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Item 7. Management’s Discussion and Analysis

2023-02-14 compared with 2022-02-08 · 366 added, 269 removed, 537 unchanged (54% of the section changed)

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• 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 2022 compared to fiscal year 2021.

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EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS

We are a global power leader that designs, manufactures, distributes and services diesel, natural gas, electric and hybrid powertrains and powertrain-related components including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems, automated transmissions, electric power generation systems, batteries, electrified power systems, hydrogen production and fuel cell products.

We are a global power leader that designs, manufactures, distributes and services diesel, natural gas, electric and hybrid powertrains and powertrain-related components including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems, automated transmissions, axles, drivelines, brakes, suspension systems, electric power generation systems, batteries, electrified power systems, electric powertrains, hydrogen production and fuel cell products.

We sell our products to original equipment manufacturers (OEMs), distributors, dealers and other customers worldwide.

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

We serve our customers through a service network of approximately 460 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.

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

This reporting structure is organized according to the products and markets each segment serves.

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Our engines are used in trucks of all sizes, buses and recreational vehicles, as well as in various industrial applications, including construction, agriculture, power generation systems and other off-highway applications.

The Components segment sells filtration products, aftertreatment systems, turbochargers, electronics, fuel systems, automated transmissions, axles, drivelines, brakes and suspension systems.

The Distribution segment includes wholly-owned and partially-owned distributorships engaged in wholesaling engines, generator sets and service parts, as well as performing service and repair activities on our products and maintaining relationships with various OEMs throughout the world.

The Components segment sells filtration products, aftertreatment systems, turbochargers, electronics, fuel systems and automated transmissions.

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

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.

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

The New Power segment is currently in the early stages of commercializing these technologies with efforts primarily focused on the development of our electrolyzers for hydrogen production and electrified power systems and related 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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Economic downturns in markets we serve generally result in reduced sales of our products and can result in price reductions in certain products and/or markets.

As a worldwide business, our operations are also affected by currency, political, economic, public health crises, epidemics or pandemics and regulatory matters, including adoption and enforcement of environmental and emission standards, in the countries we serve.

As part of our growth strategy, we invest in businesses in certain countries that carry high levels of these risks such as China, Brazil, India, Mexico, Russia and countries in the Middle East and Africa.

At the same time, our geographic diversity and broad product and service offerings have helped limit the impact from a drop in demand in any one industry or customer or the economy of any single country on our consolidated results.

COVID-19 Update

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.

As a worldwide business, our operations are also affected by geopolitical risks (such as the conflict between Russia and Ukraine), currency fluctuations, political and economic uncertainty, public health crises (epidemics or pandemics) and regulatory matters, including adoption and enforcement of environmental and emission standards, in the countries we serve.

As part of our growth strategy, we invest in businesses in certain countries that carry higher levels of these risks such as China, Brazil, India, Mexico and countries in the Middle East and Africa.

At the same time, our geographic diversity and broad product and service offerings have helped limit the impact from a drop in demand in any one industry, region, the economy of any single country or customer on our consolidated results.

Meritor Acquisition

On August 3, 2022, we completed the acquisition of Meritor, Inc.

(Meritor) with a purchase price of $2.9 billion (including debt repaid concurrent with the acquisition).

Our consolidated results and segment results include Meritor's activity since the date of acquisition.

Meritor was split into the newly formed axles and brakes business and electric powertrain.

The results for the axles and brakes business are included in our Components segment while the electric powertrain portion is included in our New Power segment.

See NOTE 2, "ACQUISITIONS," to the Consolidated Financial Statements for additional information.

Supply Chain Disruptions

We continue to experience supply chain disruptions, increased price levels and related financial impacts reflected as increased cost of sales and inventory holdings.

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

Our customers are also experiencing supply chain issues.

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.

The 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.

Russian Operations

On March 17, 2022, the Board indefinitely suspended our operations in Russia due to the ongoing conflict in Ukraine, which resulted in reduced sales in Russia and charges of $111 million in 2022.

See NOTE 23, "RUSSIAN OPERATIONS," to our Consolidated Financial Statements for additional information.

A summary of our results is as follows:

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Diluted 15.12 14.61 12.01

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) 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).

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 limiting full production capabilities.

Worldwide revenues improved 17 percent in 2022 compared to 2021, due to Meritor sales of $1.9 billion since the date of acquisition, favorable pricing and higher demand in all operating segments and most geographic regions except for China and Russia.

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.

and Canada improved by 24 percent primarily due to favorable pricing and increased demand in North American heavy-duty and medium-duty on-highway markets, which positively impacted all Components businesses and all Distribution product lines, as well as incremental sales of axles and brakes in North America since the acquisition of Meritor.

International demand (excludes the U.S.

and Canada) improved by 8 percent compared to 2021, with lower sales in China (due to a sharp slowdown in construction and truck markets, exacerbated by COVID lockdowns) and Russia (resulting from the indefinite suspension of our Russian operations)

more than offset by higher sales in most other geographic regions.

The increase in international sales was principally due to incremental sales of axles and brakes in Latin America and Western Europe since the acquisition of Meritor, favorable pricing and higher demand for power generation and generator technologies equipment and all distribution product lines.

Unfavorable foreign currency fluctuations impacted international sales by 5 percent (mainly the Euro, Chinese renminbi, British pound and Indian rupee).

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, 2022 and 2021.

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Engine $ 10,945 39 % $ 1,541 $ 9,954 42 % $ 1,411 10 % 9 %

Distribution 7,772 32 % 731 7,136 36 % 665 9 % 10 %

Components 9,736 34 % 1,346 7,665 32 % 1,180 27 % 14 %

Distribution 8,929 32 % 888 7,772 32 % 731 15 % 21 %

Power Systems 5,033 18 % 596 4,415 18 % 496 14 % 20 %

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Total $ 28,074 100 % $ 3,799 (1)

$ 24,021 100 % $ 3,521 17 % 8 %

"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.

(1) EBITDA includes $111 million of costs associated with the suspension of our Russian operations, $83 million of costs related to the acquisition and integration of Meritor and $81 million of costs associated with the planned separation of our filtration business.

Net income attributable to Cummins Inc.

