What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-08 compared with 2021-02-10 · 223 added, 282 removed, 583 unchanged (46% of the section changed)

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• LIQUIDITY AND CAPITAL RESOURCES

• CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS

• APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

• RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

The following is the discussion and analysis of changes in the financial condition and results of operations for fiscal year 2021 compared to fiscal year 2020.

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We have long-standing relationships with many of the leading manufacturers in the markets we serve, including PACCAR Inc, Navistar International Corporation, Daimler Trucks North America and Stellantis N.V.

We serve our customers through a network of over 500 wholly-owned, joint venture and independent distributor locations and over 9,000 Cummins certified dealer locations with service to approximately 190 countries and territories.

We serve our customers through a service network of approximately 500 wholly-owned, joint venture and independent distributor locations and more than 10,000 Cummins certified dealer locations in approximately 190 countries and territories.

Our reportable operating segments consist of Engine, Distribution, Components, Power Systems and New Power.

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The New Power segment designs, manufactures, sells and supports hydrogen production solutions as well as electrified power systems ranging from fully electric to hybrid along with innovative components and subsystems, including battery and fuel cell technologies.

The New Power segment is currently in the development phase with a primary focus on research and development activities for our power systems, components and subsystems.

We continue to serve all our markets as they adopt electrification and alternative power technologies, meeting the needs of our OEM partners and end customers.

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Demand in these markets tends to fluctuate in response to overall economic conditions.

Our sales may also be impacted by OEM inventory levels, production schedules and stoppages.

Our sales may also be impacted by OEM inventory levels, production schedules, stoppages and supply chain challenges.

Economic downturns in markets we serve generally result in reduced sales of our products and can result in price reductions in certain products and/or markets.

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COVID-19 Update

The outbreak of COVID-19 spread throughout the world and became a global pandemic with the resultant economic impacts evolving into a worldwide recession.

The pandemic triggered a significant downturn in our markets globally, which continued to unfavorably impact market conditions throughout 2020 and these challenging market conditions could continue for an extended period of time.

In an effort to contain the spread of COVID-19, maintain the well-being of our employees and stakeholders, match the reduced demand from our customers and in accordance with governmental requirements, we closed or partially shut down certain office, manufacturing, distribution and technical center facilities around the world in March 2020.

Although most of our manufacturing, distribution and technical center facilities re-opened early in the second quarter of 2020, some operated at reduced capacities, most of our global office buildings remained closed through the remainder of 2020.

Despite many of our markets recovering in the second half of 2020, the ongoing spread of the virus prior to widespread vaccination presents several risks to our business, especially in the first half of 2021.

COVID-19 vaccines are currently being administered around the world with the hope that the majority of the population will have access to the vaccine by the middle of 2021.

If the distribution and the effectiveness of the vaccine are consistent with current government and health organization estimates, we anticipate the vaccine will mitigate the spread of the virus by the end of 2021 and allow a return to more normal operations in the second half of the year.

While the impacts of the pandemic and the resulting global recession are expected to be temporary, the duration of the production and supply chain disruptions, and related financial impacts, cannot be estimated at this time.

Should the reduced manufacturing and distribution capacities continue for an extended period of time or worsen, the impact on our production and supply chain could have a material adverse effect on our results of operations, financial condition and cash flows.

Our Board of Directors (the Board) continues to monitor and evaluate all of these factors along with the continuing impacts of the COVID-19 pandemic on our business and operations.

The outbreak of COVID-19 in early 2020 became a global pandemic with the resultant economic impacts evolving into a worldwide recession.

The pandemic triggered a significant downturn in our markets globally, which negatively impacted our sales and results of operations during 2020.

While the majority of the negative impacts to demand largely subsided in 2021, we are still experiencing supply chain disruptions and related financial impacts reflected as increased cost of sales.

Our industry continues to be unfavorably impacted by supply chain constraints leading to shortages across multiple components categories and limiting our collective ability to meet end-user demand.

Our customers are also experiencing other supply chain issues and slowing production.

Should the supply chain issues continue for an extended period of time or worsen, the impact on our production and supply chain could have a material adverse effect on our results of operations, financial condition and cash flows.

Our Board of Directors (the Board) continues to monitor and evaluate all of these factors and the related impacts on our business and operations, and we are diligently working to minimize the supply chain impacts to our business and to our customers.

A summary of our results is as follows:

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Diluted 14.61 12.01 14.48

Worldwide revenues decreased 16 percent in 2020 compared to 2019, as we experienced lower demand in all major operating segments and most geographic regions due to the economic impacts of COVID-19 and the anticipated 2020 down cycle in most of our markets.

Net sales in the U.S.

and Canada declined by 21 percent primarily due to COVID-19 impacts resulting in decreased demand in the North American on-highway markets, which also negatively impacted our emission solutions, automated transmissions and turbo technologies businesses, reduced sales in all distribution product lines, decreased demand for power generation equipment and lower demand in off-highway markets (especially construction).

Worldwide revenues improved 21 percent in 2021 compared to 2020, as we experienced higher demand in all operating segments and all geographic regions due to an improved economic environment and fewer effects from the COVID-19 pandemic.

International demand (excludes the U.S.

and Canada) declined by 7 percent compared to 2019, with lower sales in all geographic regions except China.

The decrease in international sales was principally due to COVID-19 impacts resulting in lower demand for industrial products (primarily international mining markets), decreased demand for power generation equipment, lower volumes in on-highway markets (mainly medium-duty truck markets), reduced demand in all distribution product lines and unfavorable foreign currency impacts of 2 percent of international sales (primarily the

Brazilian real and Indian rupee), partially offset by higher demand in our emission solutions business in China and India and our electronics and fuel systems business in China.

and Canada) improved by 27 percent compared to 2020, with higher sales in all geographic regions.

The increase in international sales was principally due to higher demand in all components businesses (primarily emission solutions in India and Western Europe), industrial (especially mining) and power generation equipment (mainly in China and India), most distribution product lines and most off-highway markets (principally construction markets in Europe, Asia Pacific and China).

Favorable foreign currency fluctuations impacted international sales by 3 percent (mainly the Chinese renminbi, Euro and Australian dollar).

Net sales in the U.S.

and Canada improved by 17 percent primarily due to increased demand in North American on-highway markets, which positively impacted all components businesses.

The following table contains sales and EBITDA (defined as earnings or losses before interest expense, income taxes, depreciation and amortization and noncontrolling interests) by operating segment for the years ended December 31, 2021 and 2020.

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New Power 116 1 % (223) 72 — % (172) 61 % (30) %

Intersegment eliminations (5,074) (26) % 76 (5,968) (25) % 42 (15) % 81 %

Intersegment eliminations (5,901) (25) % (74) (5,074) (26) % 76 16 % NM

Total $ 24,021 100 % $ 3,521 $ 19,811 100 % $ 3,108 21 % 13 %

"NM" - not meaningful information

Cost of sales, selling, general and administrative and research, development and engineering expenses increased due to higher compensation costs (primarily driven by the restoration of 2020 salary reductions, higher variable compensation and 2020 salary increases deferred until 2021), which impacted the variances in gross margin and net income as well as all of our operating segments for the year ended December 31, 2021.

Net income attributable to Cummins Inc.

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of $1.8 billion, or $12.01 per diluted share, on sales of $19.8 billion.

The decrease in net income attributable to Cummins Inc.

and earnings per diluted share was driven by lower net sales, decreased gross margin, a higher effective tax rate and unfavorable foreign currency fluctuations (primarily the Brazilian real), partially offset by prior restructuring actions, temporary salary reductions and reduced variable compensation resulting in lower overall compensation expenses, increased equity, royalty and interest income from investees primarily in China (due to stronger demand for construction equipment and trucks) and favorable adjustments related to India Tax Law Changes in March 2020.

The decrease in gross margin and gross margin percentage was mainly due to lower volumes, partially offset by prior restructuring actions, temporary salary reductions and lower variable compensation resulting in decreased compensation expenses and lower material costs.

The increases in net income attributable to Cummins Inc.

and earnings per diluted share was driven by higher net sales, increased gross margin, higher equity, royalty and interest income from investees (primarily in China due to stronger demand for trucks and construction equipment in the first half of the year), favorable foreign currency fluctuations (principally the Chinese renminbi and Australian dollar, partially offset by the Brazilian real and British pound) and a lower effective tax rate, partially offset by higher compensation expenses and incremental costs associated with supply chain constraints.

The increase in gross margin was mainly due to higher volumes and favorable pricing, partially offset by higher compensation expenses, increased freight costs and higher material costs.

The 1.0 percentage point decrease in gross margin as a percentage of net sales was primarily due to higher compensation expenses and increased freight costs due to supply chain constraints, which increased at a faster rate than the increase in net sales.

Diluted earnings per common share for 2021 benefited $0.34 per share from fewer weighted-average shares outstanding, primarily due to the stock repurchase program.

