46.86% 48.74% 50.26% 51.49% 52.79%Total Cummins Inc. shareholders' equity 45.80% 40.16% 38.55% 41.01% 42.92% 44.93% 46.57% 47.88% 49.28%

Common stock & Additional paid-in capital 14.29% 12.19% 11.89% 11.63% 11.29% 11.03% 10.69% 10.29% 9.94%Retained earnings 73.55% 63.42% 67.76% 72.62% 76.44% 80.33% 83.36% 85.60% 87.82%Treasury stock, at cost -29.90% -27.14% -31.62% -34.16% -36.17% -38.15% -39.62% -40.58% -41.44%Unearned compensation 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Accumulated other comprehensive loss -12.13% -8.32% -9.48% -9.08% -8.64% -8.27% -7.86% -7.43% -7.03%Noncontrolling interests 1.99% 5.01% 4.78% 4.07% 3.94% 3.80% 3.69% 3.61% 3.51%

Cummins Inc.Value Driver Estimation

Fiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E

Pv of Minimum Payments 670.64 662.26 669.06 658.09 654.37 657.19 665.98 680.27 699.68

Net sales 17509.00 20428.00 23771.00 24353.39 24803.93 25002.36 25539.91 26408.27 27147.70

Subtract Cost of sales (Including D&A) 13057.00 15338.00 18034.00 18244.31 18560.80 18701.19 19093.14 19730.09 20278.61

Subtract Selling, general & administrative expenses (2046.00) (2390.00) (2437.00) (2730.59) (2781.10) (2803.35) (2863.62) (2960.99) (3043.89)

Subtract Research, development & engineering expenses (636.00) (752.00) (902.00) (901.74) (918.42) (925.77) (945.67) (977.83) (1005.20)

Add Implied Interest on Operating Lease 18.09 17.87 18.05 17.76 17.65 17.73 17.97 18.35 18.88

EBITA 1788.09 1965.87 2416.05 2494.51 2561.26 2589.78 2655.45 2757.72 2838.87

Marginal Tax 28.60% 29.2% 21.7% 21.7% 21.7% 21.7% 21.7% 21.7% 21.7%

Total Income Tax Provision 474.00 1,371.00 566.00 665.40 666.76 676.91 696.22 724.85 748.67 Subtract Tax on Equity, royalty & interest income from investees 86.09 104.24 85.50 90.27 91.94 92.67 94.66 97.88 100.62

Tax on Other Operating (Expense)/Income, Net Exclude Loss Contingency and Gain on Sle of Business (40.90) 17.52 (1.30) - - - - - - Add Tax on Impairment of light-duty diesel assets - - - - - - - - -

Add Tax on Restructuring actions & other charges - - - - - - - - -

Add Tax shield on Implied interest on lease 5.17 5.22 3.92 3.85 3.83 3.85 3.90 3.98 4.10

Add Tax Shield on Interest Expense (19.73) (23.65) (24.74) (14.23) (12.94) (13.09) (13.17) (13.40) (13.76)

Tax on Interest Income 6.58 5.26 7.60 9.78 9.92 13.01 16.05 19.13 22.34

Tax on Other Income/(Expense), Net 13.73 18.40 9.98 13.67 - - - - - Total adjusted taxes 433.41 1,254.45 492.88 569.77 581.68 588.17 602.58 625.22 643.56 Change in Deferred Taxes 50.00 (54.00) (97.00) - - - - - -

NOPLAT 1405 657 1826 1925 1980 2002 2053 2132 2195

Current Operating AssetNormal Cash PercentageNormal Cash 350 409 475 487 496 500 511 528 543Accounts & notes receivables, net - trade & other 3025 3618 3866 4160 4237 4271 4363 4512 4638Inventories 2675 3166 3759 3685 3754 3784 3865 3996 4108Prepaid expenses & other current assets 0 0 0 0 0 0 0 0 0Total Operating Current Assets (OCA) 6,050.18 7,192.56 8,100.42 8,332.98 8,487.14 8,555.04 8,738.97 9,036.09 9,289.11