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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.

and earnings per diluted share were driven by higher net sales and increased gross margin, partially offset by higher selling, general and administrative expenses (including Meritor acquisition and integration costs and costs associated with the planned separation of our filtration business), increased research, development and engineering expenses, lower equity, royalty and interest income from investees (primarily in China), costs associated with the suspension of our Russian operations, losses in corporate owned life insurance, increased interest expense related to new borrowings and higher intangible asset amortization resulting from our acquisitions.

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

Diluted earnings per common share for 2022 benefited $0.15 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, 2022, was 44.1 percent, compared to 31.5 percent at December 31, 2021.

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 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.

The increase was primarily due to higher debt balances since December 31, 2021, resulting from funding the acquisition of Meritor.

At December 31, 2022, we had $2.6 billion in cash and marketable securities on hand and access to our $4.0 billion credit facilities, net of commercial paper outstanding, to meet acquisition, working capital, investment and funding needs.

In 2022, we repurchased $374 million or 1.9 million shares of common stock.

See NOTE 17, "CUMMINS INC.

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

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 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.

pension trust was 8.1 percent while our U.K.

pension trust gain was 5.1 percent.

On November 30, 2022, we completed the acquisition of Siemens' Commercial Vehicles Propulsion business (Siemens CVP) for approximately $187 million.

See NOTE 2, "ACQUISITIONS," to our Consolidated Financial Statements for additional information.

On September 30, 2022, certain of our subsidiaries entered into a $1.0 billion credit agreement, consisting of a $400 million revolving credit facility and a $600 million term loan facility, in anticipation of the separation of our filtration business.

See NOTE 13, "DEBT," to our Consolidated Financial Statements for additional information.

On August 17, 2022, we entered into an amended and restated 364-day credit agreement and an incremental 364-day credit agreement, which allow us to borrow up to $1.5 billion and $500 million, respectively, of unsecured funds at any time prior to August 16, 2023.

On August 3, 2022, we completed the acquisition of Meritor with a purchase price of $2.9 billion (including debt that was retired on the closing date).

See NOTE 2, "ACQUISITIONS," to our Consolidated Financial Statements for additional information.

On July 13, 2022, we entered into a loan agreement under which we may obtain delayed-draw loans in an amount up to $2.0 billion in the aggregate prior to October 13, 2022.

We drew down the entire $2.0 billion balance on August 2, 2022, to fund the acquisition of Meritor.

In July 2022, the Board authorized an increase to our quarterly dividend of approximately 8 percent from $1.45 per share to $1.57 per share.

On April 20, 2022, we filed a confidential registration statement announcing our intent to separate the filtration business into a stand-alone company.

On April 8, 2022, we completed the acquisition of Jacobs Vehicle Systems business (Jacobs) from Altra Industrial Motion Corp.

with a purchase price of $345 million.

See NOTE 2, "ACQUISITIONS," to our Consolidated Financial Statements for additional information.

As a well-known seasoned issuer, we filed an automatic shelf registration of an undetermined amount of debt and equity with the SEC on February 8, 2022.

On February 7, 2022, we purchased Westport Fuel System Inc.'s stake in Cummins Westport, Inc.

(Westport JV) with a purchase price of $42 million.

See NOTE 2, "ACQUISITIONS," to our Consolidated Financial Statements for additional information.

In 2022, the investment loss on our U.S.

pension trusts was 5.7 percent while our U.K.

pension trusts' loss was 41.3 percent.

Our global pension plans, including our unfunded and non-qualified plans, were 120 percent funded at December 31, 2022.

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.

defined benefit plans (qualified and non-qualified), which represented approximately 69 percent of the worldwide pension obligation, were 121 percent funded, and our U.K.

defined benefit plans were 119 percent funded at December 31, 2022.

We expect to contribute approximately $106 million in cash to our global pension plans in 2023.

In addition, we expect our 2022 net periodic pension cost to approximate $33 million.

In addition, we expect our 2023 net periodic pension income to approximate $2 million.

See application of critical accounting estimates within MD&A and NOTE 11, "PENSIONS AND OTHER POSTRETIREMENT BENEFITS," to the Consolidated Financial Statements , for additional information concerning our pension and other postretirement benefit plans.

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Equity, royalty and interest income from investees 349 506 452 (157) (31) % 54 12 %

Restructuring actions — — 119 — — % 119 100 %

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

Other operating expense, net 174 31 46 (143) NM 15 33 %

OPERATING INCOME 2,929 2,706 2,269 223 8 % 437 19 %

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CONSOLIDATED NET INCOME 2,183 2,164 1,811 19 1 % 353 19 %

Net income attributable to noncontrolling interests 33 22 8 (11) (50) % (14) NM

Net income attributable to noncontrolling interests 32 33 22 1 3 % (11) (50) %

NET INCOME ATTRIBUTABLE TO CUMMINS INC .

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

Net sales increased $4.1 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.

• Components segment sales increased 27 percent largely due to axles and brakes sales since the completion of the Meritor acquisition.

• Distribution segment sales increased 15 percent mainly due to higher demand across all product lines in North America.

• Engine segment sales increased 10 percent principally due to favorable pricing and stronger medium-duty and heavy-duty on-highway demand (including higher aftermarket sales) in North America.

• Power Systems segment sales increased 14 percent primarily due to favorable pricing and higher demand in power generation markets in Latin America, North America and India and stronger demand in industrial markets with higher aftermarket sales and increased oil and gas demand in North America and China.

• New Power segment sales increased 71 percent principally due to higher electrified components sales, traction sales since the completion of the Meritor and Siemens CVP acquisitions and improved sales of fuel cells and electrolyzers.

These increases were partially offset by unfavorable foreign currency fluctuations of 2 percent of total sales, primarily in the Euro, Chinese renminbi, British pound and Indian rupee.

Sales to international markets (excluding the U.S.

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production and warehousing facility property insurance;

rent for production facilities and other production overhead.

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.

rent for production facilities;

charges for the write-downs of inventories in Russia and other production overhead.

Gross margin increased $1.0 billion and increased 0.2 points as a percentage of sales.

The provision for base warranties issued as a percentage of sales, was 1.8 percent in 2022 and 2.1 percent in 2021.

Selling, General and Administrative Expenses

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

Selling, general and administrative expenses increased $313 million, primarily due to higher consulting expenses driven by acquisitions, integration and the work towards the separation of the filtration business, higher compensation costs and increased travel expenses, partially offset by lower variable compensation expenses.

Overall, selling, general and administrative expenses, as a percentage of sales, decreased to 9.6 percent in 2022 from 9.9 percent in 2021.