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Our debt to capital ratio (total capital defined as debt plus equity) at December 31, 2021, was 30.7 percent, compared to 31.7 percent at December 31, 2020.

The increase was primarily due to a $1,797 million higher total debt balance as the result of our August 2020 debt issuance.

The decrease was primarily due to a $412 million higher equity balance driven by strong returns on pension assets.

At December 31, 2021, we had $3.2 billion in cash and marketable securities on hand and access to our $3.5 billion credit facilities, if necessary, to meet currently anticipated working capital, investment and funding needs.

In the first half of 2020, we entered into additional interest rate lock agreements to reduce the variability of the cash flows of the interest payments on a total of $500 million of fixed rate debt forecast to be issued in 2023 to replace our senior notes at maturity.

In 2020, we repurchased $641 million or 3.9 million shares of common stock.

In 2021, we repurchased $1.4 billion or 5.7 million shares of common stock.

In December 2021, the Board authorized the acquisition of up to $2.0 billion of additional common stock upon completion of the 2019 repurchase plan.

See Note 15, "CUMMINS INC.

SHAREHOLDERS' EQUITY" to the Consolidated Financial Statements for additional information.

In June and July of 2020, we settled our February 2014 interest rate swaps, which previously converted our $500 million debt issue, due in 2023, from fixed rate to floating rate based on a LIBOR spread.

We will amortize the $24 million gain realized upon settlement over the remaining three-year term of the related debt.

On August 19, 2020, we entered into an amended and restated 364-day credit agreement that allows us to borrow up to $1.5 billion of unsecured funds at any time prior to August 18, 2021.

On August 18, 2021, we entered into an amended and restated five-year revolving credit agreement, which allows us to borrow up to $2 billion of unsecured funds at any time prior to August 18, 2026.

On August 18, 2021, we also entered into an amended and restated 364-day credit agreement, which allows us to borrow up to $1.5 billion of unsecured funds at any time prior to August 17, 2022.

This credit agreement amended and restated the prior $1.5 billion 364-day credit facility that matured on August 18, 2021.

On August 24, 2020, we issued $2 billion aggregate principal amount of senior unsecured notes consisting of $500 million aggregate principal amount of 0.75% senior unsecured notes due in 2025, $850 million aggregate principal amount of 1.50% senior unsecured notes due in 2030 and $650 million aggregate principal amount of 2.60% senior unsecured notes due in 2050.

We received net proceeds of $1.98 billion.

In October 2020, the Board authorized an increase to our quarterly dividend of 3 percent from $1.311 per share to $1.35 per share.

On August 3, 2021, we announced our exploration of strategic alternatives for our filtration business.

Potential strategic alternatives to be explored include the separation of our filtration business into a stand-alone company.

The execution of this exploration process is dependent upon business and market conditions, along with a number of other factors and considerations.

In July 2021, the Board authorized an increase to our quarterly dividend of 7.4 percent from $1.35 per share to $1.45 per share.

In 2021, the investment gain on our U.S.

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Our global pension plans, including our unfunded and non-qualified plans, were 121 percent funded at December 31, 2021.

defined benefit plan, which represents approximately 52 percent of the worldwide pension obligation, was 128 percent funded, and our U.K.

defined benefit plan was 114 percent funded.

defined benefit plan, which represented approximately 52 percent of the worldwide pension obligation, was 138 percent funded, and our U.K.

defined benefit plan was 127 percent funded at December 31, 2021.

We expect to contribute approximately $47 million in cash to our global pension plans in 2022.

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See application of critical accounting estimates within MD&A and Note 10, "PENSIONS AND OTHER POSTRETIREMENT BENEFITS," to the Consolidated Financial Statements , for additional information concerning our pension and other postretirement benefit plans.

On April 29, 2019, we announced that we were conducting a formal internal review of our emissions certification process and compliance with emission standards for our pick-up truck applications, following conversations with the U.S.

Environmental Protection Agency and California Air Resources Board regarding certification of our engines in model year 2019 RAM 2500 and 3500 trucks.

We voluntarily disclosed our formal internal review to the regulators and to other government agencies, the Department of Justice (DOJ) and the SEC.

We fully cooperated with the DOJ’s and the SEC’s information requests and inquiries and, based on recent communications with these agencies, we do not expect further inquiries.

Due to the continuing nature of our formal review, our ongoing cooperation with our regulators and the presence of many unknown facts and circumstances, we cannot predict the final outcome of this review and these regulatory processes, and we cannot provide assurance that the matter will not have a materially adverse impact on our results of operations and cash flows.

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

As of the date of this filing, our credit ratings and outlooks from the credit rating agencies remain unchanged.

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Equity, royalty and interest income from investees 506 452 330 54 12 % 122 37 %

Restructuring actions — 119 — 119 100 % (119) NM

Other operating expense, net (46) (36) (6) (10) (28) % (30) NM

Restructuring actions — — 119 — — % 119 100 %

Other operating expense, net (31) (46) (36) 15 33 % (10) (28) %

OPERATING INCOME 2,706 2,269 2,700 437 19 % (431) (16) %

Interest expense 111 100 109 (11) (11) % 9 8 %

Other income, net 169 243 81 (74) (30) % 162 NM

Other income, net 156 169 243 (13) (8) % (74) (30) %

INCOME BEFORE INCOME TAXES 2,751 2,338 2,834 413 18 % (496) (18) %

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Research, development and engineering expenses 4.5 % 4.6 % 4.2 % 0.1 (0.4)

Net sales decreased $3,760 million, primarily driven by the following:

• Engine segment sales decreased 20 percent due to lower volumes in all North American on-highway markets.

• Distribution segment sales decreased 12 percent due to lower demand in all product lines.

• Components segment sales decreased 13 percent largely due to decreased demand in North America and Western Europe, partially offset by higher demand in China.

• Power Systems segment sales decreased 19 percent primarily due to reduced industrial demand in international mining markets and oil and gas markets in China and North America and lower demand in power generation markets in North America, India and Asia Pacific.

• Unfavorable foreign currency impacts of 1 percent of total sales, mainly the Brazilian real and Indian rupee.

Net sales increased $4.2 billion, primarily driven by the following:

• Engine segment sales increased 24 percent principally due to higher volumes in global medium-duty truck markets and the North American heavy-duty truck and pick-up truck markets.

• Components segment sales increased 27 percent largely due to higher emission solutions demand in North America, India and Western Europe.

• Power Systems segment sales increased 22 percent primarily due to higher demand in power generation markets in China, India and North America and global mining markets.

• Distribution segment sales increased 9 percent mainly due to higher demand across all product lines in North America and improved demand in Russia, Asia Pacific, Africa and India.

• Favorable foreign currency fluctuations of 2 percent of total sales, primarily in the Chinese renminbi, Euro and Australian dollar.

• New Power segment sales increased 61 percent principally due to higher sales in North America.

Sales to international markets (excluding the U.S.

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warehousing, including receiving and inspection;

freight costs;

engineering support costs;

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rent for production facilities and other production overhead.

Gross margin decreased $1,086 million and 0.7 points as a percentage of sales.

The decrease in gross margin and gross margin as a percentage of sales were mainly due to lower volumes, partially offset by prior restructuring actions, temporary salary reductions and lower variable compensation resulting in decreased compensation expenses and lower material costs.

The provision for warranties issued as a percentage of sales, was 2.2 percent in 2020 and 1.9 percent in 2019.

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

Gross margin increased $801 million and decreased 1.0 points as a percentage of sales.

The increase in gross margin was mainly due to higher volumes and favorable pricing, partially offset by higher compensation expenses, increased freight costs and higher material costs.

The provision for base warranties issued as a percentage of sales, was 2.1 percent in 2021 and 2.2 percent in 2020.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $329 million, primarily due to prior restructuring actions, temporary salary reductions and lower variable compensation resulting in decreased compensation expenses and reduced travel expenses.

Overall, selling, general and administrative expenses, as a percentage of sales, increased to 10.7 percent in 2020 from 10.4 percent in 2019.

The increase in selling, general and administrative expenses as a percentage of sales was primarily due to sales declining faster than selling, general and administrative expenses, despite lower compensation expenses.

Selling, general and administrative expenses increased $249 million, primarily due to higher compensation expenses.

Overall, selling, general and administrative expenses, as a percentage of sales, decreased to 9.9 percent in 2021 from 10.7 percent in 2020.

The decrease in selling, general and administrative expenses as a percentage of sales was mainly due to net sales increasing at a faster rate than the increase in selling, general and administrative expenses.

Research, Development and Engineering Expenses

Research, development and engineering expenses decreased $95 million, primarily due to prior restructuring actions, temporary salary reductions and lower variable compensation resulting in decreased compensation expenses and reduced consulting expenses.

Overall, research, development and engineering expenses, as a percentage of sales, increased to 4.6 percent in 2020 from 4.2 percent in 2019, primarily due to sales declining faster than research, development and engineering expenses decreased, despite lower compensation expenses.