Current Operating LiabilityAccounts payable (principally trade) 1,854.00 2,579.00 2,822.00 2,848.15 2,900.84 2,924.05 2,986.92 3,088.47 3,174.95

Accrued compensation, benefits & retirement costs 412.00 811.00 679.00 745.18 758.96 765.03 781.48 808.05 830.68

Current portion of accrued product warranty 333.00 454.00 654.00 558.14 568.47 573.02 585.34 605.24 622.19

Current portion of deferred revenue 468.00 500.00 498.00 510.20 519.64 523.80 535.06 553.25 568.74

Accrued income taxes payable - - - - - - - - -

Other accrued expenses 970.00 915.00 852.00 1,104.29 1,124.72 1,133.72 1,158.09 1,197.47 1,231.00

Total Operating Current Liability (OCL) 4,037.00 5,259.00 5,505.00 5,765.97 5,872.64 5,919.62 6,046.89 6,252.48 6,427.55

Net Operating Working Capital 2,013.18 1,933.56 2,595.42 2,567.01 2,614.50 2,635.42 2,692.08 2,783.61 2,861.55 Net PPE 3,800.00 3,927.00 4,096.00 4,028.87 4,006.10 4,023.38 4,077.18 4,164.65 4,283.50

Add other L-T Operating AssetsOther intangible assets, net 332.00 973.00 909.00 877.97 848.01 819.06 791.11 764.10 738.02

Operating lease 670.64 662.26 669.06 658.09 654.37 657.19 665.98 680.27 699.68

Other assets excluding defferred income taxes and pension 1,015.00 966.00 962.00 1,182.99 1,204.87 1,214.51 1,240.62 1,282.81 1,318.72

Total other L-T Operating Assets 2,017.64 2,601.26 2,540.06 2,719.05 2,707.25 2,690.77 2,697.71 2,727.18 2,756.43

Substract Other L-T Operating LiabilitiesOther liabilities &deferred revenue 1,289.00 2,027.00 2,290.00 2,346.11 2,389.51 2,408.62 2,460.41 2,544.06 2,615.30

Total Other L-T Operating Liabilities 1,289.00 2,027.00 2,290.00 2,346.11 2,389.51 2,408.62 2,460.41 2,544.06 2,615.30

Net Other L-T Operating Asset (Liabilities) 728.64 574.26 250.06 372.95 317.74 282.15 237.30 183.12 141.13

Invested Capital 6,541.82 6,434.82 6,941.48 6,968.83 6,938.34 6,940.94 7,006.57 7,131.38 7,286.19

Cummins Inc.Key Management Ratios

Fiscal Years Ending 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023E CV-2024E