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.

The decrease in selling, general and administrative expenses as a percentage of sales was due mainly 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 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.

Research, development and engineering expenses increased $188 million, principally due to higher compensation costs, increased spending on prototypes, testing and supplies and higher consulting expenses, partially offset by lower variable compensation expenses.

Overall, research, development and engineering expenses, as a percentage of sales, increased to 4.6 percent in 2022 from 4.5 percent in 2021.

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 battery electric, fuel cell electric and hydrogen engine solutions.

Equity, Royalty and Interest Income From Investees

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.

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.

Equity, royalty and interest income from investees decreased $157 million, mainly due to lower earnings at Beijing Foton Cummins Engine Co., Ltd.

and Dongfeng Cummins Engine Co., Ltd., the $28 million impairment of our investment in our Russian joint venture with KAMAZ and the February 7, 2022, purchase of Westport Fuel System Inc.'s stake in Westport JV.

See NOTE 2, "ACQUISITIONS," and NOTE 23, "RUSSIAN OPERATIONS," to our Consolidated Financial Statements for additional information.

Other Operating Expense, Net

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Amortization of intangible assets $ (70) $ (22)

Russian suspension costs (63) (1)

Asset impairments and other charges (36) —

Loss on write-off of assets (7) (12)

Loss on sale of assets, net (2) (10)

Gain (loss) on sale of assets, net 1 (2)

Royalty income, net 7 9

Other, net (6) (4)

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

Other operating expense, net $ (174) $ (31)

(1) See NOTE 23, "RUSSIAN OPERATIONS," to our Consolidated Financial Statements for additional information.

Interest Expense

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.

Interest expense increased $88 million, primarily due to the overall increase in floating interest rates, new term loan borrowings and higher short-term borrowings, including commercial paper.

Other Income, Net

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In millions 2022 2021

Non-service pension and OPEB credit $ 96 $ 65

Non-service pension and OPEB income $ 140 $ 96

Interest income 49 25

Gain on sale of land 18 —

Gain on marketable securities, net 6 9

Foreign currency gain, net 2 4

Gain on corporate owned life insurance — 57

(Loss) gain on marketable securities, net (7) 6

Foreign currency (loss) gain, net (8) 2

Loss on corporate owned life insurance (102) —

Other, net 17 27

Total other income, net $ 156 $ 169

Other income, net $ 89 $ 156

(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 2022 was 22.6 percent compared to 21.3 percent for 2021.

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 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.

The year ended December 31, 2022, contained discrete tax items that netted to zero, primarily due to $31 million of favorable changes in accrued withholding taxes, $29 million of favorable changes in tax reserves, $15 million of favorable valuation allowance adjustments and $9 million of favorable other net discrete items, offset by $69 million of unfavorable tax costs associated with internal restructuring ahead of the planned separation of our filtration business and $15 million of unfavorable return to provision adjustments related to the 2021 filed tax returns.

The year ended December 31, 2021, contained $9 million of unfavorable net discrete tax items, 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 change in effective tax rate for the year ended December 31, 2022, versus year ended December 31, 2021, was primarily due to the jurisdictional mix of pre-tax income.

Our effective tax rate for 2023 is expected to approximate 22.0 percent, excluding any discrete tax items that may arise.

On August 16, 2022, the U.S.

federal government enacted the Inflation Reduction Act of 2022 into law effective beginning in 2023.

The bill includes numerous tax provisions, including a 15 percent corporate minimum tax as well as a one percent excise tax on share repurchases.

We do not currently expect the legislation will have a material effect on our results of operations or liquidity.

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 $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.

Net Income Attributable to Cummins Inc.

and Diluted Earnings Per Common Share Attributable to Cummins Inc.

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

decreased $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.

Noncontrolling interests in income of consolidated subsidiaries decreased $1 million principally due to lower earnings at Hydrogenics Corporation, partially offset by higher earnings at Eaton Cummins Joint Venture.

For prior year results of operations comparisons to 2020 see the Results of Operations section of our 202 1 Form 10-K .

Comprehensive Income - Foreign Currency Translation Adjustment

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 foreign currency translation adjustment was a net loss of $384 million and $9 million for the years ended December 31, 2022 and 2021, respectively.

The details were as follows:

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dollar Translation adjustment Primary currency driver vs.

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

Wholly-owned subsidiaries $ (250) Chinese renminbi and Indian rupee $ (23) Brazilian real, British pound, Indian rupee and Euro, partially offset by Chinese renminbi

Equity method investments (94) Chinese renminbi 19 Chinese renminbi, partially offset by Indian rupee

Consolidated subsidiaries with a noncontrolling interest (40) Indian rupee (5) Indian rupee

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OPERATING SEGMENT RESULTS

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

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

This reporting structure is organized according to the products and markets each segment serves.

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See NOTE 24, "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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Equity, royalty and interest income from investees 166 (1)

340 312 (174) (51) % 28 9 %

Interest income 14 8 9 6 75 % (1) (11) %

Restructuring actions — — 18 — — % 18 100 %

Russian suspension costs (2)

— — 33 NM — — %

Segment EBITDA 1,541 1,411 1,235 130 9 % 176 14 %

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Segment EBITDA as a percentage of total sales 14.1 % 14.2 % 15.4 % (0.1) (1.2)

"NM" - not meaningful information

(1) Includes a $28 million impairment of our joint venture with KAMAZ and $3 million of royalty charges as part of our costs associated with the suspension of our Russian operations.

In addition, on February 7, 2022, we purchased Westport Fuel System Inc.'s stake in the Westport JV.

See NOTE 2, "ACQUISITIONS," and NOTE 23, "RUSSIAN OPERATIONS," to our Consolidated Financial Statements for additional information.

(2) See NOTE 23, "RUSSIAN OPERATIONS," to our Consolidated Financial Statements for additional information.

(3) Includes $31 million of Russian suspension costs reflected in the equity, royalty and interest income from investees line above.

Sales for our Engine segment by market were as follows:

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Total unit shipments 631,900 664,700 529,200 (32,800) (5) % 135,500 26 %

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

Engine segment sales increased $991 million across most markets.

The following were the primary drivers by market:

• 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.

• Medium-duty truck and bus sales increased $683 million mainly due to favorable pricing and higher demand (including higher aftermarket sales), especially in North America.