Research, development and engineering expenses increased $184 million, primarily due to higher compensation expenses and increased spending on consulting.

Overall, research, development and engineering expenses, as a percentage of sales, decreased to 4.5 percent in 2021 from 4.6 percent in 2020, mainly due to net sales increasing at a faster rate than the increase in research, development and engineering expenses.

Research activities continue to focus on development of new products to meet future emission standards around the world, improvements in fuel economy performance of diesel and natural gas-powered engines and related components as well as development activities around fully electric, hybrid and hydrogen powertrain solutions.

Equity, Royalty and Interest Income From Investees

Equity, royalty and interest income from investees increased $122 million, primarily due to higher earnings at Beijing Foton Cummins Engine Co., Ltd., a $37 million favorable adjustment as the result of tax changes within India's 2020-2021 Union Budget of India (India Tax Law Changes) passed in March 2020 and $18 million of technology fee revenue recorded in the first quarter of 2020.

Equity, royalty and interest income from investees increased $54 million, primarily due to higher earnings at Dongfeng Cummins Engine Co., Ltd., Tata Cummins Ltd.

(excluding the 2020 benefits noted below) and Chongqing Cummins Engine Co., Ltd., as well as the absence of $13 million of impairment charges and an $8 million loss on sale of a joint venture both recorded in 2020.

These increases were partially offset by the absence of a $37 million favorable adjustment ($18 million of which related to Tata Cummins Ltd.) as the result of tax changes within India's 2020-2021 Union Budget (India Tax Law Changes) passed in March 2020 and $18 million of technology fee revenue related to Tata Cummins Ltd., both recorded in 2020.

See NOTE 4, "INCOME TAXES" to the Consolidated Financial Statements for additional information on India Tax Law Changes.

Restructuring Actions

In the fourth quarter of 2019, we began executing restructuring actions, primarily in the form of voluntary and involuntary employee separation programs.

To the extent these programs involved voluntary separations, a liability was recorded at the time offers to employees were accepted.

To the extent these programs provided separation benefits in accordance with pre-existing agreements or policies, a liability was recorded once the amount was probable and reasonably estimable.

We incurred a charge of $119 million ($90 million after-tax) in the fourth quarter of 2019 for these actions which impacted approximately 2,300 employees.

The voluntary actions were completed by December 31, 2019 and the involuntary actions were completed by June 28, 2020.

See Note 21, "RESTRUCTURING ACTIONS," to the Consolidated Financial Statements, for additional information .

Our joint venture agreement for Cummins Westport, Inc.

expired on December 31, 2021, and will not be renewed.

Beginning in January 2022, engines previously sold through the joint venture will now be included in our consolidated results.

Other Operating Expense, Net

Other operating expense, net was as follows:

Other operating (expense) income, net was as follows:

Years ended December 31,

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Total other operating expense, net $ (31) $ (46)

(1) Includes $19 million of the total $33 million charge related to ending production of the 5 liter ISV engine for the U.S.

pick-up truck market.

Interest Expense

Interest expense decreased $9 million, mainly due to lower interest rates on average outstanding short-term borrowings, partially offset by increased interest expense associated with our $2 billion senior unsecured notes issued in August of 2020.

Interest expense increased $11 million, primarily due to increased interest expense associated with our $2 billion senior unsecured notes issued in August of 2020, partially offset by lower commercial paper interest expense.

Other Income, Net

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Non-service pension and OPEB credit $ 96 $ 65

Gain on corporate owned life insurance 57 61

Interest income 25 21

Gain on sale of land 18 —

Gain on marketable securities, net 6 9

Rental income 9 8

Foreign currency gain, net 2 4

Bank charges (17) (11)

Gain on corporate owned life insurance — 57

Other, net 9 13

Total other income, net $ 156 $ 169

(1) Includes $35 million in gains from unwinding derivative instruments not designated as hedges as a result of foreign dividends paid.

Income Tax Expense

Our effective tax rate for 2021 was 21.3 percent compared to 22.5 percent for 2020.

The year ended December 31, 2020, contained $26 million, or $0.17 per share, of unfavorable net discrete tax items, primarily due to $33 million of unfavorable changes in tax reserves and $10 million of withholding tax adjustments, partially offset by $15 million of favorable changes due to the India Tax Law Change.

The year ended December 31, 2021, contained unfavorable net discrete tax items of $9 million, primarily due to $12 million of unfavorable provision to return adjustments related to the 2020 filed tax returns, partially offset by $3 million of favorable other discrete tax items.

The year ended December 31, 2020, contained $26 million of unfavorable net discrete tax items, primarily due to $33 million of unfavorable changes in tax reserves and $10 million of withholding tax adjustments, partially offset by $15 million of favorable changes due to the India Tax Law Change.

The India Tax Law Change eliminated the dividend distribution tax and replaced it with a lower rate withholding tax as the burden shifted from the dividend payor to the dividend recipient for a net favorable income statement impact of $35 million.

See NOTE 4, "INCOME TAXES" to the Consolidated Financial Statements for additional information on India Tax Law Changes.

The year ended December 31, 2019, contained $34 million of favorable net discrete tax items, primarily due to withholding taxes and provision to return adjustments.

The change in effective tax rate for the year ended December 31, 2020, versus year ended December 31, 2019, was primarily due to a $60 million swing from favorable to unfavorable net discrete tax items.

Our effective tax rate for 2021 is expected to approximate 22.5 percent, excluding any discrete items that may arise.

The change in effective tax rate for the year ended December 31, 2021, versus year ended December 31, 2020, was primarily due to a $16 million decrease in net discrete tax items.

Our effective tax rate for 2022 is expected to approximate 21.5 percent, excluding any discrete tax items that may arise.

Net Income Attributable to Noncontrolling Interests

Noncontrolling interests eliminate the income or loss attributable to non-Cummins ownership interests in our consolidated entities.

Noncontrolling interests in income of consolidated subsidiaries increased $14 million principally due to a $19 million unfavorable adjustment as the result of India Tax Law Changes passed in March 2020.

Noncontrolling interests in income of consolidated subsidiaries increased $11 million principally due to higher earnings at Cummins India Limited and Eaton Cummins Joint Venture, partially offset by the absence of a $19 million unfavorable adjustment as the result

of India Tax Law Changes passed in March 2020.

See NOTE 4, "INCOME TAXES" to the Consolidated Financial Statements for additional information on India Tax Law Changes.

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Net income and diluted earnings per share attributable to Cummins Inc.

decreased $471 million and $2.47 per share, respectively, primarily due to lower net sales, decreased gross margin, a higher effective tax rate and unfavorable foreign currency fluctuations (primarily the Brazilian real), partially offset by prior restructuring actions, temporary salary reductions and reduced variable compensation resulting in lower overall compensation expenses, increased equity, royalty and interest income from investees primarily in China (due to stronger demand for construction equipment and trucks) and favorable adjustments related to India Tax Law Changes in March 2020.

decreased $342 million and $2.60 per share, respectively, primarily due to higher net sales, increased gross margin, higher equity, royalty and interest income from investees (primarily in China due to stronger demand for trucks and construction equipment in the first half of the year), favorable foreign currency fluctuations (principally the Chinese renminbi and Australian dollar, partially offset by the Brazilian real and British pound) and a lower effective tax rate, partially offset by higher compensation expenses and incremental costs associated with supply chain constraints.

Diluted earnings per common share for 2021 benefited $0.34 per share from fewer weighted-average shares outstanding, primarily due to the stock repurchase program.

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Comprehensive Income - Foreign Currency Translation Adjustment

The foreign currency translation adjustment was a net gain of $71 million and a net loss of $152 million for the years ended December 31, 2020 and 2019, respectively.

The foreign currency translation adjustment was a net loss of $9 million and a net gain of $71 million for the years ended December 31, 2021 and 2020, respectively.

The details were as follows:

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dollar Translation adjustment Primary currency driver vs.

Wholly-owned subsidiaries $ 23 Chinese renminbi, offset by Brazilian real and British pound $ (126) British pound, Chinese renminbi, Indian rupee, Brazilian real

Equity method investments 58 Chinese renminbi (21) Chinese renminbi, British pound

Wholly-owned subsidiaries $ (23) Brazilian real, British pound, Indian rupee, Euro, partially offset by Chinese renminbi $ 23 Chinese renminbi, partially offset by Brazilian real and British pound

Equity method investments 19 Chinese renminbi, partially offset by Indian rupee 58 Chinese renminbi

Consolidated subsidiaries with a noncontrolling interest (5) Indian rupee (10) Indian rupee

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See Note 22, "OPERATING SEGMENTS," to the Consolidated Financial Statements for additional information and a reconciliation of our segment information to the corresponding amounts in our Consolidated Statements of Net Income .

The outbreak of COVID-19 in early 2020 became a global pandemic with the resultant economic impacts evolving into a worldwide recession.