Liquidity RatiosCurrent Ratio Current Asset/Current Liability 2.06 1.93 1.94 2.29 2.57 2.25 2.09 1.78 1.57 1.54 1.60 1.73 1.86 1.97 2.08 2.19Quick Ratio (Cash+Marketable securities+Reveivable)/Current Liabilities 1.28 1.11 1.17 1.30 1.63 1.33 1.22 1.02 0.91 0.84 0.90 1.02 1.15 1.26 1.37 1.48Cash Ratio (Cash+marketable securities)/Current Liabilities 0.46 0.42 0.48 0.52 0.85 0.60 0.48 0.32 0.28 0.24 0.24 0.37 0.49 0.61 0.72 0.82Defensive Interval Ratio (Cash+ marketable securities+Receivables)/Avg daily expenditures 0.43 0.42 0.38 0.39 0.52 0.45 0.40 0.41 0.41 0.36 0.38 0.43 0.49 0.54 0.58 0.63Activity or Asset-Management RatiosReceivable turnover ratio Annual Sales/Avg receivables 5.09 5.55 7.22 6.77 6.18 6.67 6.54 5.27 5.46 5.92 5.80 5.83 5.79 5.76 5.77Days of sale outstanding(Days) 365/Receivable Turnover 71.77 65.81 50.57 53.95 59.02 54.75 55.82 69.24 66.86 61.62 62.93 62.61 63.03 63.42 63.23Inventory turnover ratio Cost of good sold/ Avg Inventory 5.20 4.88 6.17 5.57 4.92 5.15 5.26 4.47 4.43 4.84 4.91 4.93 4.89 4.86 4.87Days of inventory on hand(Days) 365/Inventory turnover 70.16 74.72 59.15 65.48 74.13 70.83 69.35 81.64 82.40 75.34 74.41 74.11 74.64 75.14 74.97Total asset turnover ratio Revenue/Avg total assets 1.12 1.20 1.49 1.27 1.13 1.24 1.27 1.06 1.10 1.22 1.19 1.16 1.12 1.08 1.06Financial Leverage RatiosLong-term debt to equity ratio Total Long-term Debt 0.16 0.14 0.11 0.10 0.21 0.20 0.20 0.22 0.19 0.19 0.19 0.17 0.16 0.15 0.14 0.13Debt to equity ratio Total Debt/Total Equity 0.17 0.16 0.12 0.10 0.21 0.21 0.21 0.25 0.24 0.29 0.25 0.23 0.21 0.20 0.19 0.18 Total debt ratio Total Debt/Total Asset 0.08 0.08 0.06 0.06 0.11 0.11 0.11 0.12 0.11 0.13 0.11 0.11 0.10 0.10 0.10 0.09Financial Leverage Total Asset/ Total Equity 2.19 2.08 2.00 1.80 1.87 1.95 1.95 2.09 2.21 2.31 2.22 2.13 2.05 1.99 1.94 1.89Profitability RatiosNet profit margin Net Income/Revneue 3.96% 7.86% 10.24% 9.49% 8.57% 8.59% 7.32% 7.96% 4.89% 9.01% 9.34% 9.19% 9.25% 9.32% 9.38% 9.42%Gross profit margin Gross Profi/Revenue 20.08% 23.95% 25.43% 26.01% 25.33% 25.29% 25.89% 25.43% 24.92% 24.13% 25.09% 25.17% 25.20% 25.24% 25.29% 25.30%Operating profit marigin EBIT/Revenue 6.31% 12.11% 14.85% 13.00% 12.14% 12.30% 10.76% 11.01% 11.58% 11.72% 11.88% 11.96% 12.00% 12.03% 12.08% 12.10%ROA Net Income/ Avg Total Asset 4.45% 9.42% 15.26% 12.06% 9.72% 10.68% 9.28% 8.43% 5.38% 10.99% 11.14% 10.66% 10.32% 10.06% 9.90%ROE Net Income/ Avg Total Equity 9.49% 19.21% 28.86% 22.16% 18.58% 20.84% 18.75% 18.18% 12.17% 24.85% 24.23% 22.28% 20.84% 19.76% 18.99%Payout Policy RatiosPayout Ratio Dividend/ Net Income 29.13% 15.09% 13.10% 19.56% 26.45% 29.49% 42.31% 46.43% 70.52% 32.83% 32.49% 32.49% 32.49% 32.49% 32.49% 32.49%Total Payout Ratio (Dividend + Repurchase)/Net Income 33.26% 36.23% 45.43% 34.29% 50.44% 68.09% 103.54% 99.86% 115.90% 84.96% 70.80% 65.61% 65.47% 64.08% 62.39% 61.61%

Present Value of Operating Lease Obligations (2018) Present Value of Operating Lease Obligations (2017) Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015)

Operating Operating Operating OperatingFiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Leases Fiscal Years Ending Leases

2018 217 2017 215 2016 210 2015 2052019 138 2018 140 2017 141 2016 1632020 109 2019 108 2018 101 2017 1372021 81 2020 80 2019 81 2018 1052022 60 2021 60 2020 59 2019 90Thereafter 120 Thereafter 114 Thereafter 137 Thereafter 153Total Minimum Payments 725 Total Minimum Payments 717 Total Minimum Payments 729 Total Minimum Payments 853Less: Interest 56 Less: Interest 55 Less: Interest 58 Less: Interest 70PV of Minimum Payments 669 PV of Minimum Payments 662 PV of Minimum Payments 671 PV of Minimum Payments 783