• Heavy-duty truck engine sales increased $519 million principally due to favorable pricing and stronger demand (including higher aftermarket sales), especially in North America with shipments up 18 percent.

The increases were partially offset by decreased light-duty automotive demand of $174 million primarily due to our indefinite suspension of our operations in Russia and lower sales to Stellantis.

Segment EBITDA

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.

Engine segment EBITDA increased $130 million, primarily due to favorable pricing and improved mix, partially offset by higher material costs, lower equity, royalty and interest income from investees (principally decreased earnings at Beijing Foton Cummins Engine Co., Ltd.

See NOTE 2, "ACQUISITIONS," and NOTE 23, "RUSSIAN OPERATIONS," to our Consolidated Financial Statements for additional information.

Components Segment Results

Financial data for the Components segment was as follows:

Favorable/(Unfavorable)

Years ended December 31, 2022 vs.

2021 2021 vs.

In millions 2022 2021 2020 Amount Percent Amount Percent

External sales $ 7,847 $ 5,932 $ 4,650 $ 1,915 32 % $ 1,282 28 %

Intersegment sales 1,889 1,733 1,374 156 9 % 359 26 %

Total sales 9,736 7,665 6,024 2,071 27 % 1,641 27 %

Research, development and engineering expenses 309 307 264 (2) (1) % (43) (16) %

Equity, royalty and interest income from investees 71 50 61 21 42 % (11) (18) %

Interest income 12 5 4 7 NM 1 25 %

Russian suspension costs (1)

5 — — 5 NM — — %

Segment EBITDA 1,346 (2)

1,180 961 166 14 % 219 23 %

Percentage Points Percentage Points

Segment EBITDA as a percentage of total sales 13.8 % 15.4 % 16.0 % (1.6) (0.6)

"NM" - not meaningful information

(1) See NOTE 23, "RUSSIAN OPERATIONS," to our Consolidated Financial Statements for additional information.

(2) Includes $83 million of costs related to the acquisition and integration of Meritor and $28 million of costs associated with the planned separation of our filtration business.

Sales for our Components segment by business were as follows:

Favorable/(Unfavorable)

Years ended December 31, 2022 vs.

2021 2021 vs.

In millions 2022 2021 2020 Amount Percent Amount Percent

Emission solutions $ 3,494 $ 3,499 $ 2,632 $ (5) — % $ 867 33 %

Axles and brakes 1,879 — — 1,879 NM — — %

Filtration 1,557 1,438 1,232 119 8 % 206 17 %

Turbo technologies 1,421 (1)

1,351 1,098 70 5 % 253 23 %

Electronics and fuel systems 792 899 754 (107) (12) % 145 19 %

Automated transmissions 593 478 308 115 24 % 170 55 %

Total sales $ 9,736 $ 7,665 $ 6,024 $ 2,071 27 % $ 1,641 27 %

"NM" - not meaningful information

(1) Includes sales of $118 million related to the newly acquired Jacobs Vehicle Systems business.

See NOTE 2, "ACQUISITIONS," to our Consolidated Financial Statements for additional information.

Components segment sales increased $2.1 billion across most businesses.

The following were the primary drivers by business:

• Axles and brakes sales added $1.9 billion in sales since the completion of the Meritor acquisition.

• Filtration sales increased $119 million mainly due to stronger aftermarket demand in North America.

• Automated transmissions sales increased $115 million largely due to higher demand in North America.

These increases were partially offset by the following:

• Electronics and fuel systems sales decreased $107 million principally due to weaker demand in China, partially offset by higher demand in North America.

• Unfavorable foreign currency fluctuations, primarily in the Euro, Indian rupee and Chinese renminbi.

Segment EBITDA

Components segment EBITDA increased $166 million, mainly due to favorable pricing, improved mix and increased volumes (including axles and brakes since the completion of the Meritor acquisition), partially offset by higher material costs and Meritor acquisition and integration costs.

Distribution Segment Results

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Equity, royalty and interest income from investees 77 63 62 14 22 % 1 2 %

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

Restructuring actions — — 37 — — % 37 100 %

Interest income 16 7 4 9 NM 3 75 %

Russian suspension costs (1)

54 — — 54 NM — — %

Segment EBITDA 888 731 665 157 21 % 66 10 %

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Segment EBITDA as a percentage of total sales 9.9 % 9.4 % 9.3 % 0.5 0.1

"NM" - not meaningful information

(1) See NOTE 23, "RUSSIAN OPERATIONS," to our Consolidated Financial Statements for additional information.

Sales for our Distribution segment by region were as follows:

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Europe 720 650 598 70 11 % 52 9 %

Russia 335 194 159 141 73 % 35 22 %

China 355 330 346 25 8 % (16) (5) %

Commonwealth of Independent States 232 335 194 (103) (31) % 141 73 %

Africa and Middle East 228 259 200 (31) (12) % 59 30 %

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Parts $ 3,818 $ 3,145 $ 2,931 $ 673 21 % $ 214 7 %

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

Engines 1,776 1,499 1,250 277 18 % 249 20 %

Power generation 1,774 1,762 1,692 12 1 % 70 4 %

Service 1,561 1,366 1,263 195 14 % 103 8 %

Total sales $ 8,929 $ 7,772 $ 7,136 $ 1,157 15 % $ 636 9 %

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

The following were the primary drivers by region:

• 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 $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

Financial data for the Components segment was as follows:

Favorable/(Unfavorable)

Years ended December 31, 2021 vs.

2020 2020 vs.

In millions 2021 2020 2019 Amount Percent Amount Percent

External sales $ 5,932 $ 4,650 $ 5,253 $ 1,282 28 % $ (603) (11) %

Intersegment sales 1,733 1,374 1,661 359 26 % (287) (17) %

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

Research, development and engineering expenses 307 264 300 (43) (16) % 36 12 %

Equity, royalty and interest income from investees 50 61 40 (11) (18) % 21 53 %

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

Restructuring actions — — 20 — — % 20 100 %

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

Percentage Points Percentage Points

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

Sales for our Components segment by business were as follows:

Favorable/(Unfavorable)

Years ended December 31, 2021 vs.

2020 2020 vs.

In millions 2021 2020 2019 Amount Percent Amount Percent

Emission solutions $ 3,499 $ 2,632 $ 3,122 $ 867 33 % $ (490) (16) %

Filtration 1,438 1,232 1,281 206 17 % (49) (4) %

Turbo technologies 1,351 1,098 1,218 253 23 % (120) (10) %

Electronics and fuel systems 899 754 759 145 19 % (5) (1) %

Automated transmissions 478 308 534 170 55 % (226) (42) %

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

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

The following were the primary drivers by business:

• 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.