The pandemic triggered a significant downturn in our markets globally, which negatively impacted our sales and results of operations during 2020.

While the majority of the negative impacts to demand largely subsided in 2021, we are still experiencing supply chain disruptions and related financial impacts reflected as increased cost of sales.

Our industry continues to be unfavorably impacted by supply chain constraints leading to shortages across multiple components categories and limiting our collective ability to meet end-user demand.

Our customers are also experiencing other supply chain issues and slowing production.

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

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Interest income 8 9 15 (1) (11) % (6) (40) %

Segment EBITDA (excluding restructuring actions) 1,235 1,472 1,446 (237) (16) % 26 2 %

Restructuring actions — 18 — 18 100 % (18) NM

Restructuring actions — — 18 — — % 18 100 %

Segment EBITDA 1,411 1,235 1,454 176 14 % (219) (15) %

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Segment EBITDA as a percentage of total sales 14.2 % 15.4 % 14.5 % (1.2) 0.9

"NM" - not meaningful information

Sales for our Engine segment by market were as follows:

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Total sales $ 9,954 $ 8,022 $ 10,056 $ 1,932 24 % $ (2,034) (20) %

Percentage Points Percentage Points

On-highway sales as percentage of total sales 81 % 78 % 80 % 3 (2)

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

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Total unit shipments 664,700 529,200 651,900 135,500 26 % (122,700) (19) %

Engine segment sales decreased $2,034 million across all markets.

Engine segment sales increased $1,932 million across all markets.

The following were the primary drivers by market:

• Heavy-duty truck engine sales decreased $907 million principally due to lower volumes in North America with lower shipments of 35 percent, partially offset by stronger demand in China.

• Medium-duty truck and bus sales decreased $641 million mainly due to lower demand in North America with decreased shipments of 30 percent.

• Light-duty automotive sales decreased $257 million primarily due to lower pick-up sales in North America with decreased shipments of 16 percent.

• Off-highway sales decreased $229 million principally due to lower demand in construction markets in North America, Western Europe and Asia Pacific, partially offset by higher construction demand in China.

• Unfavorable foreign currency fluctuations, primarily in the Brazilian real.

Total on-highway-related sales for 2020 were 78 percent of total engine segment sales, compared to 80 percent in 2019.

• Medium-duty truck and bus sales increased $711 million mainly due to higher global medium-duty demand, especially in North America, Brazil and Western Europe, partially offset by lower bus sales, mainly in North America and Western Europe.

• Heavy-duty truck engine sales increased $680 million principally due to higher volumes in North America with shipments up 37 percent.

• Light-duty automotive sales increased $365 million primarily due to higher pick-up sales in North America with shipments up 27 percent.

• Off-highway sales increased $176 million mainly due to increased demand in global construction markets, especially in Asia Pacific, Europe and North America.

Segment EBITDA

Engine segment EBITDA decreased $219 million, primarily due to lower gross margin, partially offset by increased equity, royalty and interest income from investees, lower selling, general and administrative expenses and decreased research, development and engineering expenses.

Gross margin and gross margin as a percentage of sales decreased mainly due to lower volumes, partially offset by prior restructuring actions, temporary salary reductions and lower variable compensation resulting in lower compensation expenses and decreased material costs.

Selling, general and administrative expenses decreased principally due to prior restructuring actions, temporary salary reductions and lower variable compensation resulting in decreased compensation expenses, reduced consulting expenses and lower travel expenses.

Research, development and engineering expenses decreased principally due to prior restructuring actions, temporary salary reductions and lower variable compensation resulting in decreased compensation expenses and reduced consulting expenses.

Equity, royalty and interest income from investees increased largely due to higher earnings at Beijing Foton Cummins Engine Co., Ltd.

and increased earnings at Tata Cummins Ltd., mainly due to an $18 million favorable adjustment related to India Tax Law Changes passed in March 2020 and $18 million of technology fee revenue recorded in the first quarter of 2020.

See NOTE 4, "INCOME TAXES" to the Consolidated Financial Statements for additional information on India Tax Law Changes.

Engine segment EBITDA increased $176 million, primarily due to higher volumes and higher equity, royalty and interest income from investees mainly from our Chinese joint ventures, partially offset by increased compensation expenses, higher freight costs due to supply chain constraints and increased material costs.

Distribution Segment Results

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Interest income 7 4 15 3 75 % (11) (73) %

Segment EBITDA (excluding restructuring actions) 665 693 563 (28) (4) % 130 23 %

Restructuring actions — 37 — 37 100 % (37) NM

Restructuring actions — — 37 — — % 37 100 %

Segment EBITDA 731 665 656 66 10 % 9 1 %

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Segment EBITDA as a percentage of total sales 9.4 % 9.3 % 8.1 % 0.1 1.2

"NM" - not meaningful information

Sales for our Distribution segment by region were as follows:

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Europe 650 598 531 52 9 % 67 13 %

Russia 335 194 159 141 73 % 35 22 %

China 330 346 358 (16) (5) % (12) (3) %

Africa and Middle East 259 200 235 59 30 % (35) (15) %

Russia 194 159 169 35 22 % (10) (6) %

India 198 150 201 48 32 % (51) (25) %

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Power generation 1,762 1,692 1,784 70 4 % (92) (5) %

Service 1,263 1,479 1,474 (216) (15) % 5 — %

Engines 1,499 1,250 1,518 249 20 % (268) (18) %

Service 1,366 1,263 1,479 103 8 % (216) (15) %

Total sales $ 7,772 $ 7,136 $ 8,071 $ 636 9 % $ (935) (12) %

Distribution segment sales decreased $935 million across all product lines.

Distribution segment sales increased $636 million across all product lines.

The following were the primary drivers by region:

• North American sales decreased $837 million, representing 90 percent of the total change in Distribution segment sales, due to decreased demand in all product lines, especially parts and engines sales in oil and gas markets.

• Unfavorable foreign currency fluctuations, principally in the Brazilian real, Indian rupee, Australian dollar and South African rand.

• North American sales increased $216 million, representing 34 percent of the total change in Distribution segment sales, due to higher demand in all product lines.

• Improved demand in Russia, Asia Pacific, Africa and India.

• Favorable foreign currency fluctuations, primarily in the Australian dollar, Canadian dollar and Chinese renminbi.

Segment EBITDA

Distribution segment EBITDA increased $9 million, primarily due to decreased selling, general and administrative expenses, lower restructuring charges and higher equity, royalty and interest income from investees, partially offset by lower gross margin.

Gross margin decreased mainly due to lower volumes, partially offset by prior restructuring actions, temporary salary reductions and lower variable compensation resulting in decreased compensation expenses and favorable pricing.

Gross margin as a percentage of sales increased primarily due to prior restructuring actions, temporary salary reductions and lower variable compensation resulting in decreased compensation expenses and favorable pricing.

Selling, general and administrative expenses decreased due to prior restructuring actions, temporary salary reductions and lower variable compensation resulting in decreased compensation expenses and reduced travel expenses, partially offset by higher consulting expenses.

Equity, royalty and interest income from investees increased principally due to a $5 million favorable adjustment related to India Tax Law Changes passed in March 2020.

See NOTE 4, "INCOME TAXES" to the Consolidated Financial Statements for additional information on India Tax Law Changes.

Distribution segment EBITDA increased $66 million, primarily due to higher volumes and favorable foreign currency fluctuations (especially the Australian dollar), partially offset by higher compensation expenses.

Components Segment Results

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Interest income 5 4 8 1 25 % (4) (50) %

Segment EBITDA (excluding restructuring actions) 961 1,117 1,030 (156) (14) % 87 8 %

Restructuring actions — 20 — 20 100 % (20) NM

Restructuring actions — — 20 — — % 20 100 %

Segment EBITDA 1,180 961 1,097 219 23 % (136) (12) %

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Segment EBITDA as a percentage of total sales 15.4 % 16.0 % 15.9 % (0.6) 0.1

"NM" - not meaningful information

Sales for our Components segment by business were as follows:

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Total sales $ 7,665 $ 6,024 $ 6,914 $ 1,641 27 % $ (890) (13) %

Components segment sales decreased $890 million across all businesses.

Components segment sales increased $1,641 million across all businesses.

The following were the primary drivers by business:

• Emission solutions sales decreased $490 million primarily due to weaker demand in North America and Western Europe, partially offset by stronger demand in China and India.

• Automated transmissions sales decreased $226 million primarily due to lower heavy-duty truck demand in North America.

• Turbo technologies sales decreased $120 million, principally due to lower demand in North America and Western Europe, partially offset by higher demand in China.

• Unfavorable currency fluctuations, primarily in the Brazilian real.

• Emission solutions sales increased $867 million primarily due to stronger demand in North America, India and Western Europe.

• Turbo technologies sales increased $253 million principally due to higher demand in North America and Western Europe.