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 2.70% Pre-Tax Cost of Debt 2.70% Pre-Tax Cost of Debt 2.70% Pre-Tax Cost of Debt 2.70%Number Years Implied by Year 6 Payment 2.0 Number Years Implied by Year 6 Payment 1.9 Number Years Implied by Year 6 Payment 2.3 Number Years Implied by Year 6 Payment 1.7

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment

1 217 211.3 1 215 209.4 1 210 204.5 1 205 199.62 138 130.8 2 140 132.7 2 141 133.7 2 163 154.53 109 100.6 3 108 99.7 3 101 93.2 3 137 126.54 81 72.8 4 80 71.9 4 81 72.8 4 105 94.45 60 52.5 5 60 52.5 5 59 51.6 5 90 78.86 & beyond 60 100.9 6 & beyond 60 96.0 6 & beyond 59 114.8 6 & beyond 90 129.2PV of Minimum Payments 669.1 PV of Minimum Payments 662.3 PV of Minimum Payments 670.6 PV of Minimum Payments 783.0

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 3,659,405Average Time to Maturity (years): 10.00Expected Annual Number of Options Exercised: 365,941

Current Average Strike Price: 130.55$ Cost of Equity: 8.81%Current Stock Price: $180.84

2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E

Increase in Shares Outstanding: 365,941 365,941 365,941 365,941 365,941 365,941 365,941 365,941 365,941 365,941Average Strike Price: 130.55$ 130.55$ 130.55$ 130.55$ 130.55$ 130.55$ 130.55$ 130.55$ 130.55$ 130.55$ Increase in Common Stock Account: 47,773,532 47,773,532 47,773,532 47,773,532 47,773,532 47,773,532 47,773,532 47,773,532 47,773,532 47,773,532

Change in Treasury Stock 769,500,000 769,500,000 769,500,000 769,500,000 769,500,000 769,500,000 769,500,000 769,500,000 769,500,000 769,500,000Expected Price of Repurchased Shares: 180.84$ 196.77$ 214.10$ 232.97$ 253.49$ 275.82$ 300.12$ 326.55$ 355.32$ 386.62$ Number of Shares Repurchased: 4,255,143 3,910,646 3,594,040 3,303,066 3,035,650 2,789,883 2,564,014 2,356,431 2,165,655 1,990,323

Shares Outstanding (beginning of the year) 158,000,000 154,110,798 150,566,092 147,337,993 144,400,867 141,731,158 139,307,215 137,109,142 135,118,651 133,318,937Plus: Shares Issued Through ESOP 365,941 365,941 365,941 365,941 365,941 365,941 365,941 365,941 365,941 365,941Less: Shares Repurchased in Treasury 4,255,143 3,910,646 3,594,040 3,303,066 3,035,650 2,789,883 2,564,014 2,356,431 2,165,655 1,990,323 Shares Outstanding (end of the year) 154,110,798 150,566,092 147,337,993 144,400,867 141,731,158 139,307,215 137,109,142 135,118,651 133,318,937 131,694,554

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol CMICurrent Stock Price $180.84Risk Free Rate 1.84%Current Dividend Yield 2.87%Annualized St. Dev. of Stock Returns 24.29%

Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 1 3,659,405 130.55 10.00 51.52$ 188,515,424$ Total 3,659,405 130.55$ 10.00 85.34$ 188,515,424$

Cummins Inc.Weighted Average Cost of Capital (WACC) Estimation

Risk-free rate 1.84%Equity Beta 1.17Risk Premium 5.96%Cost of equity 8.81%

Cost of DebtYTM 2.70%

Weight

MV Debt 3,100.06 Loans payable 54.00 Commercial paper 780.00 Long-term debt 1,597.00 Operating lease 669.06

MV Equity 27,051.00

Weight of Debt 10.28%Weight of Equity 89.72%Total 100.00%

WACC 8.12%

Cummins Inc.Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV Growth 3.26% CV ROIC 30.78% WACC 8.12% Cost of Equity 8.81%