Distribution segment sales increased $1.2 billion across all product lines primarily due to $1.0 billion of increased North American sales representing 90 percent of the total change in Distribution segment sales, largely due to higher demand for parts and engines.

The increase was partially offset by unfavorable foreign currency fluctuations, mainly in the Euro, Australian dollar, Indian rupee, Japanese yen and Canadian dollar.

Segment EBITDA

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.

Distribution segment EBITDA increased $157 million, primarily due to higher volumes, partially offset by unfavorable foreign currency fluctuations (principally in emerging market currencies, South African rand, Australian dollar and Japanese yen), costs associated with the suspension of our Russian operations, increased freight costs due to supply chain constraints, higher compensation expenses and an inventory write-off.

See NOTE 23, "RUSSIAN OPERATIONS," to our Consolidated Financial Statements for additional information.

Power Systems Segment Results

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Interest income 7 5 4 2 40 % 1 25 %

Restructuring actions — — 12 — — % 12 100 %

Russian suspension costs (1)

19 — — 19 NM — — %

Segment EBITDA 596 496 343 100 20 % 153 45 %

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"NM" - not meaningful information

(1) See NOTE 23, "RUSSIAN OPERATIONS," to our Consolidated Financial Statements for additional information.

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

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The following were the primary drivers:

• 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.

• Power generation sales increased $275 million mainly due to improved pricing and higher demand in Latin America, North America and India.

• Industrial sales increased $238 million principally due to stronger aftermarket demand and improved oil and gas sales in North America and China.

• Generator technologies sales increased $105 million due to higher demand in Europe and India.

These increases were partially offset by unfavorable foreign currency fluctuations, primarily in the Euro, Indian rupee and British pound.

Segment EBITDA

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.

Power Systems segment EBITDA increased $100 million, primarily due to favorable pricing, partially offset by higher material costs, increased freight costs due to supply chain constraints and costs associated with the suspension of our Russian operations.

New Power Segment Results

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.

Financial data for the New Power segment was as follows:

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Equity, royalty and interest loss from investees (8) (3) (4) (5) NM 1 25 %

Restructuring actions — — 1 — — % 1 100 %

Segment EBITDA (340) (223) (172) (117) (52) % (51) (30) %

"NM" - not meaningful information

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

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.

New Power segment sales increased 71 percent principally due to higher electrified components sales, traction sales since the completion of the Meritor and Siemens CVP acquisitions and improved sales of fuel cells and electrolyzers.

Supply Chain Disruptions

We continue to experience supply chain disruptions, increased price levels and related financial impacts reflected as increased cost of sales and inventory holdings.

Our customers are also experiencing supply chain issues.

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.

Business Outlook

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Positive Trends

• 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.

• 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.

• We expect demand for pick-up, medium-duty and heavy-duty trucks in North America to remain strong.

• We believe market demand for trucks in India will continue to be strong.

• We expect demand within our Power Systems business to remain strong, including the power generation, mining, oil and gas and marine markets.

• We anticipate demand in our aftermarket business will continue to be robust, driven primarily by truck utilization in North America and continued strong demand in our Power Systems business.

• We expect demand for trucks in China to improve from the low demand levels in 2022 as COVID-19 restrictions are eased.

Significant outbreaks of infection among the population, could, however, hamper the level of demand improvement through the year.

• Continued increases in material and labor costs, as well as other inflationary pressures, 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.

Our customers are also experiencing other supply chain issues limiting full production capabilities.

• We expect demand in construction markets in China to decline in 2023 due to emission changes and a build-up of inventory.

• The completion of the Meritor, Inc.

acquisition in 2022 impacted our liquidity and resulted in incremental interest expense for debt utilized in funding the transaction and increased amortization of intangible assets which will negatively impact net income.

• We expect the planned separation of our filtration business, into a stand-alone company, will continue to result in incremental expenses.

• Increasing interest rates could increase borrowing costs and negatively impact net income.

LIQUIDITY AND CAPITAL RESOURCES

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Net cash used in investing activities (4,172) (873) (719) (3,299) (154)

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

Net cash provided by (used in) financing activities 1,669 (2,227) 280 3,896 (2,507)

Effect of exchange rate changes on cash and cash equivalents 50 35 (11) 15 46

Net (decrease) increase in cash and cash equivalents $ (491) $ (809) $ 2,272 $ 318 $ (3,081)

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.

Net cash provided by operating activities decreased $294 million, primarily due to higher working capital requirements of $646 million, partially offset by lower equity earnings, net of dividends of $147 million and Russian suspension costs of $111 million.

The higher working capital requirements resulted in a cash outflow of $1.0 billion compared to a cash outflow of $359 million in the comparable period in 2021, mainly due to decreased accrued expenses (as a result of lower variable compensation accruals in 2022) and higher accounts receivable due to increased sales, partially offset by a lower spend in inventories and favorable changes in accounts payable.

Net cash used in investing activities increased $3.3 billion, principally due to $3.2 billion of acquisitions, net of cash acquired for Meritor, Jacobs Vehicle Systems, Siemens CVP and Westport JV.

See NOTE 2, "ACQUISITIONS," to our Consolidated Financial Statements for additional information.

Net cash provided by financing activities increased $3.9 billion, primarily due to higher net borrowings of commercial paper of $2.3 billion, increased proceeds from borrowings of $2.0 billion (principally our $2.0 billion term loan) and lower repurchases of common stock of $1.0 billion, partially offset by higher payments on borrowings and finance lease obligations of $1.5 billion ($0.9 billion of which relates to debt assumed in the Meritor acquisition that was retired during the third quarter of 2022 and $450 million of term loan payments in the fourth quarter of 2022).

The effect of exchange rate changes on cash and cash equivalents increased $15 million, primarily due to favorable fluctuations in the British pound, partially offset by unfavorable fluctuations in the Chinese renminbi.

For prior year liquidity comparisons see the Liquidity and Capital Resources section of our 202 1 Form 10-K .

Sources of Liquidity

We generate significant ongoing cash flow.

We generate significant ongoing operating cash flow.

Cash provided by operations is our principal source of liquidity with $2.0 billion provided in 2022.