• Filtration sales increased $206 million mainly due to stronger demand in North America, Europe, Latin America and Asia Pacific.

• Automated transmission sales increased $170 million principally due to higher demand in North America and expanded product offering in China.

• Favorable foreign currency fluctuations primarily in the Chinese renminbi and Euro.

Segment EBITDA

Components segment EBITDA decreased $136 million, mainly due to lower gross margin and unfavorable foreign currency fluctuations (primarily in the Brazilian real), partially offset by lower selling, general and administrative expenses, decreased research, development and engineering expenses and higher equity, royalty and interest income from investees.

Gross margin and gross margin as a percentage of sales decreased mainly due to lower volumes, partially offset by prior restructuring actions, temporary salary reductions and lower variable compensation resulting in decreased compensation expenses and lower material costs.

Selling, general and administrative expenses and research, development and engineering expenses decreased due to prior restructuring actions, temporary salary reductions and lower variable compensation resulting in decreased compensation expenses and reduced consulting expenses.

Equity, royalty and interest income from investees increased principally due to higher earnings at Fleetguard Filtration Systems India Pvt.

driven by a $14 million favorable adjustment related to India Tax Law Changes passed in March 2020 and increased earnings at Dongfeng Cummins Emission Solutions Co., Ltd.

See NOTE 4, "INCOME TAXES" to the Consolidated Financial Statements for additional information on India Tax Law Changes.

Components segment EBITDA increased $219 million, mainly due to higher volumes and favorable mix, partially offset by higher compensation expenses, increased material costs and higher freight costs due to supply chain constraints.

Power Systems Segment Results

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Research, development and engineering expenses 234 212 230 (22) (10) % 18 8 %

Equity, royalty and interest income from investees 21 38 56 (17) (45) % (18) (32) %

Equity, royalty and interest income from investees 56 21 38 35 NM (17) (45) %

Interest income 5 4 8 1 25 % (4) (50) %

Segment EBITDA (excluding restructuring actions) 343 524 614 (181) (35) % (90) (15) %

Restructuring actions — 12 — 12 100 % (12) NM

Restructuring actions — — 12 — — % 12 100 %

Segment EBITDA 496 343 512 153 45 % (169) (33) %

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Total sales $ 4,415 $ 3,631 $ 4,460 $ 784 22 % $ (829) (19) %

Power Systems segment sales decreased $829 million across all product lines.

Power Systems segment sales increased $784 million across all product lines.

The following were the primary drivers:

• Industrial sales decreased $388 million due to lower demand in international mining markets and decreased demand in oil and gas markets in China and North America.

• Power generation sales decreased $351 million due to lower demand in North America, India and Asia Pacific.

• Power generation sales increased $348 million due to higher demand in China, India and North America.

• Industrial sales increased $346 million due to higher demand in global mining markets.

• Favorable foreign currency fluctuations primarily in the Chinese renminbi and British pound.

Segment EBITDA

Power Systems segment EBITDA decreased $169 million, primarily due to lower gross margin and lower equity, royalty and interest income from investees, partially offset by lower selling, general and administrative expenses and decreased research, development and engineering expenses.

Gross margin and gross margin as a percentage of sales decreased mainly due to lower volumes, partially offset by prior restructuring actions, temporary salary reductions and lower variable compensation resulting in decreased compensation expenses, lower warranty expenses and favorable pricing.

Selling, general and administrative expenses decreased primarily due to prior restructuring actions, temporary salary reductions and lower variable compensation resulting in decreased compensation expenses, reduced travel expenses and lower consulting expenses.

Equity, royalty and interest income from investees decreased largely due to an $8 million loss on the sale of a joint venture and lower earnings at Chongqing Cummins Engine Co., Ltd.

Power Systems segment EBITDA increased $153 million, primarily due to higher volumes and increased earnings in equity, royalty and interest income from investees, partially offset by higher compensation expenses, increased freight costs due to supply chain constraints and higher material costs.

New Power Segment Results

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In millions 2021 2020 2019 Amount Percent Amount Percent

External sales $ 71 $ 38 $ 6 $ 33 87 % $ 32 NM

Intersegment sales 1 — 1 1 NM (1) (100) %

Total sales 72 38 7 34 89 % 31 NM

External sales $ 108 $ 71 $ 38 $ 37 52 % $ 33 87 %

Intersegment sales 8 1 — 7 NM 1 NM

Total sales 116 72 38 44 61 % 34 89 %

Research, development and engineering expenses 102 109 106 7 6 % (3) (3) %

Equity, royalty and interest loss from investees (3) (4) — 1 25 % (4) NM

Segment EBITDA (excluding restructuring actions) (172) (148) (90) (24) (16) % (58) (64) %

Restructuring actions — 1 — 1 100 % (1) NM

Restructuring actions — — 1 — — % 1 100 %

Segment EBITDA (223) (172) (149) (51) (30) % (23) (15) %

"NM" - not meaningful information

New Power segment sales increased 61 percent principally due to increased sales in North America.

COVID-19 Impacts

The COVID-19 pandemic negatively impacted our financial performance in 2020 and may continue to do so in the future.

Because the magnitude and duration of the pandemic and its economic consequences are unclear, the pandemic’s impact on our performance is difficult to predict.

COVID-19 Positive Trends

COVID-19 vaccines are currently being administered around the world with the hope that the majority of the population will have access to the vaccine by the middle of 2021.

If the distribution and the effectiveness of the vaccine are consistent with current government and health organization estimates we anticipate the vaccine will mitigate the spread of the virus by the end of 2021 and allow a return to more normal operations in the second half of the year.

COVID-19 Challenges

The ongoing spread of the virus and increase in infections prior to widespread vaccination presents several risks to our business, especially in the first half of 2021.

The three principle areas where COVID-19 may negatively impact our financial performance are through its impact on customer demand, the impact on our ability to procure parts from suppliers and our ability to operate our manufacturing and distribution facilities.

Customer Demand – The majority of our major customers, including PACCAR, Navistar, Daimler and Chrysler experienced extended production shutdowns in response to the pandemic in the first half of 2020.

Although many of these customers reopened their facilities and ramped up their production in the second half of 2020, levels of future production remain uncertain and will be determined by supply chain constraints, market demand and government decisions to keep economies open.

Supply Chain Impact – Supplier shutdowns may result in parts shortages and negatively impact our ability to manufacture products and meet aftermarket demand.

In addition, industry parts shortages may impact the timing of when customer facilities reopen and the speed at which customers ramp up production, negatively impacting demand for our products.

Lower demand increases the risk that certain suppliers will face financial issues, potentially impacting their ability to supply parts.

Operations Impact - Our manufacturing and distribution locations are generally considered critical services and the majority of our facilities remain open to meet customer demand.

In an effort to contain the spread of COVID-19, maintain the well-being of our employees, ensure compliance with governmental requirements or respond to declines in demand from customers, we closed or partially shut down certain office, manufacturing and distribution facilities around the world at the end of the first quarter and into the third quarter of 2020.

We have taken, and will continue to take, a variety of steps to reduce the risk of employees contracting COVID-19 at work.

These steps include social distancing, expanded cleaning and sanitization, adjusting work hours and temperature checks.

All manufacturing and distribution facilities are now open, but remain subject to future closure if deemed necessary for the safety of our employees or to comply with future government mandates.

Business Outlook Considering Potential COVID-19 Impacts

The outbreak of COVID-19 in early 2020 became a global pandemic with the resultant economic impacts evolving into a worldwide recession.

The pandemic triggered a significant downturn in our markets globally, which negatively impacted our sales and results of operations during 2020.

While the majority of the negative impacts to demand largely subsided in 2021, we are still experiencing supply chain disruptions and related financial impacts reflected as increased cost of sales.

Our industry continues to be unfavorably impacted by supply chain constraints leading to shortages across multiple components categories and limiting our collective ability to meet end-user demand.

Our customers are also experiencing other supply chain issues and slowing production.

Business Outlook

Our outlook reflects the following positive trends and challenges to our business that could impact our revenue and earnings potential in 2022.

Specific impacts of the COVID-19 pandemic are highlighted in the above section but are reflected in our market outlook.

Positive Trends

• We expect demand for pick-up trucks in North America to remain strong and in line with the second half of 2020.

• North American medium-duty and heavy-duty truck demand improved in the fourth quarter and could continue to strengthen above second half of 2020 levels.

• Market demand for trucks in India is expected to improve from 2020 levels.

• We anticipate our aftermarket business will strengthen from second half of 2020 levels, driven primarily by increased truck utilization in North America.

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

• We estimate North American medium-duty and heavy-duty truck demand will continue to improve.

• We believe market demand for trucks in India will continue the improvement trend from the second half of 2021.

• We anticipate our aftermarket business will continue to improve, driven primarily by increased truck utilization in North America.

• Our liquidity of $6.4 billion in cash, marketable securities and available credit facilities puts us in a strong position to deal with any uncertainties that may arise in 2022.