Fiscal Years Ending Dec. 31 2019E 2020E 2021E 2022E 2023E CV-2024E

DCF ModelNOPLAT 1925 1980 2002 2053 2132 2195IC 6969 6938 6941 7007 7131 7286FCF 1,897.38 2,010.06 1,999.01 1,987.24 2,007.69 2,040.50 ROIC 27.73% 28.41% 28.85% 29.58% 30.44% 30.78%CV (t=5) 40,381.92 FCFF to Discount 1,897.38 2,010.06 1,999.01 1,987.24 2,007.69 40,381.92 Periods to Discount 1 2 3 4 5 5Discount Factor 1.08 1.17 1.26 1.37 1.48 1.48PV (CF) 1,754.88 1,719.46 1,581.57 1,454.17 1,358.79 27,330.24 Value of Operating Assets 35,199.11 + Excess Cash 1,049.58

+ Marketable securities 222.00 + Investments and advances related to equity method investees 1,222.00 - Underfunded Pension (607.00)- PV of Operating Lease (669.06) - ESOP (188.52) - Current portion of long-term debt and loans payable - - Loans payable (54.00) - Commercial paper (780.00) - Current maturities of long-term debt (45.00) - Long Term Debt (1,597.00) - Noncontrolling Interest (911.00) Total Equity Value 32,841.12 Number of shares Outstanding 162.17 Intrinsic Value / Share 202.51Price as of 11/14/2019 212.95

Fiscal Years Ending 2019E 2020E 2021E 2022E 2023E CV-2024E

EP ModelNOPLAT 1925 1980 2002 2053 2132 2195Beginning IC 6,941.48 6,968.83 6,938.34 6,940.94 7,006.57 7,131.38 ROIC 27.73% 28.41% 28.85% 29.58% 30.44% 30.78%EP 1,361.04 1,413.66 1,438.17 1,489.22 1,563.52 1,616.20 CV(t=5) 33,250.54 EP to Discount 1,361.04 1,413.66 1,438.17 1,489.22 1,563.52 33,250.54 Periods to Discount 1 2 3 4 5 5Discount Factor 1.08 1.17 1.26 1.37 1.48 1.48PV(EP) 1,258.82 1,209.28 1,137.85 1,089.74 1,058.18 22,503.76 Value of Operating Assets 28,257.63

Beg IC 6,941.48 + Excess Cash 1,049.58

+ Marketable securities 222.00 + Investments and advances related to equity method investees 1,222.00 - underfunded Pension (607.00) - PV of Operating Lease (669.06) - ESOP (188.52) loans payable - - Loans payable (54.00) - Commercial paper (780.00) - Current maturities of long-term debt (45.00) - Long Term Debt (1,597.00) - Noncontrolling Interest (911.00) Total Equity Value 32,841.12 Number of shares Outstanding 162.17 Intrinsic Value / Share 202.51 Price as of 11/14/2019 212.95

Cummins Inc.Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending 2019E 2020E 2021E 2022E 2023E 2024E

EPS 14.75$ 15.13$ 15.70$ 16.48$ 17.48$ 18.37$

Key Assumptions CV growth 3.26% CV ROE 20% Cost of Equity 8.81%

Future Cash Flows P/E Multiple (CV Year) 15.05 EPS (CV Year) 18.37$ Future Stock Price 276.35$ Dividends Per Share 4.79 4.92 5.10 5.35 5.68 5.97

Discounted Cash Flows 4.41 4.15 3.96 3.82 3.72 181.19

Intrinsic Value 196.85$ Price as of 11/14/2019 206.99$

Cummins Inc.Relative Valuation Models

EPS EPS Est. 5yrTicker Company Price 2019E 2020E P/E 19 P/E 20 EPS gr. PEG 19 PEG 20CAT Caterpillar $144.49 $10.95 $10.77 13.20 13.40 1.5 8.98 9.12 TEN Tenneco Inc A $13.86 $3.57 $3.87 3.88 3.58 4.4 0.88 0.81 RBC Regal Beloit Corporation $76.44 $5.52 $5.93 13.85 12.89 10.0 1.38 1.29 ASEKY Aisin Seiki $40.41 $2.82 $3.12 14.33 12.95 14.8 0.97 0.88 DE Deere & Co $176.11 $10.13 $11.30 17.38 15.58 14.4 1.21 1.08 KMTUY Komatsu $23.50 $2.16 $2.13 10.88 11.03 9.4 1.16 1.17 BRC Brady Corporation $56.55 $2.57 $2.76 22.00 20.49 11.5 1.91 1.78 BDC Belden Inc. $52.62 $5.14 $5.26 10.24 10.00 10.2 1.01 0.98

Average 13.22 12.49 1.22 1.14

CMI Cummins Inc. $180.84 14.75 15.13 12.3 11.9 10.7 1.1 1.1

Implied Relative Value: P/E (EPS19) $ 195.07 P/E (EPS20) 189.04$ PEG (EPS19) 192.09$ PEG (EPS20) 184.98$

212.95 1,895.31 1,995.31 2,095.31 2,195.31 2,295.31 2,395.31 2,495.31 212.95 69.44% 70.44% 71.44% 72.44% 73.44% 74.44% 75.44%

7.82% 201.48 210.21 218.93 227.65 236.38 245.10 253.82 5.84% 290.81 266.53 242.26 217.99 193.71 169.44 145.177.92% 197.05 205.55 214.04 222.54 231.04 239.54 248.03 6.04% 289.14 264.87 240.59 216.32 192.05 167.77 143.508.02% 192.80 201.08 209.36 217.64 225.92 234.20 242.48 6.24% 287.46 263.19 238.91 214.64 190.37 166.09 141.828.12% 188.73 196.80 204.87 212.95 221.02 229.09 237.16 6.44% 285.76 261.49 237.22 212.95 188.67 164.40 140.138.22% 184.82 192.69 200.57 208.44 216.31 224.18 232.06 6.64% 284.06 259.78 235.51 211.24 186.97 162.69 138.428.32% 181.06 188.74 196.43 204.11 211.79 219.47 227.15 6.84% 282.34 258.06 233.79 209.52 185.24 160.97 136.708.42% 177.45 184.95 192.45 199.94 207.44 214.94 222.44 7.04% 280.60 256.33 232.06 207.78 183.51 159.24 134.96

212.95 2.96% 3.06% 3.16% 3.26% 3.36% 3.46% 3.56% 0.00 1.11 1.13 1.15 1.17 1.19 1.21 1.23

27.78% 202.53 205.14 207.85 210.68 213.63 216.70 219.91 5.66% 244.21 238.48 233.00 227.78 222.77 217.99 213.4028.78% 203.22 205.86 208.62 211.49 214.48 217.59 220.85 5.76% 238.59 233.01 227.69 222.61 217.75 213.09 208.6229.78% 203.86 206.54 209.34 212.24 215.27 218.43 221.72 5.86% 233.21 227.79 222.62 217.67 212.94 208.40 204.0630.78% 204.46 207.18 210.00 212.95 216.01 219.21 222.54 5.96% 228.07 222.80 217.76 212.95 208.34 203.92 199.6831.78% 205.03 207.77 210.63 213.61 216.71 219.94 223.31 6.06% 223.16 218.02 213.11 208.42 203.93 199.62 195.4932.78% 205.56 208.33 211.22 214.23 217.36 220.63 224.03 6.16% 218.44 213.44 208.65 204.08 199.70 195.50 191.4733.78% 206.06 208.86 211.78 214.81 217.97 221.27 224.71 6.26% 213.92 209.04 204.38 199.91 195.64 191.54 187.61

212.95 20.20% 20.70% 21.20% 21.70% 22.20% 22.70% 23.20%

2.10% 220.46 218.83 217.19 215.55 213.91 212.27 210.632.30% 219.58 217.94 216.31 214.68 213.04 211.41 209.772.50% 218.70 217.07 215.44 213.81 212.18 210.55 208.912.70% 217.82 216.20 214.57 212.95 211.32 209.69 208.062.90% 216.95 215.33 213.71 212.09 210.47 208.84 207.223.10% 216.09 214.48 212.86 211.24 209.62 208.00 206.383.30% 215.24 213.63 212.01 210.40 208.78 207.16 205.55

ROIC ERP

Marginal Tax Rate

Pre-Tax Cost of Debt

CV NOPLAT Cost of Goods Sold (Excluding D&A): % of Sales

WACCPPE, Gross

CV Growth Equity beta