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International Primary location of international balances

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

Cash and cash equivalents $ 2,101 $ 870 $ 1,231 Singapore, China, Canada, Belgium, Australia, Mexico

Marketable securities (1)

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(1) The majority of marketable securities could be liquidated into cash within a few days.

(2) The five-year credit facility for $2.0 billion and the 364-day credit facility for $1.5 billion, maturing August 2026 and August 2022, respectively, are maintained primarily to provide backup liquidity for our commercial paper borrowings and general corporate purposes.

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.

(2) The five-year credit facility for $2.0 billion, the 364-day credit facility for $1.5 billion and the $500 million incremental 364-day credit facility, maturing August 2026 and August 2023, respectively, are maintained primarily to provide backup liquidity for our commercial paper borrowings and general corporate purposes.

At December 31, 2022, we had $2.6 billion of commercial paper outstanding, which effectively reduced our available capacity under our revolving credit facilities to $1.4 billion.

Cash, Cash Equivalents and Marketable Securities

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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 for which we asserted permanent reinvestment.

consist primarily of earnings of our China, India, Canada (including underlying subsidiaries) and Netherlands domiciled subsidiaries.

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

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

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Debt Facilities and Other Sources of Liquidity

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.

On July 13, 2022, we entered into a loan agreement under which we may obtain delayed-draw loans in an amount up to $2.0 billion in the aggregate prior to October 13, 2022.

We drew down the entire $2.0 billion balance on August 2, 2022, to help fund the acquisition of Meritor.

The interest rate is based on Secured Overnight Financing Rate (SOFR) for the one-month interest period plus the relevant spread.

The loan will mature on August 1, 2025.

The agreement contains customary events of default and financial and other covenants, including maintaining a net debt to capital ratio of no more than 0.65 to 1.0.

On August 17, 2022, we 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 16, 2023.

This credit agreement amended and restated the prior $1.5 billion 364-day credit facility that matured on August 17, 2022.

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 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.

On August 17, 2022, we also entered into an incremental 364-day credit agreement, which allows us to borrow up to $500 million of unsecured funds at any time prior to August 16, 2023.

In connection with the new credit agreements, on August 17, 2022, we entered into an amendment to our $2.0 billion five-year facility to replace LIBOR with SOFR as an interest rate benchmark and to make other conforming changes to interest rate determinations.

We have access to committed credit facilities totaling $4.0 billion, including the $1.5 billion 364-day facility that expires August 16, 2023, $500 million incremental 364-day facility that expires August 16, 2023, and $2.0 billion five-year facility that expires on August 18, 2026.

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

We intend to maintain credit facilities at the current or higher aggregate amounts by renewing or

replacing these facilities at or before expiration.

The 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, 2022, our net leverage ratio was 0.31 to 1.0.

There were no outstanding borrowings under these facilities at December 31, 2022.

We can issue up to $4.0 billion of unsecured, short-term promissory notes (commercial paper) pursuant to the Board authorized commercial paper programs.

The programs facilitate the private placement of unsecured short-term debt through third-party brokers.

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

These programs facilitate the private placement of unsecured short-term debt through third-party brokers.

We use the net proceeds from the commercial paper borrowings for acquisitions and general corporate purposes.

The total combined borrowing capacity under the revolving credit facilities and commercial paper programs should not exceed $4.0 billion.

At December 31, 2022, we had $2.6 billion of commercial paper outstanding, which effectively reduced our available capacity under our revolving credit facilities to $1.4 billion.

See NOTE 13, "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.

In 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.

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

In 2019 we entered into $350 million of interest rate lock agreements, and in 2020 we entered into an additional $150 million of 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 December 2022, we settled certain rate lock agreements with notional amounts totaling $150 million for $49 million in cash.

This amount will remain in other comprehensive income to be recognized over the term of the anticipated new debt as discussed above.

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 8, 2022.

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.

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

The cessation date for submission and publication of rates for certain tenors of LIBOR has since been extended until mid-2023.

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 U.S.

The Alternative Reference Rates Committee has identified the SOFR as its preferred alternative rate for U.S.

dollar LIBOR.

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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.

In anticipation of LIBOR's phase out, our revolving credit and term loan agreements incorporate the use of SOFR as a replacement for LIBOR.

Our 5-year credit facility maturing August 18, 2026, as amended to date, also incorporates SOFR.

Additionally, with respect to our approximately $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.

On September 30, 2022, certain of our subsidiaries entered into a $1.0 billion credit agreement (Credit Agreement), consisting of a $400 million revolving credit facility and a $600 million term loan facility (Facilities), in anticipation of the separation of our filtration business.

Borrowings under the Credit Agreement will not become available under the Credit Agreement unless and until, among other things, there is a sale to the public of shares in our subsidiary that holds the filtration business (Parent Borrower).

The Credit Agreement will automatically terminate if no such public sale of shares of Parent Borrower occurs on or prior to March 30, 2023.

Borrowings under the Credit Agreement would be available to Parent Borrower and one or more of its subsidiaries (Borrower).

If borrowings become available under the Credit Agreement, the Facilities would mature on September 30, 2027.

Borrowings under the Credit Agreement would bear interest at varying rates, depending on the type of loan and, in some cases, the rates of designated benchmarks and the applicable Borrower’s election.

Generally, U.S.

dollar-denominated loans would bear interest at adjusted term SOFR (which includes a 0.10 percent credit spread adjustment to term SOFR) for the applicable interest period plus a rate ranging from 1.125 percent to 1.75 percent depending on Parent Borrower's net leverage ratio.

Supply Chain Financing

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The maximum amount that we may have outstanding under the program is $532 million.

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

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, 2022, were $331 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 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

Per Share Total Cost of

Repurchases Remaining

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

Total 5.7 244.73 $ 1,402

(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.

Acquisitions for the year ended December 31, 2022, were as follows.

Entity Acquired (Dollars in millions) Date of Acquisition Additional Percent Interest Acquired Payments to Former Owners Acquisition Related Debt Retirements Total Purchase Consideration (1)

Siemens Commercial Vehicles Propulsion (Siemens CVP) 11/30/22 100% $ 187 $ — $ 187

Meritor, Inc.

08/03/22 100% 2,613 248 2,861

Jacobs Vehicle Systems 04/08/22 100% 345 — 345

Westport JV 02/07/22 50% 42 — 42

See NOTE 2, "ACQUISITIONS," to our Consolidated Financial Statements for additional information.

Total dividends paid to common shareholders in 2022, 2021 and 2020 were $855 million, $809 million and $782 million, respectively.

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We expect to fund dividend payments with cash from operations.

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 July 2022, the Board authorized an increase to our quarterly dividend of approximately 8 percent from $1.45 per share to $1.57 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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Total $ 6.04 $ 5.60 $ 5.28

Stock Repurchases

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

For the year ended December 31, 2022, we made the following purchases under our stock repurchase program:

In millions (except per share amounts)

For each quarter ended Shares

Purchased Average Cost

Per Share Total Cost of

Repurchases Remaining

March 31 1.6 $ 199.27 $ 311 $ 2,281

June 30 0.1 194.00 36 2,245

September 30 0.2 197.72 23 2,222

December 31 0.0 (2)

206.12 4 2,218

Total 1.9 198.74 $ 374

(1) The remaining $218 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.

(2) Shares purchased in the fourth quarter totaled 21,830.

We intend to repurchase outstanding shares from time to time during 2023 to enhance shareholder value.

Capital Expenditures

Capital expenditures, including spending on internal use software, were $786 million, $575 million and $775 million in 2021, 2020 and 2019, respectively.

Capital expenditures were $916 million, $734 million and $528 million in 2022, 2021 and 2020, respectively.

We continue to invest in new product lines and targeted capacity expansions.

We plan to spend an estimated $850 million to $900 million in 2022 on capital expenditures, excluding internal use software, with over 60 percent of these expenditures expected to be invested in North America.

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

We plan to spend an estimated $1.2 billion to $1.3 billion in 2023 on capital expenditures with over 60 percent of these expenditures expected to be invested in North America.

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.

We had $2.6 billion of commercial paper outstanding at December 31, 2022, that matures in less than one year.

The maturity schedule of our existing long-term debt requires significant cash outflows in 2023 when our 3.65 percent senior notes and 2025 when our term loan and 0.75 percent senior notes are due.

Required annual long-term debt principal payments range from $44 million (2024) to $2.1 billion (2025) over the next five years.

See NOTE 13, "DEBT," to the Consolidated Financial Statements for additional information.

Our global pension plans, including our unfunded and non-qualified plans, were 120 percent funded at December 31, 2022.

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.

defined benefit plans (qualified and non-qualified), which represented approximately 69 percent of the worldwide pension obligation, were 121 percent funded, and our U.K.

defined benefit plans were 119 percent funded at December 31, 2022.

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.

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

pension trust was 8.1 percent while our U.K.

pension trust gain was 5.1 percent.

Approximately 69 percent of our pension plan assets are held in highly liquid investments such as fixed income and equity securities.

The remaining 31 percent of our plan assets are held in less liquid, but market valued investments, including real estate, private equity, venture capital, opportunistic credit and insurance contracts.

In 2022, the investment loss on our U.S.

pension trusts was 5.7 percent while our U.K.

pension trusts' loss was 41.3 percent.

We sponsor funded and unfunded domestic and foreign defined benefit pension plans.

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Performance and excise bonds 27 80

Guarantees, indemnifications and other commitments 25 14

Guarantees and other commitments 34 12

Total $ 3,105 $ 7,479

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

The contractual obligations reported above exclude our unrecognized tax benefits of $89 million as of December 31, 2021.

The contractual obligations reported above exclude our unrecognized tax benefits of $283 million as of December 31, 2022, which includes $104 million of current tax liabilities and $179 million of long-term deferred tax liabilities.

We are not able to reasonably estimate the period in which cash outflows relating to uncertain tax contingencies could occur.

See NOTE 5, "INCOME TAXES," to the Consolidated Financial Statements for additional information.

Redeemable Noncontrolling Interests

A 19 percent minority shareholder in one of our businesses, Hydrogenics Corporation (Hydrogenics), has, among other rights and subject to related obligations and restrictive covenants, rights that are exercisable between September 2022 and September 2026 to require us to (1) purchase such shareholder's shares (put option) at an amount up to the fair market value (calculated pursuant to a process outlined in the shareholders' agreement) and (2) sell to such shareholder Hydrogenics' electrolyzer business at an amount up to the fair market value of the electrolyzer business (calculated pursuant to a process outlined in the shareholders’ agreement).

We recorded the estimated fair value of the put option as redeemable noncontrolling interests in our Consolidated Financial Statements with an offset to additional paid-in capital.

At December 31, 2022, the redeemable noncontrolling interest balance was $258 million.

Credit Ratings

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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 believe our access to capital markets, our existing cash and marketable securities, operating cash flow and revolving credit facilities provide us with the financial flexibility needed to fund acquisitions, dividend payments, common stock repurchases, targeted capital expenditures, projected pension obligations, working capital and debt service obligations through 2023 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.

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Our senior management has discussed the development and selection of our accounting policies, related accounting estimates and the disclosures set forth below with the Audit Committee of the Board.

We believe our critical accounting estimates include estimating liabilities for warranty programs, assessing goodwill impairments, accounting for income taxes and pension benefits.

We believe our critical accounting estimates include estimating liabilities for warranty programs, fair value of intangible assets, assessing goodwill impairments, accounting for income taxes and pension benefits.

Warranty Programs

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NOTE 14, "PRODUCT WARRANTY LIABILITY," to our Consolidated Financial Statements contains a summary of the activity in our warranty liability account for 2022, 2021 and 2020 including adjustments to pre-existing warranties.

Fair Value of Intangible Assets

We make strategic acquisitions that may have a material impact on our consolidated results of operations or financial position.

We allocate the purchase price of acquired businesses to the assets acquired and liabilities assumed in the transaction at their estimated fair values.

The determination of the fair value of intangible assets, which represent a significant portion of the purchase price in many of our acquisitions can be complex and requires the use of significant judgment with regard to (i) the fair value and (ii) the period and the method by which the intangible asset will be amortized.

We use information available to us to make fair value determinations and engage independent valuation specialists, when necessary, to assist in the fair value determination of significant acquired intangibles.

We estimate the fair value of acquisition-related intangible assets principally based on projections of cash flows that will arise from identifiable intangible assets of acquired businesses, which includes estimates of discount rates, revenue growth rates, earnings or losses before interest expense, income taxes, depreciation and amortization and noncontrolling interests (EBITDA), royalty rates, customer attrition rates, customer renewal rates and technology obsolesce rates.

The projected cash flows are discounted to determine the present value of the assets at the dates of acquisition.

Although we believe the projections, assumptions and estimates made were reasonable and appropriate, these estimates require significant judgment by management, are inherently uncertain and subject to refinement.

During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill.

Any adjustments subsequent to the measurement period are recorded to our consolidated statements of income.

See NOTE 2, "ACQUISITIONS," to our Consolidated Financial Statements for additional information about our recent business combinations.

Goodwill Impairment

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In addition, we also perform a sensitivity analysis to determine how much our forecasts can fluctuate before the fair value of a reporting unit would be lower than its carrying amount.

Future changes in the judgments, assumptions and estimates that are used in our goodwill impairment testing, including discount rates or future operating results and related cash flow projections, could result in significantly different estimates of the fair values in the future.

An increase in discount rates, a reduction in projected cash flows or a combination of the two could lead to a reduction in the estimated fair values, which may result in impairment charges that could materially affect our financial statements in any given year.

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

After considering the results of the recent fair value valuations related to the Meritor acquisition, the capital markets environment, economic conditions, results of operations and other factors, we concluded that the fair value of all of our reporting units exceeded their carrying value as of September 30, 2022.

However, given the recent acquisition of Meritor, when fair value equaled carrying value as of the acquisition date (August 3, 2022), there is a heightened risk of a future impairment to the extent its fair value changes in future periods.

Accounting for Income Taxes

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We evaluate the recoverability of our deferred tax assets each quarter by assessing the likelihood of future profitability and available tax planning strategies that could be implemented to realize our net deferred tax assets.

At December 31, 2021, we recorded net deferred tax assets of $25 million.

The assets included $395 million for the value of net operating loss and credit carryforwards.

At December 31, 2022, we recorded a net deferred tax liability of $24 million.

The net deferred tax assets included $799 million for the value of net operating loss and credit carryforwards.

A valuation allowance of $704 million was recorded to reduce the tax assets to the net value management believed was more likely than not to be realized.

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As a result, our pension benefit programs are based on a number of statistical and judgmental assumptions that attempt to anticipate future events and are used in calculating the expense and liability related to our plans each year at December 31.

These assumptions include discount rates used to value liabilities, assumed rates of return on plan assets, future compensation increases, employee turnover rates, actuarial assumptions relating to retirement age, mortality rates and participant withdrawals.

These assumptions include discount rates used to value liabilities, assumed rates of return on plan assets, future compensation increases, inflation, employee turnover rates, actuarial assumptions relating to retirement age, mortality rates and participant withdrawals.

The actuarial assumptions we use may differ significantly from actual results due to changing economic conditions, participant life span and withdrawal rates.

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The one-year return for our U.S.

plans was 8.1 percent for 2021.

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.

plans was a 5.7 percent loss for 2022.

plan assets averaged annualized returns of 6.58 percent over the prior ten years and resulted in approximately $166 million of actuarial losses in accumulated other comprehensive loss (AOCL) in the same period.

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 7.00 percent in 2023 for U.S.

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The one-year return for our U.K.

plans was 5.1 percent for 2021.

We generated average annualized returns of 9.14 percent over ten years, resulting in approximately $767 million of actuarial gains in AOCL.

plans was a 41.3 percent loss for 2022.

The majority of the Cummins U.K.

plan’s assets and certain Meritor U.K.

plan’s assets are linked to the price of U.K.

government gilts in order to hedge movements in the liabilities.

government gilts fell approximately 40 percent during 2022 while our total U.K.

pension assets fell by 41.3 percent as a result of the asset price declines over the same period.

We generated average annualized returns of 2.76 percent over ten years, resulting in approximately $310 million of actuarial losses in AOCL.

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 that an investment return assumption of

3.75 percent in 2022 for U.K.

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 5.00 percent in 2023 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:

Our target allocation for 2023 and pension plan asset allocations, excluding Meritor, at December 31, 2022 and 2021 are as follows:

Plan Cummins U.K.

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

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Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %

Meritor’s investment policies in the U.S.

have historically targeted a well-diversified asset allocation strategy to promote asset growth while maintaining an acceptable level of risk over the long-term with a goal of minimizing company contributions.

We are actively reviewing the plan investments and will pursue adjustments to the allocation when appropriate and necessary to align the assets more closely with our management’s strategy and view of prudent and acceptable risk to the company, the plan and its funding goals.

Target allocation for 2023 and pension plan asset allocation at December 31, 2022, for Meritor plans are as follows:

Plan Meritor U.K.

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

Investment description 2023 2022 2023 2022

Liability matching — % — % 35 % 70 %

Risk seeking 100 % 100 % 65 % 30 %

Total 100 % 100 % 100 % 100 %

Due to the extreme market volatility in the U.K.

during the fourth quarter of 2022, the Meritor U.K.

plan rebalanced a significant portion of the plan into liability matching assets.

The current investment policy and asset allocation targets for the U.K.

plan are being actively reviewed to determine if any changes are appropriate.

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.

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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.

Net actuarial losses decreased our shareholders' equity by $129 million after-tax in 2022.

The loss is primarily due to unfavorable asset returns, partially offset by higher discount rates in the U.S.

The table below sets forth the net periodic pension (income) cost for the years ended December 31 and our expected cost for 2023.

In millions 2023 2022 2021 2020

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

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.

Net periodic pension (income) cost $ (2) $ 19 $ 78 $ 102

We expect 2023 net periodic pension income to increase compared to 2022, primarily due to the full year benefit of the Meritor pension plans added during the acquisition and a higher estimated return on assets in the U.S.

The decrease in net periodic pension cost in 2022 compared to 2021 was primarily due to higher discount rates in the U.S.

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 due to favorable actuarial experience and investment returns, partially offset by 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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The resulting discount rate is reflective of both the current interest rate environment and the plan's distinct liability characteristics.

The table below sets forth the estimated impact on our 2022 net periodic pension cost relative to a change in the discount rate and a change in the expected rate of return on plan assets.

In millions Impact on Pension Cost Increase/(Decrease)

The table below sets forth the estimated impact on our 2023 net periodic pension income relative to a change in the discount rate and a change in the expected rate of return on plan assets.

In millions Impact on Pension Income Increase/(Decrease)

Discount rate used to value liabilities

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NOTE 11, "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