• Market demand in truck and construction markets in China is expected to decline from record levels in 2020.

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

• Uncertainty in the U.K.

surrounding its ability to negotiate trade agreements as a sovereign country could have material negative impacts on our European operations in the long-term.

• Supply constraints driven by strong demand in multiple end markets and regions may lead to increased costs, including higher freight and conversion costs.

• Continued increases in material and commodity costs could negatively impact earnings.

• Our industry's sales continue to be unfavorably impacted by supply chain constraints leading to shortages across multiple components categories and limiting our collective ability to meet end-user demand.

Our customers are also experiencing other supply chain issues slowing production.

• We expect market demand in truck and construction markets in China to decline from 2021 full year levels.

Separation of Filtration Business

On August 3, 2021, we announced our exploration of strategic alternatives for our filtration business.

Potential strategic alternatives to be explored include the separation of our filtration business into a stand-alone company.

The execution of this exploration process is dependent upon business and market conditions, along with a number of other factors and considerations.

LIQUIDITY AND CAPITAL RESOURCES

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Net cash used in investing activities (873) (719) (1,150) (154) 431

Net cash provided by (used in) financing activities 280 (2,095) (1,400) 2,375 (695)

Net cash (used in) provided by financing activities (2,227) 280 (2,095) (2,507) 2,375

Effect of exchange rate changes on cash and cash equivalents 35 (11) (110) 46 99

Net increase (decrease) in cash and cash equivalents $ 2,272 $ (174) $ (66) $ 2,446 $ (108)

Net cash provided by operating activities decreased $459 million, primarily due to lower consolidated net income of $457 million, higher restructuring payments of $106 million, increased equity in income of investees, net of dividends of $91 million and lower other liabilities of $51 million, partially offset by lower working capital requirements of $396 million.

During 2020, lower working capital requirements resulted in a cash inflow of $365 million compared to a cash outflow of $31 million in 2019, mainly due to higher accounts payable and accrued expenses, partially offset by a decrease in inventory and higher accounts and notes receivable.

Net cash used in investing activities decreased $431 million, primarily due to the prior year acquisition of Hydrogenics for $235 million, lower capital expenditures of $172 million and higher cash flows from derivatives not designated as hedges of $48 million, partially offset by higher investments in and advances to equity investees of $31 million.

Net cash provided by financing activities increased $2,375 million, principally due to the issuance of $2 billion of long-term debt and lower repurchases of common stock of $630 million, partially offset by higher net payments of commercial paper of $217 million.

The effect of exchange rate changes on cash and cash equivalents decreased $99 million, primarily due to favorable fluctuations in the British pound of $73 million.

Net (decrease) increase in cash and cash equivalents $ (809) $ 2,272 $ (174) $ (3,081) $ 2,446

Net cash provided by operating activities decreased $466 million, primarily due to higher working capital requirements of $724 million and a net decrease in changes in other liabilities of $195 million, partially offset by higher consolidated net income of $353 million and lower restructuring payments of $109 million.

During 2021, higher working capital requirements resulted in a cash outflow of $359 million compared to a cash inflow of $365 million in 2020, mainly due to higher inventories, partially offset by higher accrued expenses.

Net cash used in investing activities increased $154 million, principally due to higher capital expenditures of $206 million, partially offset by favorable changes in cash flows from derivatives not designated as hedges of $45 million and increased proceeds from sale of land of $20 million.

Net cash used in financing activities increased $2,507 million, primarily due to lower proceeds from borrowings of $1,935 million, mainly resulting from our $2 billion bond issuance in 2020, and higher repurchases of common stock of $761 million, partially offset by lower net payments of commercial paper of $327 million.

The effect of exchange rate changes on cash and cash equivalents increased $46 million, primarily due to favorable fluctuations in the British pound of $55 million, partially offset by unfavorable fluctuations in the South Korean won, Chinese renminbi and Australian dollar.

For prior year liquidity comparisons see the Liquidity and Capital Resources section of our 2020 Form 10-K .

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International Primary location of international balances

Cash and cash equivalents $ 3,401 $ 1,914 $ 1,487 China, Singapore, Mexico, Belgium, Australia, Canada

Cash and cash equivalents $ 2,592 $ 509 $ 2,083 China, Singapore, Netherlands, Belgium, Australia, Mexico, Canada

Marketable securities (1)

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If we distribute our foreign cash balances to the U.S.

or to other foreign subsidiaries, we could be required to accrue and pay withholding taxes, for example, if we repatriated cash from certain foreign subsidiaries whose earnings we have asserted are permanently reinvested outside of the U.S.

or to other foreign subsidiaries, we could be required to accrue and pay withholding taxes, for example, if we repatriated cash from certain foreign subsidiaries whose earnings we asserted are completely or partially permanently reinvested.

Foreign earnings for which we assert permanent reinvestment outside the U.S.

consist primarily of earnings of our China, India and Netherlands domiciled subsidiaries.

At present, we do not foresee a need to repatriate any earnings from these subsidiaries for which we have asserted permanent reinvestment.

At present, we do not foresee a need to repatriate any earnings for which we asserted permanent reinvestment.

However, to help fund cash needs of the U.S.

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Debt Facilities and Other Sources of Liquidity

On April 14, 2020, we were approved for the Federal Reserve Bank of New York’s Commercial Paper Funding Facility (CPFF) program to assure access to the commercial paper funding markets during volatile credit market conditions.

The CPFF was intended to provide a liquidity backstop to U.S.

issuers of commercial paper through a special purpose vehicle (SPV).

The facility allows us, based on our current short-term credit rating, to issue three-month unsecured commercial paper at a rate equal to a + 110 basis point spread over the three-month overnight index swap rate on the date of issuance.

The maximum amount of commercial paper that we may issue at any time through this program is $1.5 billion less the total principal amount of all other outstanding commercial paper that we have issued.

We retain full access to our Board authorized $3.5 billion commercial paper program, as reduced by any amounts issued under this facility.

The SPV is currently scheduled to cease purchasing commercial paper on March 17, 2021.

At December 31, 2020, there were no outstanding borrowings under the CPFF program.

We will amortize the $24 million gain realized upon settlement over the remaining three-year term of the related debt.

On August 19, 2020, we entered into an amended and restated 364-day credit agreement that allows us to borrow up to $1.5 billion of unsecured funds at any time prior to August 18, 2021.

On August 18, 2021, we entered into an amended and restated five-year revolving credit agreement, which allows us to borrow up to $2 billion of unsecured funds at any time prior to August 18, 2026.

On August 18, 2021, we also entered into an amended and restated 364-day credit agreement, which allows us to borrow up to $1.5 billion of unsecured funds at any time prior to August 17, 2022.

This credit agreement amended and restated the prior $1.5 billion 364-day credit facility that matured on August 18, 2021.

We received net proceeds of $1.98 billion.

We have access to committed credit facilities that total $3.5 billion, including the new $1.5 billion 364-day facility that expires August 18, 2021 and our $2.0 billion five-year facility that expires on August 22, 2023.

We maintain credit facilities at the current or higher aggregate amounts by renewing or replacing these facilities at or before expiration.

See Note 12, "DEBT," to our Consolidated Financial Statements for additional information.

We have access to committed credit facilities that total $3.5 billion, including the $1.5 billion 364-day facility that expires August 17, 2022 and our $2.0 billion five-year facility that expires on August 18, 2026.

We intend to maintain credit facilities at the current or higher aggregate amounts by renewing or replacing these facilities at or before expiration.

These revolving credit facilities are maintained primarily to provide backup liquidity for our commercial paper borrowings and for general corporate purposes.

Both credit agreements include a financial covenant requiring that the leverage ratio of net debt of the company and its subsidiaries to the consolidated total capital of the company and its subsidiaries may not exceed 0.65 to 1.0.

Both credit agreements include various financial covenants, including, among others, maintaining a net debt to capital ratio of no more than 0.65 to 1.0.

At December 31, 2021, our leverage ratio was 0.12 to 1.0.

There were no outstanding borrowings under these facilities at December 31, 2021.

We can issue up to $3.5 billion of unsecured, short-term promissory notes (commercial paper) pursuant to the Board authorized commercial paper programs.

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We intend to use the net proceeds from the commercial paper borrowings for general corporate purposes.

At December 31, 2020, we had $323 million of commercial paper outstanding, which effectively reduced the available capacity under our revolving credit facilities to $3.2 billion.

The total combined borrowing capacity under the revolving credit facilities and commercial paper programs should not exceed $3.5 billion.

See Note 12, "DEBT," to our Consolidated Financial Statements for additional information.

At December 31, 2021, we had $313 million of commercial paper outstanding, which effectively reduced the available capacity under our revolving credit facilities to $3.2 billion.

In the second half of 2021, we entered into a series of interest rate swaps to effectively convert our $500 million senior notes, due in 2025, from a fixed rate of 0.75 percent to a floating rate equal to the three-month LIBOR plus a spread.

We also entered into a series of interest rate swaps to effectively convert $765 million of our $850 million senior notes, due in 2030, from a fixed rate of 1.50 percent to a floating rate equal to the three-month LIBOR plus a spread.

The swaps were designated, and will be accounted for, as fair value hedges.

As a well-known seasoned issuer, we filed an automatic shelf registration for an undetermined amount of debt and equity securities with the SEC on February 13, 2019.

Under this shelf registration we may offer, from time to time, debt securities, common stock, preferred and preference stock, depositary shares, warrants, stock purchase contracts and stock purchase units.

We plan to file a new shelf registration statement in the first quarter of 2022, prior to the expiration of the shelf registration statement currently in effect.

In July 2017, the U.K.'s Financial Conduct Authority, which regulates the London Interbank Offered Rate (LIBOR), announced it intends to phase out LIBOR by the end of 2021.

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Various central bank committees and working groups continue to discuss replacement of benchmark rates, the process for amending existing LIBOR-based contracts and the potential economic impacts of different alternatives.

The Alternative Reference Rates Committee has identified the Secured Overnight Financing Rate (SOFR) as its preferred alternative rate for USD LIBOR.

The Alternative Reference Rates Committee has identified the Secured Overnight Financing Rate (SOFR) as its preferred alternative rate for U.S.

dollar LIBOR.

SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S.

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Treasury-backed repurchase transactions.

We are evaluating the potential impact of the replacement of the LIBOR benchmark interest rate including risk management, internal operational readiness and monitoring the Financial Accounting Standards Board standard-setting process to address financial reporting issues that might arise in connection with transition from LIBOR to a new benchmark rate.

While we do not believe the change will impact us significantly, we continue to evaluate contracts throughout the company.

In anticipation of LIBOR's phase out, our revolving credit agreements include a transition mechanism for selecting a benchmark replacement rate for LIBOR, with such benchmark replacement rate to be subject to our agreement.

We have evaluated the potential impact of the replacement of the LIBOR benchmark interest rate including risk management, internal operational readiness and monitoring the Financial Accounting Standards Board standard-setting process to address financial reporting issues that might arise in connection with transition from LIBOR to a new benchmark rate.

While we do not believe the change will materially impact us due to our operational and system readiness coupled with relevant contractual fallback language, we continue to evaluate all eventual transition risks.

In anticipation of LIBOR's phase out, our most recent revolving credit agreements include a well-documented transition mechanism for selecting a benchmark replacement rate for LIBOR, subject to our agreement.

Additionally, with respect to our $1.3 billion in LIBOR-based fixed to variable rate swaps maturing in 2025 and 2030, we reviewed and believe our adherence to the 2020 LIBOR fallback protocol will allow for a smooth transition to the designated replacement rate when that transition occurs.

Supply Chain Financing

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We then pay the financial intermediary the face amount of the invoice on the regularly scheduled due date.

The maximum amount that we may have outstanding under the program is $361 million.

We do not reimburse vendors for any costs they incur for participation in the program and their participation is completely voluntary.

As a result, all amounts owed to the financial intermediaries are presented as "Accounts payable" in our Consolidated Balance Sheets .

Amounts due to the financial intermediaries reflected in accounts payable at December 31, 2021, were $147 million.

Stock Repurchases

In December 2021, the Board authorized the acquisition of up to $2.0 billion of additional common stock upon completion of the 2019 repurchase plan.

In October 2018, the Board authorized the acquisition of up to $2.0 billion of additional common stock.

For the year ended December 31, 2020, we made the following purchases under our stock repurchase programs:

In millions, except per share amounts Shares

In December 2019, the Board authorized the acquisition of up to $2.0 billion of additional common stock upon completion of the 2018 repurchase plan.

For the year ended December 31, 2021, we made the following purchases under our stock repurchase program:

In millions (except per share amounts)

For each quarter ended Shares

Purchased Average Cost

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Repurchases Remaining

October 2018, $2 billion repurchase program

March 29 3.5 $ 156.92 $ 550 $ 85

June 28 — — — 85

September 27 — — — 85

December 31 0.4 219.15 85 —

Subtotal 3.9 163.11 635 —

December 2019, $2 billion repurchase program

April 4 1.7 $ 247.35 $ 418 $ 1,576

July 4 2.7 252.66 672 904

October 3 0.6 231.57 138 766

December 31 0.7 222.14 174 2,592

218.97 6 1,994

Total 5.7 244.73 $ 1,402

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

(2) The shares purchased under the 2019 repurchase program rounded to zero.

We temporarily suspended share repurchases after the purchases made in the first quarter of 2020 to conserve cash, but resumed repurchasing shares in the fourth quarter of 2020.

We may repurchase outstanding shares from time to time during 2021 to enhance shareholder value and to offset the dilutive impact of employee stock-based compensation plans.

(1) The remaining $592 million authorized capacity under the 2019 plan was calculated based on the cost to purchase the shares, but excludes commission expenses in accordance with the authorized plan.

We intend to repurchase outstanding shares from time to time during 2022 to enhance shareholder value.

Total dividends paid to common shareholders in 2021, 2020 and 2019 were $809 million, $782 million and $761 million, respectively.

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We expect to fund dividend payments with cash from operations.

In October 2020, the Board authorized an increase to our quarterly dividend of 3 percent from $1.311 per share to $1.35 per share.

In July 2021, the Board authorized an increase to our quarterly dividend of 7.4 percent from $1.35 per share to $1.45 per share.

Cash dividends per share paid to common shareholders and the Board authorized increases for the last three years were as follows:

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In addition, we plan to spend an estimated $70 million to $80 million on internal use software in 2022.

Current Maturities of Short and Long-Term Debt

We had $313 million of commercial paper outstanding at December 31, 2021, that matures in less than one year.

The maturity schedule of our existing long-term debt does not require significant cash outflows until 2023 when our 3.65 percent senior notes and 2025 when our 0.75 percent senior notes are due.

Required annual long-term debt principal payments range from $24 million to $536 million over the next five years.

See Note 12, "DEBT," to the Consolidated Financial Statements for additional information.

Our global pension plans, including our unfunded and non-qualified plans, were 121 percent funded at December 31, 2021.

defined benefit plan, which represents approximately 52 percent of the worldwide pension obligation, was 128 percent funded, and our U.K.

defined benefit plan was 114 percent funded.

defined benefit plan, which represented approximately 52 percent of the worldwide pension obligation, was 138 percent funded, and our U.K.

defined benefit plan was 127 percent funded at December 31, 2021.

The funded status of our pension plans is dependent upon a variety of variables and assumptions including return on invested assets, market interest rates and levels of voluntary contributions to the plans.

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Expected contributions to our defined benefit pension plans in 2022 will meet or exceed the current funding requirements.

Current Maturities of Short and Long-Term Debt

We had $323 million of commercial paper outstanding at December 31, 2020, that matures in less than one year.

The maturity schedule of our existing long-term debt does not require significant cash outflows until 2023 when our 3.65% senior notes are due.

Required annual long-term debt principal payments range from $23 million to $526 million over the next five years.

See Note 11, "DEBT," to the Consolidated Financial Statements for additional information.

Restructuring Actions

In the fourth quarter of 2019, we began executing restructuring actions, primarily in the form of voluntary and involuntary employee separation programs.

We incurred a charge of $119 million ($90 million after-tax) in the fourth quarter of 2019 for these actions which impacted approximately 2,300 employees.

Restructuring payments were substantially complete at September 27, 2020.

See Note 21, "RESTRUCTURING ACTIONS," to the Consolidated Financial Statements, for additional information .

Credit Ratings

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

Long-Term Short-Term

Credit Rating Agency (1)

Senior Debt Rating Debt Rating Outlook

Standard & Poor’s Rating Services A+ A1 Stable

Moody’s Investors Service, Inc.

(1) Credit ratings are not recommendations to buy, are subject to change, and each rating should be evaluated independently of any other rating.

In addition, we undertake no obligation to update disclosures concerning our credit ratings, whether as a result of new information, future events or otherwise.

Management's Assessment of Liquidity

Despite the global recession and volatility in the capital markets due to the pandemic, our financial condition and liquidity remain strong.

Our solid balance sheet and credit ratings enable us to have ready access to credit and the capital markets.

We assess our liquidity in terms of our ability to generate adequate cash to fund our operating, investing and financing activities.

We believe our existing cash and marketable securities, operating cash flow and revolving credit facilities provide us with the financial flexibility needed to fund working capital, common stock repurchases, acquisitions, targeted capital expenditures, dividend payments, projected pension obligations and debt service obligations through 2021 and beyond.

We continue to generate significant cash from operations and maintain access to our expanded revolving credit facilities and commercial paper programs as noted above.

CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS

Future Uses of Cash

A summary of our contractual obligations and other commercial commitments at December 31, 2021, are as follows:

Contractual Cash Obligations Payments Due by Period

In millions 2021 2022-2023 2024-2025 After 2025 Total

In millions Current Long-Term

Long-term debt and finance lease obligations (1)

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See Note 4, "INCOME TAXES," to the Consolidated Financial Statements for additional information.

Credit Ratings

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

Long-Term Short-Term

Credit Rating Agency (1)

Senior Debt Rating Debt Rating Outlook

Standard & Poor’s Rating Services A+ A1 Stable

Moody’s Investors Service, Inc.

(1) Credit ratings are not recommendations to buy, are subject to change, and each rating should be evaluated independently of any other rating.

In addition, we undertake no obligation to update disclosures concerning our credit ratings, whether as a result of new information, future events or otherwise.

Management's Assessment of Liquidity

Our financial condition and liquidity remain strong.

Our solid balance sheet and credit ratings enable us to have ready access to credit and the capital markets.

We assess our liquidity in terms of our ability to generate adequate cash to fund our operating, investing and financing activities.

We believe our existing cash and marketable securities, operating cash flow and revolving credit facilities provide us with the financial flexibility needed to fund common stock repurchases, dividend payments, targeted capital expenditures, projected pension obligations, acquisitions, working capital and debt service obligations through 2022 and beyond.

We continue to generate significant cash from operations and maintain access to our revolving credit facilities and commercial paper programs as noted above.

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

A summary of our significant accounting policies is included in Note 1, "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES," of our Consolidated Financial Statements which discusses accounting policies that we have selected from acceptable alternatives.

Our Consolidated Financial Statements are prepared in accordance with generally accepted accounting principles in the U.S.

which often requires management to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts presented and disclosed in the financial statements.

Management reviews these estimates and assumptions based on historical experience, changes in business conditions, including the impacts of COVID-19, and other relevant factors they believe to be reasonable under the circumstances.

Management reviews these estimates and assumptions based on historical experience, changes in business conditions and other relevant factors they believe to be reasonable under the circumstances.

In any given reporting period, our actual results may differ from the estimates and assumptions used in preparing our Consolidated Financial Statements.

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We generally record warranty expense for new products upon shipment using a preceding product's warranty history and a multiplicative factor based upon preceding similar product experience and new product assessment until sufficient new product data is available for warranty estimation.

We then use a blend of actual new product experience and preceding product historical experience for several subsequent

quarters, and new product specific experience thereafter.

We then use a blend of actual new product experience and preceding product historical experience for several subsequent quarters and new product specific experience thereafter.

Note 13, "PRODUCT WARRANTY LIABILITY," to our Consolidated Financial Statements contains a summary of the activity in our warranty liability account for 2021, 2020 and 2019 including adjustments to pre-existing warranties.

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We have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value as a basis for determining whether it is necessary to perform an annual quantitative goodwill impairment test.

We have elected this option on certain reporting units.

We elected this option on certain reporting units.

The following events and circumstances are considered when evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount:

• Macroeconomic conditions, such as a deterioration in general economic conditions, including COVID-19 impacts, fluctuations in foreign exchange rates and/or other developments in equity and credit markets;

• Macroeconomic conditions, such as a deterioration in general economic conditions, fluctuations in foreign exchange rates and/or other developments in equity and credit markets;

• Industry and market considerations, such as a deterioration in the environment in which an entity operates, material loss in market share and significant declines in product pricing;

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We perform the required procedures as of the end of our fiscal third quarter.

While none of our reporting units recorded a goodwill impairment in 2020, we determined the automated transmission business is our only reporting unit with material goodwill where the estimated fair value does not substantially exceed the carrying value.

The estimated fair value of the reporting unit exceeds its carrying amount of $1.1 billion by approximately 18 percent.

Total goodwill in this reporting unit is $544 million.

Since this reporting unit is made up of only one business, our joint venture with Eaton Corporation plc (Eaton Cummins Automated Transmission Technologies), acquired in 2017, we did not expect the estimated fair value would exceed the carrying value by a significant amount.

We valued this reporting unit primarily using an income approach based on its expected future cash flows.

The critical assumptions that factored into the valuation are the projected future revenues and EBITDA margins of the business as well as the discount rate used to present value these future cash flows.

A 100 basis point increase in the discount rate would result in a 16 percent decline in the fair value of the reporting unit.

Accounting for Income Taxes

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We sponsor a number of pension plans globally, with the majority of assets in the U.S.

and the U.K., we have several major defined benefit plans that are separately funded.

and the U.K., we have major defined benefit plans that are separately funded.

We account for our pension programs in accordance with employers' accounting for defined benefit pension plans, which requires that amounts recognized in financial statements be determined using an actuarial basis.

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plan assets averaged annualized returns of 8.61 percent over the prior ten years and resulted in approximately $431 million of actuarial gains in accumulated other comprehensive loss (AOCL) in the same period.

Based on the historical returns and forward-looking return expectations as plan assets continue to be de-risked, consistent with our investment policy, we believe continuing our investment return assumption of 6.25 percent per year in 2021 for U.S.

pension assets is reasonable.

Based on the historical returns and forward-looking return expectations for capital markets, as plan assets continue to be de-risked, consistent with our investment policy, we believe our investment return assumption of 6.25 percent in 2022 for U.S.

pension assets is reasonable and attainable.

The methodology used to determine the rate of return on pension plan assets in the U.K.

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Our strategy with respect to our investments in pension plan assets is to be invested with a long-term outlook.

Based on the historical returns and forward-looking return expectations as the plan assets continue to be de-risked, we believe continuing our investment return

assumption of 4.0 percent in 2021 for U.K.

pension assets is reasonable.

Our pension plan asset allocations at December 31, 2020 and 2019 and target allocation for 2021 are as follows:

Based on the historical returns and forward-looking return expectations as the plan assets continue to be de-risked, we believe that an investment return assumption of

3.75 percent in 2022 for U.K.

pension assets is reasonable and attainable.

Our target allocation for 2022 and pension plan asset allocations at December 31, 2021 and 2020 are as follows:

Target Allocation Percentage of Plan Assets at December 31, Target Allocation Percentage of Plan Assets at December 31,

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The differences between the actual return on plan assets and expected long-term return on plan assets are recognized in the asset value used to calculate net periodic cost over five years.

The table below sets forth the expected return assumptions used to develop our pension cost for the period 2018-2020 and our expected rate of return for 2021.

The table below sets forth our expected rate of return for 2022 and the expected return assumptions used to develop our pension cost for the period 2019-2021.

Long-term Expected Return Assumptions

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Under the delayed recognition alternative, the actuarial gains and losses are recognized and recorded in AOCL.

At December 31, 2020, we had net pension actuarial losses of $714 million and $250 million for the U.S.

pension plans, respectively.

As these amounts exceed 10 percent of their respective plan assets, the excess is amortized over the average remaining service lives of participating employees.

Net actuarial losses decreased our shareholders' equity by $63 million after-tax in 2020.

The loss is primarily due to lower discount rates in the U.S.

and U.K, partially offset by strong asset returns in the U.S.

As our losses related to the U.S.

pension plans exceed 10 percent of their respective plan assets, the excess is amortized over the average remaining service lives of participating employees.

Net actuarial gains increased our shareholders' equity by $280 million after-tax in 2021.

The gain is primarily due to strong asset returns and higher discount rates in the U.S.

The table below sets forth the net periodic pension cost for the years ended December 31 and our expected cost for 2022.

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Net periodic pension cost $ 33 $ 78 $ 102 $ 65

We expect 2021 net periodic pension cost to decrease compared to 2020, primarily due to favorable actuarial experience and investment returns, partially offset by lower discount rates in the U.S.

The increase in net periodic pension cost in 2020 compared to 2019 was primarily due to lower discount rates in the U.S.

The decrease in net periodic pension cost in 2019 compared to 2018 was due to higher discount rates and favorable actuarial experience in the U.S.

and U.K., partially offset by a lower expected rate of return in the U.S.

We expect 2022 net periodic pension cost to decrease compared to 2021, primarily due to higher discount rates in the U.S.

and U.K., and favorable actuarial experience in the U.S., partially offset by a lower expected rate of return in the U.K.

The decrease in net periodic pension cost in 2021 compared to 2020 was primarily due to favorable actuarial experience and investment returns, partially offset by lower discount rates in the U.S.

The increase in net periodic pension cost in 2020 compared to 2019 was due to lower discount rates in the U.S.

The weighted-average discount rates used to develop our net periodic pension cost are set forth in the table below.

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Note 10, "PENSIONS AND OTHER POSTRETIREMENT BENEFITS," to our Consolidated Financial Statements provides a summary of our pension benefit plan activity, the funded status of our plans and the amounts recognized in our Consolidated Financial Statements .

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

See Note 1, "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES", to our Consolidated Financial Statements for additional information.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis