What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2023-02-14 compared with 2022-02-08 · 617 added, 296 removed, 1600 unchanged (36% of the section changed)

7 unchanged sentences

• Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021 and 2020

• Consolidated Statements of Changes in Equity for the years ended December 31, 2021, 2020 and 2019

• Consolidated Statements of Changes in Redeemable Noncontrolling Interests and Equity for the years ended December 31, 2022, 2021 and 2020

• Notes to the Consolidated Financial Statements

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 2 ACQUISITIONS

NOTE 3 REVENUE FROM CONTRACTS WITH CUSTOMERS

10 unchanged sentences

NOTE 15 COMMITMENTS AND CONTINGENCIES

NOTE 16 REDEEMABLE NONCONTROLLING INTERESTS

NOTE 17 CUMMINS INC.

4 unchanged sentences

NOTE 21 EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.

NOTE 20 ACQUISITION

NOTE 21 RESTRUCTURING ACTIONS

NOTE 22 DERIVATIVES

NOTE 23 RUSSIAN OPERATIONS

NOTE 24 OPERATING SEGMENTS

13 unchanged sentences

Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of our Consolidated Financial Statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

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

As part of our ongoing integration of the Meritor business, we are continuing to incorporate our controls and procedures into Meritor and to augment our company-wide controls to reflect the risks inherent in an acquisition of this type.

As permitted by the Securities and Exchange Commission (SEC) staff guidance for newly acquired businesses, management’s assessment of the effectiveness of our internal control over financial reporting for the year ending December 31, 2022, excludes the acquired Meritor business in order for management to have sufficient time to evaluate and implement our internal control structure over the operations of the Meritor business.

Meritor is a wholly-owned subsidiary whose total assets and total net sales represent approximately 12 percent and 7 percent of our consolidated financial statement amounts as of and for the year ended December 31, 2022.

Management assessed the effectiveness of our internal control over financial reporting and concluded it was effective as of December 31, 2022.

3 unchanged sentences

Please refer to Exhibits 31(a) and 31(b) attached to this report for certifications required under Section 302 of the Sarbanes-Oxley Act of 2002.

THOMAS LINEBARGER /s/ MARK A.

Chairman and Chief Executive Officer Vice President and Chief Financial Officer

/s/ JENNIFER RUMSEY /s/ MARK A.

President and Chief Executive Officer Vice President and Chief Financial Officer

Report of Independent Registered Public Accounting Firm

2 unchanged sentences

We have audited the accompanying consolidated balance sheets of Cummins Inc.

and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of net income, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2021, including the related notes (collectively referred to as the “consolidated financial statements”).

and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of net income, comprehensive income, changes in redeemable noncontrolling interests and equity, and cash flows for each of the three years in the period ended December 31, 2022, including the related notes (collectively referred to as the “consolidated financial statements”).

We also have audited the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

14 unchanged sentences

We believe that our audits provide a reasonable basis for our opinions.

As described in Management’s Report on Internal Control Over Financial Reporting, management has excluded Meritor, Inc.

(Meritor) from its assessment of internal control over financial reporting as of December 31, 2022 because it was acquired by the Company in a purchase business combination during 2022.

We have also excluded Meritor from our audit of internal control over financial reporting.

Meritor is a wholly-owned subsidiary whose total assets and total net sales excluded from management’s assessment and our audit of internal control over financial reporting represent approximately 12% and 7%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2022.

Definition and Limitations of Internal Control over Financial Reporting

2 unchanged sentences

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

and (iii) provide reasonable assurance regarding

prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

3 unchanged sentences

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Goodwill Impairment Test - Automated Transmission Reporting Unit

As described in Notes 1 and 9 to the consolidated financial statements, the Company’s consolidated goodwill balance was $ 1,287 million, and the goodwill associated with the Automated Transmission reporting unit was $ 544 million as of December 31, 2021.

Management performs an impairment test as of the end of the fiscal third quarter each year, or more frequently if events or circumstances indicate the fair value of a reporting unit is less than its carrying amount.

Management performs the annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.

Management’s valuation method is an income approach using a discounted cash flow model.

The discounted cash flow model requires projections of revenue, gross margin, operating expenses, working capital investment and fixed asset additions for the Automated Transmission reporting unit over a multi-year period, and a discount rate based upon a weighted-average cost of capital.

The principal considerations for our determination that performing procedures relating to the goodwill impairment test for the Automated Transmission reporting unit is a critical audit matter are (i) the significant judgment by management when developing the fair value of the Automated Transmission reporting unit;

(ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating the significant assumptions related to projections of revenue and projections of gross margin;

Acquisition of Meritor - Valuation of Customer Relationships

As described in Note 2 to the consolidated financial statements, the Company completed the acquisition of Meritor on August 3, 2022 for the total purchase price of $ 2.9 billion, including debt that was retired on the closing date of $ 248 million.

Of the identifiable intangible assets acquired, management recognized customer relationships of $ 960 million.

Management estimated the fair value of the customer relationships using the multi-period excess earnings method.

Key assumptions used in the multi-period excess earnings method include projections of revenue and earnings or losses before interest expense, income taxes, depreciation and amortization and non-controlling interests (EBITDA), discount rate, customer attrition rates, and customer renewal rates.

The principal considerations for our determination that performing procedures relating to the valuation of the customer relationships acquired in the acquisition of Meritor is a critical audit matter are (i) the significant judgment by management when determining the fair value estimate of the customer relationships acquired;

(ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to projections of EBITDA;

and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included testing the effectiveness of controls relating to management’s goodwill impairment test, including controls over the valuation of the Automated Transmission reporting unit.

These procedures also included, among others, testing management’s process for developing the fair value of the Automated Transmission reporting unit.

This included evaluating the appropriateness of the discounted cash flow model, testing the completeness and accuracy of underlying data used in the discounted cash flow model, and evaluating the reasonableness of significant assumptions used by management related to projections of revenue and projections of gross margin.

Evaluating management’s assumptions related to projections of revenue and projections of gross margin involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the Automated Transmission reporting unit and (ii) the consistency with external market and industry data.

Professionals with specialized skill and knowledge were used to assist in the evaluation of the appropriateness of the Company’s discounted cash flow model.

These procedures included testing the effectiveness of controls relating to management’s valuation of the customer relationships acquired, including controls over the determination of the significant assumptions related to projections of EBITDA.

These procedures also included, among others (i) reading the purchase agreement and (ii) testing management’s process for determining the fair value estimate of the customer relationships acquired.

This included evaluating the appropriateness of the multi-period excess earnings method, testing the completeness and accuracy of underlying data used in the multi-period excess earnings method, and evaluating the reasonableness of the significant assumptions used by management related to projections of EBITDA.

Evaluating management’s significant assumptions related to projections of EBITDA involved considering (i) the past performance of Meritor and (ii) the consistency with economic and industry data.

Professionals with specialized skill and knowledge were used to assist in the evaluation of the appropriateness of the Company’s multi-period excess earnings method.

Base Product Warranty Liability

As described in Notes 1 and 14 to the consolidated financial statements, management estimates and records a liability for base product warranty programs at the time products are sold.

As of December 31, 2021, the accrued liability for base product warranty programs was $1,439 million.

As of December 31, 2022, the total accrued liability for product warranty programs was $1,470 million.

The estimate for one of the base product warranty programs is based on historical experience and reflects management's best estimates of expected costs at the time products are sold and subsequent adjustment to those expected costs when actual costs differ.

Management’s estimate of the base product warranty liability is generally affected by component failure rates, repair costs, and the point of failure within the product life cycle.

and (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating the significant assumptions related to component failure rates, repair costs, and the point of failure within the product life cycle.

The principal considerations for our determination that performing procedures relating to the base product warranty liability is a critical audit matter are (i) the significant judgment by management when determining the estimate for the base product warranty liability and (ii) a high degree of auditor judgment and effort in performing procedures and evaluating management’s significant assumptions related to component failure rates, repair costs, and the point of failure within the product life cycle.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included testing the effectiveness of controls relating to management’s estimate for the base product warranty liability, including controls related to the determination of component failure rates, repair costs, and the point of failure within the product life cycle.

These procedures also included, among others, testing management’s process for determining the base product warranty liability.

This included evaluating the appropriateness of the method used by management,

testing the completeness and accuracy of underlying data used in the warranty estimate, and evaluating the reasonableness of significant assumptions used by management related to the component failure rates, repair costs, and the point of failure within the product life cycle.

Evaluating management’s assumptions related to the component failure rates, repair costs, and the point of failure within the product life cycle involved evaluating whether the assumptions used by management were reasonable considering the historical product experience of the Company.

These procedures included testing the effectiveness of controls relating to management’s estimate for the base product warranty liability, including controls related to the determination of the significant assumptions related to component failure rates, repair costs, and the point of failure within the product life cycle.

These procedures also included, among others, testing management’s process for determining the estimate for the base product warranty liability.

This included evaluating the appropriateness of the method used by management, testing the completeness and accuracy of underlying data used in the warranty

estimate, and evaluating the reasonableness of the significant assumptions used by management related to component failure rates, repair costs, and the point of failure within the product life cycle.

Evaluating management’s significant assumptions related to component failure rates, repair costs, and the point of failure within the product life cycle involved considering the historical product experience of the Company.

/s/ PricewaterhouseCoopers LLP

6 unchanged sentences

In millions, except per share amounts 2022 2021 2020

NET SALES (a) (Note 2)

NET SALES (Note 3)

$ 28,074 $ 24,021 $ 19,811

4 unchanged sentences

Research, development and engineering expenses 1,278 1,090 906

Equity, royalty and interest income from investees (Note 3) 506 452 330

Restructuring actions (Note 21) — — 119

Other operating expense, net ( 31 ) ( 46 ) ( 36 )

Equity, royalty and interest income from investees (Notes 4 and 23) 349 506 452

Other operating expense, net (Note 23) 174 31 46

OPERATING INCOME 2,929 2,706 2,269

10 unchanged sentences

Diluted $ 15.12 $ 14.61 $ 12.01

(a) Includes sales to nonconsolidated equity investees of $ 1,713 million, $ 1,283 million and $ 1,191 million for the years ended December 31, 2021, 2020 and 2019, respectively.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

6 unchanged sentences

Unrealized gain (loss) on derivatives 106 26 ( 34 )

Total other comprehensive income (loss), net of tax 406 36 ( 226 )

Total other comprehensive (loss) income, net of tax ( 359 ) 406 36

COMPREHENSIVE INCOME 1,824 2,570 1,847

Comprehensive income attributable to noncontrolling interests 28 12 3

Comprehensive (loss) income attributable to noncontrolling interests ( 8 ) 28 12

COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC.

26 unchanged sentences

Commercial paper (Note 13) 2,574 313

Current maturities of long-term debt (Note 13) 573 59

Accrued compensation, benefits and retirement costs 617 683

2 unchanged sentences

Other accrued expenses (Note 12) 1,465 1,190

Current maturities of long-term debt (Note 12) 59 62

Total current liabilities 11,421 7,084

1 unchanged sentence

Long-term debt (Note 13) 4,498 3,579

Pensions and other postretirement benefits (Note 10) 604 630

Accrued product warranty (Note 13) 684 672

Deferred revenue (Note 3) 844 850

2 unchanged sentences

Commitments and contingencies (Note 15)

Redeemable noncontrolling interests (Notes 1 and 16) $ 258 $ 366

shareholders’ equity (Note 17)

9 unchanged sentences

Total equity $ 9,967 $ 9,035

Total liabilities and equity $ 23,710 $ 22,624

Total liabilities, redeemable noncontrolling interests and equity $ 30,299 $ 23,710

The accompanying notes are an integral part of our Consolidated Financial Statements.

11 unchanged sentences

Pension contributions and OPEB payments (Note 11) ( 85 ) ( 102 ) ( 121 )

Share-based compensation expense (Note 18) 37 31 49

Restructuring actions, net of cash payments ( 1 ) ( 110 ) 115

Gain on corporate owned life insurance — ( 57 ) ( 61 )

Russian suspension costs, net of recoveries (Note 23) 111 — —

Restructuring payments — ( 1 ) ( 110 )

Loss (gain) on corporate owned life insurance 102 — ( 57 )

Foreign currency remeasurement and transaction exposure ( 27 ) 37 2

10 unchanged sentences

Capital expenditures ( 916 ) ( 734 ) ( 528 )

Investments in internal use software ( 52 ) ( 47 ) ( 75 )

Proceeds from sale of land 20 — —

Investments in and advances to equity investees ( 48 ) ( 51 ) ( 20 )

Acquisitions of businesses, net of cash acquired (Note 2) ( 3,191 ) — —

1 unchanged sentence

Investments in marketable securities—liquidations (Note 6) 1,151 673 469

Cash flows from derivatives not designated as hedges 49 4 ( 44 )

Other, net ( 143 ) ( 6 ) ( 67 )

2 unchanged sentences

Proceeds from borrowings (Note 13) 2,103 79 2,014

Net payments of commercial paper ( 10 ) ( 337 ) ( 120 )

Net borrowings (payments) of commercial paper (Note 13) 2,261 ( 10 ) ( 337 )

Payments on borrowings and finance lease obligations ( 1,550 ) ( 73 ) ( 73 )

Net (payments) borrowings under short-term credit agreements ( 28 ) 10 53

Distributions to noncontrolling interests ( 28 ) ( 26 ) ( 33 )

Dividend payments on common stock (Note 17) ( 855 ) ( 809 ) ( 782 )

Repurchases of common stock (Note 17) ( 374 ) ( 1,402 ) ( 641 )

Proceeds from issuing common stock 56 88 76

Other, net 84 ( 12 ) 99

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

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

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 50 35 ( 11 )

4 unchanged sentences

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

In millions Common

CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY

In millions Redeemable Noncontrolling Interests Common

Stock Additional

7 unchanged sentences

BALANCE AT DECEMBER 31, 2019 $ 58 $ 556 $ 1,790 $ 14,416 $ ( 7,225 ) $ ( 2 ) $ ( 2,028 ) $ 7,507 $ 900 $ 8,407

Adoption of new accounting standards ( 4 ) ( 4 ) — ( 4 )

Net income ( 4 ) 1,789 1,789 26 1,815

Other comprehensive loss, net of tax (Note 16) ( 221 ) ( 221 ) ( 5 ) ( 226 )

Other comprehensive income (loss), net of tax (Note 18) 46 46 ( 10 ) 36

Issuance of common stock 10 10 — 10

4 unchanged sentences

Share-based awards 1 87 88 — 88

Fair value adjustment of redeemable noncontrolling interests 231 ( 231 ) ( 231 ) — ( 231 )

Other shareholder transactions ( 3 ) 15 15 ( 14 ) 1

BALANCE AT DECEMBER 31, 2020 $ 282 $ 556 $ 1,617 $ 15,419 $ ( 7,779 ) $ — $ ( 1,982 ) $ 7,831 $ 876 $ 8,707

Adoption of new accounting standards ( 4 ) ( 4 ) — ( 4 )

Net income ( 13 ) 2,131 2,131 46 2,177

1 unchanged sentence

Issuance of common stock 1 1 — 1

Employee benefits trust activity 32 2 34 — 34

Repurchases of common stock (Note 17) ( 1,402 ) ( 1,402 ) — ( 1,402 )

2 unchanged sentences

Share-based awards 1 55 56 — 56

Fair value adjustment of redeemable noncontrolling interests 97 ( 97 ) ( 97 ) — ( 97 )

Other shareholder transactions 21 3 24 — 24

1 unchanged sentence

Net income ( 24 ) 2,151 2,151 56 2,207

Other comprehensive income (loss), net of tax (Note 16) 411 411 ( 5 ) 406

Other comprehensive loss, net of tax (Note 18) ( 319 ) ( 319 ) ( 40 ) ( 359 )

Issuance of common stock 8 8 — 8

3 unchanged sentences

Share-based awards 3 77 80 — 80

Acquisition of business (Note 2) — 111 111

Fair value adjustment of redeemable noncontrolling interests ( 104 ) 104 104 — 104

Other shareholder transactions 20 29 5 34 14 48

7 unchanged sentences

In 2001, we changed our name to Cummins Inc.

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 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.

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.

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," for additional information.

Reporting Period

Beginning in 2022, we transitioned to a Gregorian calendar with our reporting period ending on the last day of the quarterly calendar period.

In 2021 and prior, our reporting period ended on the Sunday closest to the last day of the quarterly calendar period.

Our fiscal year ends on December 31, regardless of the day of the week on which December 31 falls.

Principles of Consolidation

8 unchanged sentences

Certain amounts for 2021 and 2020 were reclassified to conform to the current year presentation.

During the third quarter of 2022, we determined that a put right held by a minority shareholder in one of our subsidiaries, which became exercisable in September 2022, was incorrectly classified as noncontrolling interests (NCI) as opposed to mezzanine equity in our Consolidated Balance Sheets .

Because the put right was exercisable at fair value (as defined in the governing documents of the subsidiary), the NCI should have also been reflected at fair value at each balance sheet date with an offset to additional paid-in-capital (APIC).

As a result, we have revised our historical financial statements to reflect the NCI at its estimated fair value as redeemable noncontrolling interests in our Consolidated Balance Sheets with a corresponding offset in NCI and APIC.

This error did not impact our Consolidated Statements of Net Income , Consolidated Statements of Comprehensive Income or Consolidated Statements of Cash Flows for any period.

The amounts reclassified from NCI and revisions to APIC were as follows:

In millions Noncontrolling Interests Additional Paid-in Capital Total Correction to Mezzanine Equity

December 31, 2019 $ 58 $ — $ 58

December 31, 2020 51 231 282

December 31, 2021 38 328 366

March 31, 2022 34 358 392

June 30, 2022 27 199 226

See NOTE 16, "REDEEMABLE NONCONTROLLING INTERESTS," for further information regarding the put right.

We have concluded the correction of this error does not have a material impact to our previously issued annual and interim consolidated financial statements.

Investments in Equity Investees

9 unchanged sentences

Our share of the results from joint ventures, affiliated companies and alliances is reported in our Consolidated Statements of Net Income as Equity, royalty and interest income from investees, and is reported net of all applicable income taxes.

Our foreign equity investees are presented net of applicable foreign income taxes in our Consolidated Statements of Net Income .

Our share of the results from our foreign equity investees are presented net of applicable foreign income taxes in our Consolidated Statements of Net Income .

Our remaining U.S.

3 unchanged sentences

Preparation of financial statements requires management to make estimates and assumptions that affect reported amounts presented and disclosed in our Consolidated Financial Statements .

Significant estimates and assumptions in these Consolidated Financial Statements require the exercise of judgement and are used for, but not limited to, estimates of future cash flows and other assumptions associated with goodwill and long-lived asset impairment tests, useful lives for depreciation and amortization, warranty programs, determination of discount rate and other assumptions for pensions and other postretirement benefit costs, restructuring costs, income taxes, deferred tax valuation allowances, contingencies and allowances for doubtful accounts.

Significant estimates and assumptions in these Consolidated Financial Statements require the exercise of judgement and are used for, but not limited to, estimates of future cash flows and other assumptions associated with the valuation of intangible assets and goodwill and long-lived asset impairment tests, useful lives for depreciation and amortization, warranty programs, determination of discount rate and other assumptions for pensions and other postretirement benefit obligations and related costs, income taxes, deferred tax valuation allowances, contingencies and allowances for doubtful accounts.

Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be different from these estimates.

5 unchanged sentences

Our long-term arrangements generally do not include committed volumes until underlying purchase orders are issued.

Our performance obligations vary by contract, but may include diesel and natural gas engines and engine-related component products, including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems, automated transmissions, electric power generation systems and construction related projects, batteries, electrified power systems, hydrogen production and fuel cell products, parts, maintenance services and extended warranty coverage.

Our performance obligations vary by contract, but may include diesel and natural gas engines and engine-related component products, including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems, automated transmissions, engine braking, cylinder deactivation and start and stop thermal management technologies, drivetrain systems and components including axles, drivelines, braking and suspension systems, electric power generation systems and construction related projects, batteries, electrified power systems, hydrogen production and fuel cell products, parts, maintenance services and extended warranty coverage.

Typically, we recognize revenue on the products we sell at a point in time, generally in accordance with shipping terms, which reflects the transfer of control to the customer.

29 unchanged sentences

These rebates are typically paid on a quarterly, or more frequent basis.

At the time of the sales, we consider the expected amount of these rebates when determining the overall transaction price.

At the time of the sales, we consider the expected

amount of these rebates when determining the overall transaction price.

Estimates are adjusted at the end of each quarter based on the amounts yet to be paid.

32 unchanged sentences

Unbilled revenue relates to our right to consideration for our completed performance under a contract.

Unbilled revenue generally arises from contractual provisions that delay a portion of the

billings on genset deliveries until commissioning occurs.

Unbilled revenue generally arises from contractual provisions that delay a portion of the billings on genset deliveries until commissioning occurs.

Unbilled revenue may also occur when billings trail the provision of service in construction and long-term maintenance contracts.

6 unchanged sentences

Costs to fulfill a contract are generally limited to customer-specific engineering expenses that do not meet the definition of research and development expenses.

As a practical expedient, we have elected to recognize these costs of obtaining a contract as an expense when the related contract period is less than one year.

a practical expedient, we have elected to recognize these costs of obtaining a contract as an expense when the related contract period is less than one year.

When the period exceeds one year, this asset is amortized over the life of the contract.

16 unchanged sentences

dollar is the functional currency, including those operating in highly inflationary economies when applicable, we remeasure non-monetary balances and the related income statement amounts using historical exchange rates.

We include the resulting gains and losses in income, including the effect of derivatives in our Consolidated Statements of Net Income , which combined with transaction gains and losses amounted to a net gain of $ 2 million, $ 4 million and $ 28 million for the years ended December 31, 2021, 2020 and 2019, respectively.

We include the resulting gains and losses in income, including the effect of derivatives in our Consolidated Statements of Net Income , which combined with transaction gains and losses amounted to a net loss of $ 8 million and a net gain of $ 2 million and $ 4 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Fair Value Measurements

9 unchanged sentences

These contracts are used strictly for hedging and not for speculative purposes.

We are exposed to market risk from fluctuations in interest rates.

We manage our exposure to interest rate fluctuations through the use of interest rate swaps and locks.

The objective is to more effectively balance our borrowing costs and interest rate risk for current and future exposure.

The gain or loss on the swaps as well as the offsetting gain or loss on the hedged item are recognized in current income as "Interest expense." The gain or loss on the locks is deferred and reported as a component of AOCL.

For more detail on our interest rate swaps, see Note 12, "DEBT."

Due to our international business presence, we are exposed to foreign currency exchange risk.

9 unchanged sentences

These derivative instruments are not designated as hedges.

We are further exposed to foreign currency exchange risk as many of our subsidiaries are subject to fluctuations as the functional currencies of the underlying entities are not our U.S.

dollar reporting currency.

In order to minimize movements in certain investments, in 2022 we began entering into foreign exchange forwards designated as net investment hedges.

These forwards are utilized to hedge portions of our net investments against the effect of exchange rate fluctuations on the translation of foreign currency balances to the U.S.

The change in fair value related to the spot-to-forward rate difference is recorded as other income (expense) with all other changes in fair value deferred and reported as components of AOCL.

The unrealized gain or loss is classified into income in the same period when the foreign subsidiary is sold or substantially liquidated.

We are exposed to fluctuations in commodity prices due to contractual agreements with component suppliers.

2 unchanged sentences

At December 31, 2022, realized and unrealized gains and losses related to these hedges were not material to our financial statements.

We also enter into physical forward contracts, which qualify for the normal purchases scope exceptions and are treated as purchase commitments.

We also enter into physical forward contracts, which qualify for the normal purchases scope exception and are treated as purchase commitments.

Additional information on the physical forwards is included in NOTE 15, "COMMITMENTS AND CONTINGENCIES."

We are exposed to market risk from fluctuations in interest rates.

We manage our exposure to interest rate fluctuations through the use of interest rate swaps and locks.

The objective is to more effectively balance our borrowing costs and interest rate risk for current and future exposure.

The gain or loss on the swaps as well as the offsetting gain or loss on the hedged item are recognized in current income as interest expense.

The gain or loss on the locks is deferred and reported as a component of AOCL.

For more detail on our interest rate swaps, see NOTE 22, "DERIVATIVES."

We record all derivatives at fair value in our financial statements.

Cash flows related to derivatives that are designated as hedges are included in the cash flows from operating activities, while cash flows related to derivatives, that are not designated as hedges, are included in cash flows from investing activities in our Consolidated Statements of Cash Flows .

Cash flows related to derivatives that are designated as hedges are classified in the same manner as the item being hedged, while cash flows related to derivatives that are not designated as hedges are included in cash flows from investing activities in our Consolidated Statements of Cash Flows .

Substantially all of our derivative contracts are subject to master netting arrangements, which provide us with the option to settle certain contracts on a net basis when they settle on the same day with the same currency.

48 unchanged sentences

Property, Plant and Equipment

We record property, plant and equipment at cost, inclusive of assets under finance lease assets.

We record property, plant and equipment at cost, inclusive of assets under finance leases.

We depreciate the cost of the majority of our property, plant and equipment using the straight-line method with depreciable lives ranging from 20 to 40 years for buildings and 3 to 15 years for machinery, equipment and fixtures.

20 unchanged sentences

Lease expense for operating leases is recognized on a straight-line basis over the lease term.

Lease expense for finance leases are generally front-loaded as the finance lease ROU asset is depreciated on a straight-line basis, but interest expense on the liability is recognized utilizing the interest method that results in more expense during the early years of the lease.

Lease expense for finance leases is generally front-loaded as the finance lease ROU asset is depreciated on a straight-line basis, but interest expense on the liability is recognized utilizing the interest method that results in more expense during the early years of the lease.

We have lease agreements with lease and non-lease components, primarily related to real estate, vehicle and information technology (IT) assets.

8 unchanged sentences

An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value.

When we are required or opt to perform the quantitative impairment test, the fair value of each reporting unit is estimated with either the market approach or the income approach using a discounted cash flow model.

When we are required or opt to perform the quantitative impairment test, the fair value of each reporting unit is estimated with either the market approach or the income approach.

Our income approach method uses a discounted cash flow model in which cash flows anticipated over several periods, plus a terminal value at the end of that time horizon, are discounted to their present value using an appropriate rate of return.

3 unchanged sentences

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

• Within our New Power segment, our electrified power, fuel cell and hydrogen technologies businesses were aggregated into a single reporting unit and

• Within our New Power segment, our fuel cell and electrolyzer businesses were aggregated into a single reporting unit and

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

3 unchanged sentences

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.

At December 31, 2021, our recorded goodwill was $ 1,287 million, of which approximately 42 percent or $ 544 million resided in the automated transmissions reporting unit, 30 percent in the aggregated emission solutions and filtration reporting unit, 20 percent in the new power reporting unit and 6 percent in the distribution reporting unit.

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.

At December 31, 2022, our recorded goodwill was $ 2.3 billion, of which approximately 31 percent resided in the axles and brakes reporting unit, 23 percent in the automated transmissions reporting unit and 16 percent in the aggregated emission solutions and filtration reporting unit.

Changes in our projections or estimates, a deterioration of our operating results and the related cash flow effect or a significant increase in the discount rate could decrease the estimated fair value of our reporting units and result in a future impairment of goodwill.

15 unchanged sentences

As a result of the uncertainty surrounding the nature and frequency of product campaigns, the liability for such campaigns is recorded when we commit to a recall action or when a recall becomes probable and estimable, which generally occurs when it is announced.

The liability for these campaigns is reflected in the provision for warranties issued.

The liability for these campaigns is reflected in the provision for product campaigns.

We review and assess the liability for these programs on a quarterly basis.

10 unchanged sentences

When not associated with a sales contract, we generally account for these reimbursements as an offset to the related research and development expenditure.

Research and development expenses, net of contract reimbursements, were $ 1.1 billion, $ 903 million and $ 998 million for the years ended December 31, 2021, 2020 and 2019, respectively.

Research and development expenses, net of contract reimbursements, were $ 1.2 billion, $ 1.1 billion and $ 0.9 billion for the years ended December 31, 2022, 2021 and 2020, respectively.

Contract reimbursements were $ 110 million, $ 104 million and $ 86 million for the years ended December 31, 2022, 2021 and 2020, respectively.

3 unchanged sentences

Certain joint venture agreements transfer product at cost, some transfer product on a cost-plus basis, and others transfer product at market value.

Our related party sales are presented on the face of our Consolidated Statements of Net Income .

Our related party purchases were not material to our financial position or results of operations.

Sales to nonconsolidated equity investees were $ 1.2 billion, $ 1.7 billion and $ 1.3 billion for the years ended December 31, 2022, 2021 and 2020, respectively.

Related party sales in 2022 were down primarily due to lower sales in China due to COVID shutdowns and the acquisition of Cummins Westport, Inc.

(Westport JV).

Accounts receivable from nonconsolidated equity investees are presented on the face of our Consolidated Balance Sheets .

Purchases from nonconsolidated equity investees were $ 1.8 billion, $ 1.8 billion and $ 1.3 billion for the years ended December 31, 2022, 2021 and 2020, respectively, and accounts payable to nonconsolidated equity investees were $ 292 million and $ 227 million at December 31, 2022, and 2021, respectively.

Government Assistance

From time to time, we receive assistance from government agencies primarily related to two areas (1) expense reimbursement and funding grants in the form of cash in conjunction with research and development projects and (2) incentives primarily related to investments in new or existing facilities.

The grants and related projects range in term from 1 to 6 years.

Generally, the grant awards for research are payable to us when we achieve specific milestones or deliverables.

Certain grant awards are subject to audit, whereby non-compliance may result in a refund to the government agency.

Grants related to investments supporting facilities are typically in the form of reimbursement for capital assets or expenses such as training the employees at those facilities.

We recognize grant awards related to research and development as an offset of the related research and development expenditure when the awards become payable upon us meeting a specific milestone or deliverable.

We recognize grant awards for reimbursement of capital as a reduction in value of the related fixed asset.

We recognize grants for reimbursement of training or other expenses as an offset to the related expense.

For the year ended December 31, 2022, government grants did not have a material impact on our financial statements as a whole and we did not have any individually material grant awards.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

In November 2021, the Financial Accounting Standards Board (FASB) issued a standard related to the disclosure of government assistance received by an entity.

Under the new standard, entities are required to disclose (1) the types of assistance received, (2) accounting for the assistance and (3) impact of the assistance in the financial statements.

We adopted the new standard on January 1, 2022, on a prospective basis, and it did not have a material impact on our financial statements.

See Government Assistance above for additional information.

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)

Goodwill Acquired Intangibles Recognized (2)

Siemens Commercial Vehicles Propulsion (Siemens CVP) 11/30/22 100 % $ 187 $ — $ 187 $ 70 $ 106

Meritor, Inc.

08/03/22 100 % 2,613 248 2,861 894 1,610

Jacobs Vehicle Systems 04/08/22 100 % 345 — 345 108 164

Westport JV 02/07/22 50 % 42 — 42 — 20

(1) The newly consolidated entities were accounted for as business combinations.

On the date of acquisition, Meritor, Inc.

was included in the Components and New Power segments, Siemens CVP was included in the New Power segment, Jacobs Vehicle Systems was included in the Components segment and Westport JV was included in the Engine segment.

(2) Intangible assets acquired in the business combination were mostly customer, technology and trade name related.

On November 30, 2022, we acquired Siemens' Commercial Vehicles Propulsion business for approximately $ 187 million, subject to working capital and other customary adjustments.

This business develops, designs and produces electric drive systems including electric motors, inverters, software and related services for the commercial vehicle markets.

This acquisition is included in our New Power segment.

This acquisition added key capabilities in direct drive and transmission-based remote mount electric motors, inverters, software and related services that are critical elements in the next generation of electric powertrain, which will accelerate our ability to offer global customers a wider array of electrified product solutions across commercial vehicle applications.

The preliminary purchase price allocation was as follows:

Inventories $ 21

Property, plant and equipment 3

Intangible assets 106

Deferred revenue ( 3 )

Other, net ( 10 )

Total purchase price $ 187

The estimated fair values (all considered Level 3 measurements) of the identifiable intangible assets acquired, their weighted-average useful lives, the related valuation methodology and key assumptions are as follows:

Fair Value (in millions) Weighted-Average Useful Life (in years) Valuation Methodology Key Assumptions

Customer relationships $ 62 20 Multi-period excess earnings Discount rate, customer renewal rates

Technology 28 11 Relief-from-royalty Royalty rate, rate of return, obsolescence factor

Trade name 16 17 Relief-from-royalty Royalty rate, discount rate

Annual amortization of the intangible assets for the next five years is expected to approximate $ 7 million per year.

Goodwill was determined based on the residual difference between the fair value of consideration transferred and the value assigned to tangible and intangible assets and liabilities.

The majority of the goodwill is deductible for tax purposes.

Among the factors contributing to a purchase price resulting in the recognition of goodwill are the business's expected future customers, new versions of technologies, an acquired workforce and other economic benefits that are anticipated to arise from future product sales and operational synergies from combining the business with Cummins.

Included in our results for the year ended December 31, 2022, were revenues of $ 2 million and loss of $ 4 million related to this business.

The results of this business were reported in our New Power segment.

Pro forma financial information for the acquisition was not presented as the effects are not material to our Consolidated Financial Statements.

Meritor, Inc.

On August 3, 2022, we completed the acquisition of Meritor whereby we paid $ 36.50 per share for each outstanding share of Meritor, a global leader of drivetrain, mobility, braking, aftermarket and electric powertrain solutions for commercial vehicle and industrial markets.

The total purchase price was $ 2.9 billion, including debt that was retired on the closing date of $ 248 million.

In addition, we assumed $ 1.0 billion of additional debt, of which $ 0.9 billion was retired prior to the end of the third quarter.

The acquisition was funded with a combination of $ 2.0 billion in new debt (see NOTE 13, "DEBT" for additional details), cash on hand and additional commercial paper borrowings.

The integration of Meritor’s people, technology and capabilities position us as one of the few companies able to provide integrated powertrain solutions across combustion and electric power applications at a time when demand for decarbonized solutions is continuing to accelerate.

The majority of this business will be included within our Components segment with the exception of the electric powertrain business, which will be included in our New Power segment.

The values assigned to individual assets acquired and liabilities assumed are preliminary based on management’s current best estimate and subject to change as certain matters are finalized.

The primary areas that remain open include, but are not limited to, legal and other contingent liabilities and deferred taxes as we continue to refine our allocation by jurisdiction.

The preliminary purchase price allocation has been updated as follows:

Cash and cash equivalents $ 98

Accounts and notes receivable, net 640

Inventories 750

Property, plant and equipment 846

Intangible assets 1,610

Investments and advances related to equity method investees 382

Pension assets 147

Other current and long-term assets 322

Accounts payable (principally trade) ( 711 )

Net deferred taxes ( 320 )

Other liabilities (pensions and other postretirement benefits) ( 129 )

Long-term debt ( 962 )

Other current and long-term liabilities ( 595 )

Noncontrolling interests ( 111 )

Total purchase price $ 2,861

We made certain measurement period adjustments in the fourth quarter to the balance sheet resulting in an increase in goodwill of $ 44 million.

None of the adjustments were individually material.

There was no income statement impact on prior periods as a result of these changes.

Fair Value (in millions) Weighted-Average Useful Life (in years) Valuation Methodology Key Assumptions

Customer relationships $ 960 12 Multi-period excess earnings Revenue, EBITDA (1) , discount rate, customer renewal rates, customer attrition rates

Technology 345 8 Relief-from-royalty Royalty rate, discount rate, obsolescence factor

Trade name 305 21 Relief-from-royalty Royalty rate, discount rate

(1) E arnings or losses before interest expense, income taxes, depreciation and amortization and noncontrolling interests

Annual amortization of the intangible assets for the next five years is expected to approximate $ 142 million per year.

Goodwill was determined based on the residual difference between the fair value of consideration transferred and the value assigned to tangible and intangible assets and liabilities.

Goodwill was allocated to the Components segment ($ 727 million) and the New Power segment ($ 167 million) based on the relative value of those businesses compared to the assets and liabilities assigned to them.

We do not expect any of the goodwill to be deductible for tax purposes.

Among the factors contributing to a purchase price resulting in the recognition of goodwill are Meritor’s expected future customers, new versions of technologies, an acquired workforce, other economic benefits that are anticipated to arise from future product sales and operational synergies from combining the business with Cummins.

Included in our results for the year ended December 31, 2022, were revenues of $ 1.9 billion and net loss of $ 43 million related to this business.

In addition, in 2022 we incurred acquisition related costs of $ 30 million included in selling, general and administrative expenses in our Consolidated Statements of Net Income .

The following table presents the supplemental consolidated results of the Company for the years ended December 31, 2022 and 2021, on an unaudited pro-forma basis as if the acquisition had been consummated on January 1, 2021.

The primary adjustments reflected in the pro-forma results related to (1) increase in interest expense for debt used to fund the acquisition, (2) removal of acquisition related costs from 2022 (and included in 2021) and (3) changes related to purchase accounting primarily related to amortization of intangibles, fixed assets and joint ventures.

The unaudited pro forma financial information presented below does not purport to represent the actual results of operations that Cummins and Meritor would have achieved had the companies been combined during the periods presented and was not intended to project the future results of operations that the combined company could achieve after the acquisition.

The unaudited pro forma financial information does not reflect any potential cost savings, operating efficiencies, long-term debt pay down estimates, financial synergies or other strategic benefits as a result of the acquisition or any restructuring costs to achieve those benefits.

(Unaudited) Years ended

In millions December 31,

2022 December 31,

Net sales $ 30,841 $ 27,949

Net income 2,196 2,058

The Meritor acquisition increased net assets in the Components segment by $ 3.8 billion and New Power segment by $ 0.3 billion.

Jacobs Vehicle Systems

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

The purchase price was $ 345 million in cash, subject to typical adjustments related to closing working capital and other amounts and does not contain any contingent consideration.

Jacobs is a supplier of engine braking, cylinder deactivation and start and stop thermal management technologies.

The acquisition furthers our investment in key technologies and capabilities to drive growth, while securing our supply base.

The final purchase price allocation was as follows:

Cash and cash equivalents $ 18

Accounts and notes receivable, net 24

Inventories 15

Property, plant and equipment 70

Intangible assets 164

Accounts payable (principally trade) ( 21 )

Net deferred taxes ( 27 )

Other, net ( 6 )

Total purchase price $ 345

Fair Value (in millions) Weighted-Average Useful Life (in years) Valuation Methodology Key Assumptions

Customer relationships $ 108 9 Multi-period excess earnings Discount rate, customer renewal rates

Technology 31 7 Relief-from-royalty Royalty rate, rate of return, obsolescence factor

Trade name 25 14 Relief-from-royalty Royalty rate, discount

Annual amortization of the intangible assets for the next five years is expected to approximate $ 18 million per year.

Goodwill was determined based on the residual difference between the fair value of consideration transferred and the value assigned to tangible and intangible assets and liabilities.

Approximately $ 9 million of the goodwill is deductible for tax purposes.

Among the factors contributing to a purchase price resulting in the recognition of goodwill are Jacob’s expected future customers, new versions of technologies, an acquired workforce and other economic benefits that are anticipated to arise from future product sales and operational synergies from combining the business with Cummins.

Included in our results for the year ended December 31, 2022, were revenues of $ 118 million and loss of $ 1 million related to this business.

The results of this business were reported in our Components segment.

Pro forma financial information for the acquisition was not presented as the effects are not material to our Consolidated Financial Statements.

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

We will continue to operate the business as the sole owner.

The purchase price was $ 42 million and was allocated primarily to cash, warranty and deferred revenue related to extended coverage contracts.

The results of the business were reported in our Engine segment.

Pro forma financial information for the acquisition was not presented as the effects are not material to our Consolidated Financial Statements.

Pending Acquisition

In October 2022, we signed an agreement to purchase all of the equity ownership interest of Teksid Hierro de Mexico, S.A.

(Teksid MX) and Teksid, Inc.

from Stellantis N.V.

for approximately € 115 million, subject to certain adjustments set forth in the agreement.

Teksid MX operates a cast iron foundry located in Monclova, Mexico, which primarily forges blocks and heads used in our and other manufacturers’ engines.

facilitates the commercialization of Teksid MX products in North America.

The transaction, which is subject to customary closing conditions and receipt of applicable regulatory approvals, is expected to close in early 2023.

Since we are the primary customer of the foundry, the acquisition is not expected to result in material incremental sales to our business.

The acquisition will be included in our Engine segment.

REVENUE FROM CONTRACTS WITH CUSTOMERS

35 unchanged sentences

Total sales $ 8,199 $ 7,589 $ 5,925

Components segment external sales by business were as follows:

Years ended December 31,

In millions 2022 2021 2020

Emission solutions $ 3,086 $ 3,142 $ 2,352

Axles and brakes 1,879 — —

Filtration 1,259 1,171 1,005

Turbo technologies 806 787 673

Automated transmissions 593 481 303

Electronics and fuel systems 224 351 317

Total sales $ 7,847 $ 5,932 $ 4,650

Distribution segment external sales by region were as follows:

4 unchanged sentences

Europe 705 647 597

Russia 334 191 157

China 351 323 340

Africa and Middle East 227 259 198

Commonwealth of Independent States 232 334 191

India 217 194 150

5 unchanged sentences

Parts $ 3,809 $ 3,136 $ 2,921

Power generation 1,754 1,686 1,777

Engines 1,770 1,493 1,245

Power generation 1,767 1,754 1,686

Service 1,555 1,359 1,258

Total sales $ 8,901 $ 7,742 $ 7,110

Components segment external sales by business were as follows:

Years ended December 31,

In millions 2021 2020 2019

Emission solutions $ 3,142 $ 2,352 $ 2,763

Filtration 1,171 1,005 1,024

Turbo technologies 787 673 696

Automated transmissions 481 303 534

Electronics and fuel systems 351 317 236

Total sales $ 5,932 $ 4,650 $ 5,253

Power Systems segment external sales by product line were as follows:

11 unchanged sentences

Beijing Foton Cummins Engine Co., Ltd.

Dongfeng Cummins Engine Company, Ltd.

Chongqing Cummins Engine Company, Ltd.

Sisamex 50 % 144 —

Cummins-Scania XPI Manufacturing, LLC 50 % 130 125

Automotive Axles Limited 36 % 125 —

Chongqing Cummins Engine Company, Ltd.

Dongfeng Cummins Engine Company, Ltd.

Tata Cummins, Ltd.

Freios Master 49 % 86 —

Other Various 474 503

6 unchanged sentences

Manufacturing entities

Beijing Foton Cummins Engine Co., Ltd.

$ 112 $ 113 $ 60

Dongfeng Cummins Engine Company, Ltd.

$ 45 $ 82 $ 63

Beijing Foton Cummins Engine Co., Ltd.

Chongqing Cummins Engine Company, Ltd.

Tata Cummins, Ltd.

All other manufacturers 28 (2)

7 unchanged sentences

See NOTE 5, "INCOME TAXES" for additional information on India Tax Law Change.

(2) Includes impairment charges of $ 13 million and loss on sale of business of $ 8 million for a joint venture in the Power Systems segment.

(2) 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 Westport JV.

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

(3) Includes $ 19 million in favorable adjustments related to India Tax Law Change, impairment charges of $ 13 million and loss on sale of business of $ 8 million for a joint venture in the Power Systems segment.

See NOTE 5, "INCOME TAXES" for additional information on India Tax Law Change.

Manufacturing Entities

2 unchanged sentences

Our engine manufacturing joint ventures are supplied by our Components segment in the same manner as it supplies our wholly-owned Engine segment and Power Systems segment manufacturing facilities.

Our Components segment joint ventures and wholly-owned entities provide electronics, fuel systems, filtration, aftertreatment systems, turbocharger products and automated transmissions that are used with our engines as well as some competitors' products.

Our Components segment joint ventures and wholly-owned entities provide electronics, fuel systems, filtration, aftertreatment systems, turbocharger products, axles, drivelines, braking systems and automated transmissions that are used with our engines as well as some competitors' products.

The results and investments in our joint ventures in which we have 50 percent or less ownership interest (except for Eaton Cummins Automated Transmission Technologies joint venture, which is consolidated due to our majority voting interest) are included in equity, royalty and interest income from investees and investments and advances related to equity method investees in our Consolidated Statements of Net Income and Consolidated Balance Sheets , respectively.

3 unchanged sentences

The light-duty business produces our families of ISF 2.5 liter to 4.5 liter high performance light-duty diesel engines in Beijing.

These engines are used in light-duty and medium-duty commercial trucks, pick-up trucks, buses, multipurpose and sport utility vehicles with main markets in China, Brazil and Russia.

These engines are used in light-duty and medium-duty commercial trucks, pick-up trucks, buses, multipurpose and sport utility vehicles with main markets in China and Brazil.

Certain types of small construction equipment and industrial applications are also served by these engine families.

12 unchanged sentences

This joint venture manufactures several models of our heavy-duty and high-horsepower diesel engines primarily serving the industrial and stationary power markets in China.

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.

• Tata Cummins, Ltd.

- Tata Cummins, Ltd.

is a joint venture in India with Tata Motors Ltd., the largest automotive company in India and a member of the Tata group of companies.

This joint venture manufactures Cummins' 3.80 to 8.9 -liter diesel and natural gas engines in India with a power range from 75 to 400 horsepower for use in trucks manufactured by Tata Motors, as well as for various industrial and power generation applications for Cummins.

Distribution Entities

41 unchanged sentences

Impact of India tax law changes — — ( 17 )

Total deferred income tax expense (benefit) 7 7 ( 4 )

Total deferred income tax (benefit) expense ( 274 ) 7 7

Income tax expense $ 636 $ 587 $ 527

12 unchanged sentences

Effective tax rate 22.6 % 21.3 % 22.5 %

Our effective tax rate for 2021 was 21.3 percent compared to 22.5 percent for 2020 and 20.0 percent for 2019.

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, 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 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.

7 unchanged sentences

(1) The adjustment to income tax expense includes $ 15 million of favorable discrete items.

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

At December 31, 2022, $ 5.2 billion of non-U.S.

10 unchanged sentences

Lease liabilities 110 108

Capitalized research and development expenditures 238 —

Accrued expenses 174 111

7 unchanged sentences

Lease assets ( 108 ) ( 105 )

Intangible assets ( 435 ) ( 44 )

Other ( 50 ) ( 29 )

Total deferred tax liabilities ( 1,483 ) ( 1,002 )

Net deferred tax assets $ 25 $ 154

Net deferred tax (liabilities) assets $ ( 24 ) $ 25

Our 2022 U.S.

2 unchanged sentences

A valuation allowance is recorded to reduce the gross deferred tax assets to an amount we believe is more likely than not to be realized.

The valuation allowance is $ 360 million and increased in 2021 by a net $ 14 million.

The valuation allowance is $ 704 million and increased in 2022 by a net $ 344 million primarily due to the Meritor acquisition.

The valuation allowance is primarily attributable to the uncertainty regarding the realization of a portion of the U.S.

9 unchanged sentences

Other liabilities

Long-term income tax 263 289

Long-term income taxes 192 263

Deferred income tax liabilities 649 403

2 unchanged sentences

Balance at beginning of year $ 89 $ 122 $ 77

Additions to tax positions due to acquisitions 189 — —

Additions to current year tax positions 17 11 9

23 unchanged sentences

Debt securities 2 — 2 1 — 1

Total marketable securities $ 583 $ 12 $ 595 $ 451 $ 10 $ 461

(1) Unrealized gains and losses for debt securities are recorded in other comprehensive income while unrealized gains and losses for equity securities are recorded in "Other income, net" in our Consolidated Statements of Net Income .

Marketable securities $ 474 $ ( 2 ) $ 472 $ 583 $ 12 $ 595

(1) Unrealized gains and losses for debt securities are recorded in other comprehensive income while unrealized gains and losses for equity securities are recorded in our Consolidated Statements of Net Income .

All debt securities are classified as available-for-sale.

25 unchanged sentences

Excess of FIFO over LIFO ( 240 ) ( 192 )

Total inventories $ 4,355 $ 3,425

Inventories $ 5,603 $ 4,355

PROPERTY, PLANT AND EQUIPMENT

64 unchanged sentences

Balance at December 31, 2020 $ 941 $ 257 $ 79 $ 10 $ 6 $ 1,293

Translation and other 7 — — — — 7

Acquisitions — — — 2 — 2

Foreign currency translation and other ( 7 ) — — ( 1 ) — ( 8 )

Balance at December 31, 2021 934 257 79 11 6 1,287

Acquisitions 835 237 — — — 1,072

Translation and other ( 7 ) — — ( 1 ) — ( 8 )

Foreign currency translation and other ( 17 ) 1 — — — ( 16 )

Balance at December 31, 2022 $ 1,752 $ 495 $ 79 $ 11 $ 6 $ 2,343

8 unchanged sentences

Trademarks, patents, customer relationships and other, net 2,418 628

Total other intangible assets, net $ 900 $ 963

Other intangible assets, net $ 2,687 $ 900

Amortization expense for software and other intangibles totaled $ 223 million, $ 144 million and $ 165 million for the years ended December 31, 2022, 2021 and 2020, respectively.

8 unchanged sentences

The level of benefits and terms of vesting may vary among plans and are offered in accordance with applicable laws.

Pension plans assets are administered by trustees and are principally invested in fixed income securities and equity securities.

Pension plan assets are administered by trustees and are principally invested in fixed income securities and equity securities.

It is our policy to make contributions to our various qualified plans in accordance with statutory and contractual funding requirements, and any additional contributions we determine are appropriate.

Prior to the acquisition, Meritor provided a range of benefits to certain employees and retirees, including pension benefits and postretirement healthcare benefits (OPEB).

The Meritor U.S.

defined benefit plans are frozen.

As part of the acquisition, we assumed the assets and liabilities associated with these plans, which are included in the tables below.

Obligations, Assets and Funded Status

7 unchanged sentences

Interest cost 101 79 39 30

Actuarial (gain) loss ( 132 ) 224 ( 136 ) 136

Actuarial gain ( 643 ) ( 132 ) ( 702 ) ( 136 )

Benefits paid from fund ( 200 ) ( 178 ) ( 70 ) ( 63 )

Benefits paid directly by employer ( 25 ) ( 18 ) — —

Plan amendment 3 — — —

Assumption of Meritor's benefit obligation 786 — 418 —

Foreign currency translation adjustments — — ( 204 ) ( 27 )

5 unchanged sentences

Benefits paid from fund ( 200 ) ( 178 ) ( 70 ) ( 63 )

Assumption of Meritor's plan assets 699 — 565 —

Foreign currency translation adjustments — — ( 258 ) ( 32 )

4 unchanged sentences

Accrued compensation, benefits and retirement costs ( 24 ) ( 18 ) — —

Pension and OPEB ( 431 ) ( 431 ) — —

Other liabilities ( 445 ) ( 431 ) — —

Net amount recognized $ 657 $ 536 $ 272 $ 503

15 unchanged sentences

PBO 1,078 449 — —

Components of Net Periodic Pension Cost

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

Components of Net Periodic Pension Cost (Income)

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

Qualified and Non-Qualified Pension Plans

5 unchanged sentences

Recognized net actuarial loss 23 47 41 3 31 34

Net periodic pension cost $ 67 $ 75 $ 53 $ 11 $ 27 $ 12

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

Net periodic pension cost (income) $ 33 $ 67 $ 75 $ ( 14 ) $ 11 $ 27

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

In millions 2022 2021 2020

1 unchanged sentence

Recognized net actuarial loss ( 26 ) ( 78 ) ( 75 )

Incurred actuarial (gain) loss ( 368 ) 85 101

Incurred prior service cost 3 — —

Incurred actuarial loss (gain) 173 ( 368 ) 85

Foreign currency translation adjustments — 5 19

Total recognized in other comprehensive (income) loss $ ( 444 ) $ 26 $ 74

Total recognized in net periodic pension cost and other comprehensive (income) loss $ ( 366 ) $ 128 $ 139

Total recognized in other comprehensive loss (income) $ 148 $ ( 444 ) $ 26

Total recognized in net periodic pension cost and other comprehensive loss (income) $ 167 $ ( 366 ) $ 128

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

10 unchanged sentences

Compensation increase rate 2.71 % 2.72 % 2.73 % 3.75 % 3.75 % 3.75 %

Our investment policies in the U.S.

Our investment policies, excluding Meritor, in the U.S.

provide for the rebalancing of assets to maintain our long-term strategic asset allocation.

2 unchanged sentences

We believe that our portfolio is highly diversified and does not have any significant exposure to concentration risk.

The plan assets for our defined benefit pension plans do not include any of our common stock.

qualified pension plans, our assumption for the expected return on assets was 6.25 percent in 2021.

The plan assets for our defined benefit pension plans do not include any of our common stock or corporate bonds.

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.

For the Cummins U.S.

qualified pension plan, our assumption for the expected return is greatly influenced by our objective to match assets and liabilities and the increase in bond yields.

Projected returns are based primarily on broad, publicly traded equity and fixed income indices and forward-looking estimates of active portfolio and investment management.

We expect additional positive returns from this active investment management.

Based on the historical returns and forward-looking return expectations, we elected to maintain our assumption of 6.25 percent in 2022.

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

Asset Class Target Minimum Maximum

Based on the historical returns and forward-looking return expectations, we elected an assumption of 7.00 percent in 2023.

For the Meritor U.S.

qualified pension plan, our assumption for the expected return is based upon the primary investment objective to exceed, on a net-of-fees basis, the rate of return on a policy portfolio represented in the following table.

We expect active management and the alternative investments to provide excess return over the long run.

Based upon these objectives, historical returns, yield curve movements and forward-looking expectations, we elected an assumption of 7.00 percent in 2023.

To achieve these objectives, we established the following targets:

Cummins Meritor

Asset Class Plan Target Plan Target

equities 5 % 11 %

5 unchanged sentences

Opportunistic credit 4 % — %

Alternative investments — % 39 %

Fixed income 72 % 41 %

Total 100 % 100 %

The fixed income component is structured to represent a custom bond benchmark that will closely hedge the change in the value of our liabilities.

The fixed income component of the Cummins plan is structured to represent a custom bond benchmark that will closely hedge the change in the value of our liabilities.

This component is structured in such a way that its benchmark covers approximately 100 percent of the plan's exposure to changes in its discount rate (AA corporate bond yields).

1 unchanged sentence

However, all managers hired to manage assets for the trust are prohibited from using leverage unless approved by the BPC.

qualified pension plans, our assumption for the expected return on assets was 4.0 percent in 2021.

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

Investment strategies for the Meritor plan assets reflect a balance of risk-reducing and return-seeking considerations.

The objective of minimizing the volatility of assets relative to liabilities is addressed primarily through asset diversification.

Assets are broadly diversified across several asset classes to achieve risk-adjusted returns that accomplish this objective.

Meritor plan assets are also allocated to fixed income investments, which seek to minimize interest rate risk volatility relative to pension liabilities.

The fixed income portfolio partially matches the long-dated nature of the pension liabilities reducing interest rate risk.

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

was based on establishing an equity-risk premium over current long-term bond yields adjusted based on target asset allocations.

3 unchanged sentences

To achieve these objectives, we established the following targets:

Asset Class Target

Cummins Plan Target Meritor Plan Target Range

Asset Class Minimum Maximum

Equities 8 % 15 % 30 %

Private markets/secure income assets 19 % — % — %

Credit 16.0 %

Diversifying strategies 5.0 %

Credit/bank loans 4 % — % 15 %

Diversified strategies 4 % 25 % 50 %

Real estate — % — % 15 %

Fixed income/insurance annuity 64 % 25 % 45 %

Total 100.0 %

Cash 1 % — % — %

As part of our strategy in the U.K.

2 unchanged sentences

plan, derivatives may be used to better match liability duration and are not used in a speculative way.

The 56 percent fixed income component is structured in a way that covers approximately 90 percent of the plan's exposure to changes in its discount rate.

The fixed income component of the Cummins portfolio, excluding the annuity contract, hedges approximately 15 percent of the plan’s exposure to interest rates and 30 percent of the plan’s exposure to inflation.

The insurance annuity contract covers approximately another 21 percent of exposure to interest rates and 18 percent of inflation.

The fixed income component of the Meritor portfolio, excluding the annuity contract, hedges approximately 100 percent of the plan's exposure to interest rates and 100 percent of the plan's exposure to inflation.

The insurance annuity contract effectively hedges 100 percent of the insured liabilities exposure to interest rates and 100 percent of the insured liabilities to inflation.

Based on the above discussion, we elected an assumption of 5.00 percent in 2023.

13 unchanged sentences

Corporate debt

Asset/mortgaged backed securities 7 — — 7

Net cash equivalents (1)

Diversified strategies 14 — — 14

Private markets and real assets (2)

Net plan assets subject to leveling $ 681 $ 661 $ 641 $ 1,983

Pending trade/purchases/sales 2

Investments measured at net asset value 1,838

11 unchanged sentences

Corporate debt

Asset/mortgaged backed securities — 3 — 3

Net cash equivalents (1)

1 unchanged sentence

Net plan assets subject to leveling $ 460 $ 595 $ 551 $ 1,606

Pending trade/purchases/sales 2

Investments measured at net asset value 1,934

14 unchanged sentences

These funds are valued using NAVs and allow quarterly or more frequent redemptions.

• Diversified Strategies ($ 18 million at December 31, 2022) - These commingled funds invest in commodities, fixed income and equity securities.

They have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days.

The reconciliation of Level 3 assets was as follows:

10 unchanged sentences

Purchases, sales and settlements, net ( 12 ) ( 17 ) ( 29 )

Assumption of Meritor's plan assets 94 — 94

Balance at December 31, 2022 $ 559 $ 82 $ 641

11 unchanged sentences

$ 13 $ — $ — $ 13

Government debt — 222 — 222

Corporate debt

Net cash equivalents (1)

2 unchanged sentences

Net plan assets subject to leveling $ 49 $ 337 $ 818 $ 1,204

Pending trade/purchases/sales 141

Investments measured at net asset value 323

16 unchanged sentences

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

(2) In July 2012, the U.K.

pension plan purchased an insurance contract that will guarantee payment of specified pension liabilities.

The contract defers payment for 10 years.

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

1 unchanged sentence

Real assets include real estate and infrastructure.

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

Ce rtain of our assets are valued based on their respective NAV (or its equivalent), as an alternative to estimated fair value due to the absence of readily available market prices.

2 unchanged sentences

Equities ($ 0 million and $ 194 million at December 31, 2022 and 2021, respectively) - These commingled funds have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days.

• Government Debt ($ 64 million at December 31, 2022) - These commingled funds have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days.

• Asset/Mortgage Backed Securities ($ 128 million and $ 99 million at December 31, 2022 and 2021, respectively) - This asset type represents investments in fixed- and floating-rate loans.

9 unchanged sentences

Actual return on plan assets

Unrealized gains (losses) on assets still held at the reporting date 80 ( 2 ) 22 100

Unrealized (losses) gains on assets still held at the reporting date ( 42 ) 2 114 74

Purchases, sales and settlements, net — — ( 9 ) ( 9 )

3 unchanged sentences

Purchases, sales and settlements, net — ( 23 ) ( 13 ) ( 36 )

Assumption of Meritor's plan assets 92 — — 92

Balance at December 31, 2022 $ 428 $ 8 $ 382 $ 818

18 unchanged sentences

Other postretirement benefits 141 173

Other long-term liabilities 437 320

Other liabilities $ 3,311 $ 2,796

Loans Payable and Commercial Paper

Loans Payable

Loans payable at December 31, 2022 and 2021 were $ 210 million and $ 208 million, respectively, and consisted primarily of notes payable to financial institutions.

1 unchanged sentence

Weighted-average interest rate 4.02 % 2.71 %

Commercial Paper

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

We had $ 313 million and $ 323 million in outstanding borrowings under our commercial paper programs at December 31, 2021 and 2020, respectively.

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

We had $ 2.6 billion and $ 313 million in outstanding borrowings under our commercial paper programs at December 31, 2022 and 2021, respectively.

The weighted-average interest rate for commercial paper at December 31 was as follows:

1 unchanged sentence

( 0.01 ) % (2)

(1) The weighted-average interest rate, inclusive of all brokerage fees, was negative 0.01 percent at December 31, 2021.

This included $ 113 million of borrowings under the Europe program that were at a negative weighted-average interest rate of 0.39 percent and $ 200 million of borrowings under the U.S.

(1) The weighted-average interest rate, inclusive of all brokerage fees, was 4.27 percent at December 31, 2022.

This included $ 107 million of borrowings under the Europe program at a weighted-average interest rate of 1.86 percent and $ 2.5 billion of borrowings under the U.S.

program at a weighted-average interest rate of 4.38 percent.

3 unchanged sentences

Revolving Credit Facilities

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.

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.

On August 18, 2021, we entered into an amended and restated 5 -year revolving credit agreement, which allows us to borrow up to $ 2 billion of unsecured funds at any time prior to August 18, 2026.

This credit agreement replaces the prior $ 2 billion 5 -year credit agreement that would have matured on August 22, 2023.

Amounts payable under our revolving credit facility will rank pro rata with all of our unsecured, unsubordinated indebtedness.

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 Secured Overnight Financing Rate (SOFR) as an interest rate benchmark and to make other conforming changes to interest rate determinations.

Amounts payable under our revolving credit facility rank pro rata with all of our unsecured, unsubordinated indebtedness.

Up to $ 300 million under this credit facility is available for swingline loans.

Based on our current long-term debt ratings, the applicable margin on LIBOR rate loans was 0.75 percent per annum as of December 31, 2021.

Based on our current long-term debt ratings, the applicable margin on SOFR rate loans was 0.85 percent per annum including a 0.10 percent LIBOR to SOFR adjustment as of December 31, 2022.

Advances under the facility may be prepaid without premium or penalty, subject to customary breakage costs.

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.

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

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

At December 31, 2022, we were in compliance with the financial debt covenants.

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.

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

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

At December 31, 2021, our $ 313 million of commercial paper outstanding effectively reduced the $ 3.5 billion available capacity under our revolving credit facilities to $ 3.2 billion.

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

At December 31, 2022, our $ 2.6 billion of commercial paper outstanding effectively reduced the $ 4.0 billion available capacity under our revolving credit facilities to $ 1.4 billion.

At December 31, 2022, we also had $ 226 million available for borrowings under our international and other domestic credit facilities.

4 unchanged sentences

Senior notes, due 2023 (1)

3.65 % $ 500 $ 500

Term loan, due 2025 Variable 1,550 —

Senior notes, due 2025 (2)

15 unchanged sentences

Long-term debt $ 4,498 $ 3,579

(1) Senior notes, due 2023, are classified as current maturities of long-term debt at December 31, 2022.

(2) In 2021 we entered into a series of interest rate swaps to effectively convert from a fixed rate to floating rate.

See "Interest Rate Risk" below for additional information.

(2) The effective interest rate is 7.48 %.

See "Interest Rate Risk" section of NOTE 22, "DERIVATIVES," for additional information.

(3) The effective interest rate is 7.48 percent.

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

1 unchanged sentence

Principal payments $ 573 $ 44 $ 2,061 $ 56 $ 64

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

We received net proceeds of $ 1.98 billion.

The senior unsecured notes pay interest semi-annually on March 1 and September 1, commencing on March 1, 2021.

The indenture governing the senior unsecured notes contains covenants that, among other matters, limit (i) our ability to consolidate or merge into, or sell, assign, convey, lease, transfer or otherwise dispose of all or substantially all of our and our subsidiaries' assets to another person, (ii) our and certain of our subsidiaries' ability to create or assume liens and (iii) our and certain of our subsidiaries' ability to engage in sale and leaseback transactions.

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.

During the fourth quarter of 2022, we paid down $ 450 million of the term loan.

The interest rate is based on 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.

The $ 250 million 7.125 percent debentures and $ 165 million 5.65 percent debentures are unsecured and are not subject to any sinking fund requirements.

7 unchanged sentences

Our current shelf is scheduled to expire in February 2025.

We have begun the renewal process and plan to file a new automatic shelf registration statement in the first quarter of 2022.

Interest Expense

For the years ended December 31, 2022, 2021 and 2020, total interest incurred was $ 204 million, $ 113 million and $ 102 million, respectively, and interest capitalized was $ 5 million, $ 2 million and $ 2 million, respectively.

Interest Rate Risk

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

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

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

The gain or loss on these derivative instruments, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, are recognized in current income as "Interest expense." The net swap settlements that accrue each period are also reported in the Consolidated Financial Statements as "Interest expense."

We had a series of interest rate swaps to effectively convert our September 2013, $ 500 million debt issue, due in 2023, from a fixed rate of 3.65 percent to a floating rate equal to the one-month LIBOR plus a spread.

The debt is included in the Consolidated Balance Sheets as "Long-term debt." The terms of the swaps mirrored those of the debt, with interest paid semi-annually.

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

The gain or loss on these derivative instruments, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, were recognized in current income as "Interest expense." The net swap settlements that accrued each period were also reported in the Consolidated Financial Statements as "Interest expense." A basis adjustment related to credit risk, excluded from the assessment of effectiveness, was being amortized over the life of the hedge using a straight-line method and was considered de minimis.

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

The $ 24 million gain realized upon settlement is being amortized over the remaining three -year term of the related debt.

The following table summarizes the gains and losses:

Years ended December 31,

In millions 2021 2020 2019

Type of Swap Gain (Loss) on Swaps Gain (Loss) on Borrowings Gain (Loss) on Swaps Gain (Loss) on Borrowings Gain (Loss) on

Swaps Gain (Loss) on

Interest rate swaps (1)

$ ( 3 ) $ 2 $ 7 $ ( 5 ) $ 16 $ ( 14 )

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

In 2019 we entered into $ 350 million of interest rate lock agreements, and in the first half of 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.

The terms of the rate locks mirror the time period of the expected fixed rate debt issuance and the expected timing of interest payments on that debt.

The gains and losses on these derivative instruments will be initially recorded in other comprehensive income and will be released to earnings in "Interest expense" in future periods to reflect the difference in (1) the fixed rates economically locked in at the inception of the hedge and (2) the actual fixed rates established in the debt instrument at issuance.

The following table summarizes the interest rate lock activity in AOCL:

Year ended December 31,

In millions 2021 2020 2019

Type of Swap Gain (Loss)

Recognized in AOCL Gain (Loss) Reclassified from AOCL into Interest Expense Gain (Loss)

Recognized in AOCL Gain (Loss) Reclassified from AOCL into Interest Expense

Interest rate locks $ 19 $ — ( 22 ) — ( 10 ) —

Fair Value of Debt

5 unchanged sentences

(1) The fair value of debt is derived from Level 2 input measures.

Filtration Contingent Debt Agreement

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.

PRODUCT WARRANTY LIABILITY

7 unchanged sentences

Amortization of deferred revenue on extended warranty contracts ( 298 ) ( 260 ) ( 227 )

Changes in estimates for pre-existing product warranties ( 228 ) ( 52 ) ( 24 )

Foreign currency translation and other ( 1 ) 5 1

Changes in estimates for pre-existing product warranties and campaigns ( 128 ) ( 228 ) ( 52 )

Acquisitions (1)

Foreign currency translation adjustments and other ( 16 ) ( 1 ) 5

Balance, end of year $ 2,477 $ 2,425 $ 2,307

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

We recognized supplier recoveries of $ 39 million, $ 170 million and $ 20 million for the years ended December 31, 2022, 2021 and 2020, respectively.

7 unchanged sentences

Current portion $ 726 $ 755 Current portion of accrued product warranty

Long-term portion 684 672 Accrued product warranty

Long-term portion 744 684 Other liabilities

Total $ 1,470 $ 1,439

Total warranty accrual $ 2,477 $ 2,425

Engine System Campaign Accrual

During 2017, the California Air Resources Board (CARB) and the U.S.

Environmental Protection Agency (EPA) selected certain of our pre-2013 model year engine systems for additional emissions testing.

Some of these engine systems failed CARB and EPA tests as a result of degradation of an aftertreatment component.

In the second quarter of 2018, we reached agreement with the CARB and EPA regarding our plans to address the affected populations.

From the fourth quarter of 2017 through the second quarter of 2018, we recorded charges for the expected costs of field campaigns to repair these engine systems.

The campaigns launched in the third quarter of 2018 are being completed in phases across the affected population.

The total engine system campaign charge, excluding supplier recoveries, was $ 410 million.

In the fourth quarter of 2020, we recorded an additional $ 20 million charge related to this campaign, as a change in estimate, to bring the total campaign, excluding supplier recoveries, to $ 430 million.

At December 31, 2021, the remaining accrual balance was $ 82 million.

COMMITMENTS AND CONTINGENCIES

11 unchanged sentences

workplace safety;

and environmental matters.

environmental matters;

and asbestos claims.

We also have been identified as a potentially responsible party at multiple waste disposal sites under U.S.

7 unchanged sentences

While we believe we comply with such laws, they are complex, subject to varying interpretations and we are often engaged in litigation regarding the application of these laws to particular circumstances.

On April 29, 2019, we announced that we were conducting a formal internal review of our emissions certification process and compliance with emission standards for our pick-up truck applications, following conversations with the EPA and CARB regarding certification of our engines in model year 2019 RAM 2500 and 3500 trucks.

On June 28, 2022, KAMAZ Publicly Traded Company (KAMAZ) was designated to the List of Specially Designated Nationals and Blocked Persons by the U.S.

Department of the Treasury’s Office of Foreign Assets Control.

We filed blocked property reports for relevant assets and are seeking relevant authorizations to extricate ourselves from our relationship with KAMAZ and its subsidiaries, including our unconsolidated joint venture with KAMAZ (Unconsolidated JV), in compliance with U.S.

On April 29, 2019, we announced that we were conducting a formal internal review of our emissions certification process and compliance with emission standards for our pick-up truck applications, following conversations with the Environmental Protection Agency (EPA) and California Air Resources Board (CARB) regarding certification of our engines in model year 2019 RAM 2500 and 3500 trucks.

This review is being conducted with external advisors as we strive to ensure the certification and compliance processes for all of our pick-up truck applications are consistent with our internal policies, engineering standards and applicable laws.

During conversations with the EPA and CARB about the effectiveness of our pick-up truck applications, the regulators raised concerns that certain aspects of our emissions systems may reduce the effectiveness of

our emissions control systems and thereby act as defeat devices.

As a result, our internal review focuses, in part, on the regulators’ concerns.

1 unchanged sentence

Based on discussions with the regulators, we have developed a new calibration for the engines in model year 2019 RAM 2500 and 3500 trucks that has been included in all engines shipped since September 2019.

During our ongoing discussions, the regulators turned their attention to other model years and other engines, most notably our pick-up truck applications for RAM 2500 and 3500 trucks for model years 2013 through 2018.

Due to the continuing nature of our formal review, our ongoing cooperation with our regulators and the presence of many unknown facts and circumstances, we cannot predict the final outcome of this review and these regulatory processes, nor whether, or the extent to which, they could have a material adverse impact on our results of operations and cash flows.

We have also been in communication with Environmental and Climate Change Canada regarding similar issues relating to some of these very same platforms.

In connection with these and other ongoing discussions with the EPA and CARB, we are developing a new software calibration and will recall model years 2013 through 2018 RAM 2500 and 3500 trucks.

We accrued $30 million for the RAM recall during the first quarter of 2022, an amount that reflected our current estimate of the cost of that recall.

We are also developing a new software calibration and hardware fix and will recall model years 2016 through 2019 Titan trucks.

We accrued $29 million for the Titan recall during the third quarter of 2022, an amount that reflected our current estimate of the cost of that recall.

We will continue to work together closely with the relevant regulators to develop and implement recommendations for improvement and seek to reach further resolutions as part of our ongoing commitment to compliance.

Due to the presence of many unknown facts and circumstances, we are not yet able to estimate any further financial impact of these matters.

It is possible that the consequences resulting from our formal review and these regulatory processes could have a material adverse impact on our results of operations and cash flows.

Guarantees and Commitments

19 unchanged sentences

Because the indemnifications are not related to specified known liabilities and due to their uncertain nature, we are unable to estimate the maximum amount of the potential loss associated with these indemnifications.

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.

The redeemable noncontrolling interest balance was $ 258 million and $ 366 million at December 31, 2022 and 2021, respectively.

SHAREHOLDERS' EQUITY

25 unchanged sentences

Thereafter, the losses are deducted from retained earnings.

Treasury stock activity for the three-year period ended December 31, 2021, consisting of shares issued and repurchased is presented in our Consolidated Statements of Changes in Equity .

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.

Treasury stock activity for the three-year period ended December 31, 2022, consisting of shares issued and repurchased is presented in our Consolidated Statements of Changes in Redeemable Noncontrolling Interests and Equity .

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 the stock repurchase program:

3 unchanged sentences

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

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 repurchased $ 374 million, $ 1,402 million and $ 641 million of our common stock in the years ended December 31, 2022, 2021 and 2020, respectively.

3 unchanged sentences

In July 2022, the Board authorized an increase to our quarterly dividend of 8.3 percent from $ 1.45 per share to $ 1.57 per share.

In October 2020, the Board authorized a 3.0 percent increase to our quarterly cash dividend on our common stock from $ 1.311 per share to $ 1.35 per share.

In July 2019, the Board approved a 15.0 percent increase to our quarterly dividend on our common stock from $ 1.14 per share to $ 1.311 per share.

In July 2021, the Board authorized a 7.4 percent increase to our quarterly cash dividend on our common stock from $ 1.35 per share to $ 1.45 per share.

In October 2020, the Board approved a 3.0 percent increase to our quarterly dividend on our common stock from $ 1.311 per share to $ 1.35 per share.

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

17 unchanged sentences

Balance at December 31, 2019 $ ( 734 ) $ ( 1,285 ) $ ( 9 ) $ ( 2,028 )

Other comprehensive income before reclassifications

Other comprehensive income (loss) before reclassifications

Before-tax amount ( 92 ) 73 ( 41 ) ( 60 ) $ ( 10 ) $ ( 70 )

3 unchanged sentences

65 — ( 2 ) 63 — 63

Net current period other comprehensive loss ( 63 ) ( 147 ) ( 11 ) ( 221 ) $ ( 5 ) $ ( 226 )

Net current period other comprehensive (loss) income ( 1 ) 81 ( 34 ) 46 $ ( 10 ) $ 36

Balance at December 31, 2020 $ ( 735 ) $ ( 1,204 ) $ ( 43 ) $ ( 1,982 )

Other comprehensive income before reclassifications

Other comprehensive income (loss) before reclassifications

Before-tax amount 425 ( 5 ) 38 458 $ ( 5 ) $ 453

Tax benefit 26 8 9 43 — 43

Tax (expense) benefit ( 103 ) 1 ( 12 ) ( 114 ) — ( 114 )

After-tax amount 322 ( 4 ) 26 344 ( 5 ) 339

1 unchanged sentence

67 — — 67 — 67

Net current period other comprehensive (loss) income ( 1 ) 81 ( 34 ) 46 $ ( 10 ) $ 36

Net current period other comprehensive income (loss) 389 ( 4 ) 26 411 $ ( 5 ) $ 406

Balance at December 31, 2021 $ ( 346 ) $ ( 1,208 ) $ ( 17 ) $ ( 1,571 )

Other comprehensive income before reclassifications

Other comprehensive income (loss) before reclassifications

Before-tax amount ( 123 ) ( 350 ) 136 ( 337 ) $ ( 40 ) $ ( 377 )

Tax (expense) benefit ( 103 ) 1 ( 12 ) ( 114 ) — ( 114 )

Tax benefit (expense) 19 6 ( 32 ) ( 7 ) — ( 7 )

After-tax amount ( 104 ) ( 344 ) 104 ( 344 ) ( 40 ) ( 384 )

1 unchanged sentence

23 — 2 25 — 25

Net current period other comprehensive income (loss) 389 ( 4 ) 26 411 $ ( 5 ) $ 406

Net current period other comprehensive (loss) income ( 81 ) ( 344 ) 106 ( 319 ) $ ( 40 ) $ ( 359 )

Balance at December 31, 2022 $ ( 427 ) $ ( 1,552 ) $ 89 $ ( 1,890 )

6 unchanged sentences

Cummins India Ltd.

Hydrogenics Corporation (1)

Total $ 927 $ 927

(1) See Note 20, "ACQUISITION," for additional information.

Noncontrolling interests $ 992 $ 889

STOCK INCENTIVE AND STOCK OPTION PLANS

16 unchanged sentences

Compensation expense is recorded ratably over the period beginning on the grant date until the shares become unrestricted and is based on the amount of the award that is expected to be earned under the plan formula, adjusted each reporting period based on current information.

Restricted common stock is awarded from time to time at no cost to certain employees.

Most awards are entitled to cash dividends and voting rights.

Restricted stock and restricted stock units are awarded from time to time at no cost to certain employees.

Restrictions limit the sale or transfer of the shares during a defined period.

Generally, one-third of the shares become vested and free from restrictions after two years and one-third of the shares issued become vested and free from restrictions each year thereafter on the anniversary of the grant date, provided the participant remains an employee.

The fair value of the award is equal to the average market price of our stock on the grant date.

Most awards are not entitled to cash dividends and voting rights until vesting.

Generally, the shares vest and become free from restrictions ratably over a three -year service period, provided the participant remains an employee.

The fair value of the awards typically equals the average market price of our stock on the grant date adjusted for the present value of dividends over the vesting period.

Compensation expense is determined at the grant date and is recognized over the restriction period on a straight-line basis.

Employee compensation expense (net of estimated forfeitures) related to our share-based plans for the years ended December 31, 2022, 2021 and 2020, was approximately $ 33 million, $ 36 million and $ 30 million, respectively.

In addition, non-employee director share-based compensation expense for the years ended December 31, 2021, 2020 and 2019, was approximately $ 1 million, $ 1 million and $ 1 million, respectively.

Shares granted to non-employee directors vest immediately and have no restrictions or performance conditions.

The excess tax benefit associated with our employee share-based plans for the years ended December 31, 2022, 2021 and 2020, was $ 8 million, $ 9 million and $ 4 million, respectively.

43 unchanged sentences

The total vesting date fair value of performance shares vested during the years ended December 31, 2022, 2021 and 2020, was $ 24 million, $ 35 million and $ 41 million, respectively.

There were no restricted shares vested for the year ended December 31, 2021.

The total fair value of restricted shares vested was less than $ 1 million and less than $ 1 million for the years ended December 31, 2020 and 2019, respectively.

The total fair value of restricted shares vested was $ 1 million, $ 0 and less than $ 1 million for the years ended December 31, 2022, 2021 and 2020, respectively.

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

32 unchanged sentences

Options excluded 20,595 6,463 645,334

The acquisition for the year ended December 31, 2019, was as follows:

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

Goodwill Recognized Intangibles Recognized (2)

Net Sales Previous Fiscal Year Ended

Hydrogenics Corporation 9/09/19 81 % $ 235 $ — $ 235 $ 161 $ 161 $ 34

(1) All results from the acquired entity were included in segment results subsequent to the acquisition date, and the acquisition was accounted for as a business combination and included in the New Power segment on the date of acquisition.

(2) Intangible assets acquired in the business combination were mostly customer and technology related, the majority of which will be amortized over a period of up to 20 years from the date of the acquisition.

No material acquisitions occurred during the years ended December 31, 2021 or 2020.

RESTRUCTURING ACTIONS

We executed restructuring actions in the form of voluntary and involuntary employee separation programs in the fourth quarter of 2019.

These actions were in response to the continued deterioration in our global markets in the second half of 2019, as well as expected reductions in orders in most U.S.

and international markets in 2020.

We reduced our worldwide workforce by approximately 2,300 employees.

We incurred a charge of $ 119 million ($ 90 million after-tax) in the fourth quarter of 2019 for these actions.

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

We are exposed to financial risk resulting from volatility in foreign exchange rates, interest rates and commodity prices.

This risk is closely monitored and managed through the use of physical forward contracts (which are not considered derivatives), and financial derivative instruments including foreign currency forward contracts, commodity swap contracts and interest rate swaps and locks.

Financial derivatives are used expressly for hedging purposes and under no circumstances are they used for speculative purposes.

When material, we adjust the estimated fair value of our derivative contracts for counterparty or our credit risk.

None of our derivative instruments are subject to collateral requirements.

In addition, these arrangements provide for a net settlement of all contracts with a given counterparty in the event that the arrangement is terminated due to the occurrence of default or a termination event.

Foreign Currency Exchange Rate Risk

We had foreign currency forward contracts with notional amounts of $ 3.6 billion and $ 2.7 billion at December 31, 2022 and 2021, respectively.

The following currencies comprise 88 percent and 87 percent of outstanding foreign currency forward contracts at December 31, 2022 and 2021, respectively:

Chinese renminbi, British pound, Canadian dollar, Australian dollar and Euro.

We are further exposed to foreign currency exchange risk as many of our subsidiaries are subject to fluctuations as the functional currencies of the underlying entities are not our U.S.

dollar reporting currency.

To help minimize movements for certain investments, in 2022 we began entering into foreign exchange forwards designated as net investment hedges for certain of our investments.

Under the current terms of our foreign exchange forwards, we agreed with third parties to sell British pound in exchange for U.S.

dollar currency at a specified rate at the maturity of the contract.

The notional amount of these hedges at December 31, 2022, was $705 million.

The following table summarizes the net investment hedge activity in AOCL:

Year ended December 31,

In millions 2022

Type of Derivative Gain (Loss)

Recognized in AOCL Gain (Loss) Reclassified from AOCL into Earnings

Foreign exchange forwards $ ( 22 ) $ —

Interest Rate Risk

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.

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

The gain or loss on these derivative instruments, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, are recognized in current income as interest expense.

The net swap settlements that accrue each period are also reported in the Consolidated Financial Statements as interest expense.

The debt is included in the Consolidated Balance Sheets as long-term debt.

The terms of the swaps mirrored those of the debt, with interest paid semi-annually.

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

The gain or loss on these derivative instruments, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, were recognized in current income as interest expense.

The net swap settlements that accrued each period were also reported in the Consolidated Financial Statements as interest expense.

A basis adjustment related to credit risk, excluded from the assessment of effectiveness, was being amortized over the life of the hedge using a straight-line method and was considered de minimis.

The following table summarizes the gains and losses:

Years ended December 31,

In millions 2022 2021 2020

Type of Swap Gain (Loss) on

Swaps Gain (Loss) on

Borrowings Gain (Loss) on

Swaps Gain (Loss) on

Borrowings Gain (Loss) on

Swaps Gain (Loss) on

Interest rate swaps (1)

$ ( 148 ) $ 145 $ ( 3 ) $ 2 $ 7 $ ( 5 )

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

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.

The terms of the rate locks mirror the time period of the expected fixed rate debt issuance and the expected timing of interest payments on that debt.

The gains and losses on these derivative instruments will be initially recorded in other comprehensive income and will be released to earnings in interest expense in future periods to reflect the difference in (1) the fixed rates economically locked in at the inception of the hedge and (2) the actual fixed rates established in the debt instrument at issuance.

In December 2022, we settled certain rate lock agreements with notional amounts totaling $ 150 million for $ 49 million.

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

The following table summarizes the interest rate lock activity in AOCL:

Year ended December 31,

In millions 2022 2021 2020

Type of Swap Gain (Loss)

Recognized in AOCL Gain (Loss) Reclassified from AOCL into Interest Expense Gain (Loss)

Recognized in AOCL Gain (Loss) Reclassified from AOCL into Interest Expense

Interest rate locks $ 112 $ — $ 19 $ — $ ( 22 ) $ —

Cash Flow Hedging

The following table summarizes the effect on our Consolidated Statements of Net Income for derivative instruments classified as cash flow hedges.

The table does not include amounts related to ineffectiveness as it was not material for the periods presented.

Years ended December 31,

In millions 2022 2021 2020

Gain (loss) reclassified from AOCL into income - Net sales (1)

$ (4) $ (4) $ 3

Gain (loss) reclassified from AOCL into income - Cost of sales (1)(2)

Total $ ( 3 ) $ 2 $ 3

(1) Includes foreign currency forward contracts.

(2) Includes commodity swap contracts.

Derivatives Not Designated as Hedging Instruments

The following table summarizes the effect on our Consolidated Statements of Net Income for derivative instruments not classified as cash flow hedges:

Years ended December 31,

In millions 2022 2021 2020

Gain (loss) recognized in income - Cost of sales (1)

$ 2 $ — $ ( 1 )

Gain (loss) recognized in income - Other income, net (1)

Total $ ( 3 ) $ 45 $ —

(1) Includes foreign currency forward contracts.

Fair Value Amount and Location of Derivative Instruments

The following table summarizes the location and fair value of derivative instruments on our Consolidated Balance Sheets :

Derivatives Designated as Hedging Instruments Derivatives Not Designated as Hedging Instruments

December 31, December 31,

In millions 2022 2021 2022 2021

Notional amount $ 3,051 $ 2,558 $ 2,900 $ 1,888

Derivative assets

Prepaid expenses and other current assets $ 18 $ 15 $ 27 $ 4

Other assets 80 — — —

Total derivative assets (1)

$ 98 $ 15 $ 27 $ 4

Derivative liabilities

Other accrued expenses $ 19 $ 11 $ 3 $ 4

Other liabilities 151 19 — —

Total derivative liabilities (1)

$ 170 $ 30 $ 3 $ 4

(1) Estimates of the fair value of all derivative assets and liabilities above are derived from Level 2 inputs, which are estimated using actively quoted prices for similar instruments from brokers and observable inputs where available, including market transactions and third-party pricing services, or net asset values provided to investors.

We do not currently have any Level 3 input measures and there were no transfers into or out of Level 2 or 3 during 2022 or 2021.

We elected to present our derivative contracts on a gross basis in our Consolidated Balance Sheets .

Had we chosen to present on a net basis, we would have derivatives in a net asset position of $ 52 million and derivatives in a net liability position of $ 100 million.

RUSSIAN OPERATIONS

On March 17, 2022, the Board indefinitely suspended our operations in Russia due to the ongoing conflict in Ukraine.

At the time of suspension, our Russian operations included a wholly-owned distributor in Russia, an Unconsolidated JV with KAMAZ (a Russian truck manufacturer) and direct sales into Russia from our other business segments.

As a result of the suspension of operations, we evaluated the recoverability of assets in Russia and assessed other potential liabilities.

We experienced and expect to continue to experience an inability to collect customer receivables and may be the subject of litigation as a consequence of our suspension of commercial operations in Russia.

We recorded a charge of $ 111 million during 2022 related to these actions.

As of December 31, 2022, we had no inventory and approximately $ 14 million of receivables in Russia, all of which are fully reserved.

In addition, we have cash balances of $ 66 million, some of which will be used to fund ongoing employee, tax and contract settlement obligations.

The following summarizes the costs associated with the suspension of our Russian operations in our Consolidated Statements of Net Income:

In millions December 31,

2022 Statement of Net Income Location

Inventory write-downs $ 17 Cost of sales

Accounts receivable reserves 41 Other operating expense, net

Impairment and other joint venture costs 31 Equity, royalty and interest income from investees

Other 22 Other operating expense, net

Russian suspension costs, net of recoveries $ 111

We will continue to evaluate the situation as conditions evolve and may take additional actions as deemed necessary in future periods.

OPERATING SEGMENTS

Operating segments under GAAP are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (CODM), or decision-making group, in deciding how to allocate resources and in assessing performance.

Our CODM is the President and Chief Operating Officer.

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

Our CODM is the Chief Executive Officer.

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.

1 unchanged sentence

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.

6 unchanged sentences

These include certain costs and expenses of shared services, such as information technology, human resources, legal, finance and supply chain management.

We do not allocate gains or losses of corporate owned life insurance to individual segments.

We do not allocate gains or losses of corporate owned life insurance and certain filtration separation costs to individual segments.

EBITDA may not be consistent with measures used by other companies.

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

In millions Engine Distribution Components Power Systems New Power Total Segments

In millions Engine Components Distribution Power Systems New Power Total Segments

External sales $ 8,199 $ 7,847 $ 8,901 $ 2,951 $ 176 $ 28,074

3 unchanged sentences

Equity, royalty and interest income (loss) from investees 166 (1)

71 77 43 ( 8 ) 349

Interest income 14 12 16 7 — 49

Russian suspension costs (2)

5 54 19 — 111

Segment EBITDA 1,541 1,346 (4)

888 596 ( 340 ) 4,031

Depreciation and amortization (5)

15 unchanged sentences

Capital expenditures 341 184 92 80 37 734

(Table continued on next page)

In millions Engine Distribution Components Power Systems New Power Total Segments

External sales $ 5,925 $ 4,650 $ 7,110 $ 2,055 $ 71 $ 19,811

2 unchanged sentences

Research, development and engineering expenses 290 264 31 212 109 906

Equity, royalty and interest income from investees 200 52 40 38 — 330

Equity, royalty and interest income (loss) from investees 312 61 62 21 ( 4 ) 452

Interest income 9 4 4 4 — 21

Segment EBITDA (excluding restructuring actions) 1,472 693 1,117 524 ( 148 ) 3,658

Restructuring actions (2)

18 37 20 12 1 88

Segment EBITDA 1,235 961 665 343 ( 172 ) 3,032

2 unchanged sentences

Capital expenditures 202 140 89 79 18 528

(1) Depreciation and amortization, as shown on a segment basis, excludes the amortization of debt discount and deferred costs included in the Consolidated Statements of Net Income as "Interest expense." The amortization of debt discount and deferred costs were $ 3 million, $ 3 million and $ 3 million for the years ended 2021, 2020 and 2019, respectively.

(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.

See 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 (loss) from investees line above.

(4) 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.

(5) Depreciation and amortization, as shown on a segment basis, excludes the amortization of debt discount and deferred costs included in the Consolidated Statements of Net Income as interest expense.

The amortization of debt discount and deferred costs were $ 3 million, $ 3 million and $ 3 million for the years ended 2022, 2021 and 2020, respectively.

A portion of depreciation expense is included in research, development and engineering expense.

(2) See Note 21 "RESTRUCTURING ACTIONS," for additional information.

A reconciliation of our total segment sales to total net sales in the Consolidated Statements of Net Income was as follows:

Years ended December 31,

In millions 2021 2020 2019

Total segment sales $ 29,922 $ 24,885 $ 29,539

Elimination of intersegment sales ( 5,901 ) ( 5,074 ) ( 5,968 )

Total net sales $ 24,021 $ 19,811 $ 23,571

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

2 unchanged sentences

TOTAL SEGMENT EBITDA $ 4,031 $ 3,595 $ 3,032

Intersegment elimination ( 74 ) 76 42

Intersegment eliminations and other ( 232 ) (1)

Interest expense 199 111 100

6 unchanged sentences

$ 2,151 $ 2,131 $ 1,789

(1) Intersegment eliminations and other included $ 53 million of costs associated with the planned separation of our filtration business.

A reconciliation of our segment net assets to the corresponding amounts in the Consolidated Balance Sheets is shown in the table below:

2 unchanged sentences

Cash, cash equivalents and marketable securities 2,573 3,187

Net liabilities deducted in arriving at net assets (1)

Pension and OPEB adjustments excluded from net assets 966 67

Net liabilities deducted in arriving at net segment assets (1)

Pension and OPEB adjustments excluded from net segment assets 832 966

Deferred tax assets not allocated to segments 625 428

1 unchanged sentence

Total assets $ 30,299 $ 23,710

(1) Liabilities deducted in arriving at net assets include certain accounts payable, accrued expenses, long-term liabilities and other items.

(1) Liabilities deducted in arriving at net segment assets include certain accounts payable, accrued expenses, long-term liabilities and other items.

See NOTE 3, "REVENUE FROM CONTRACTS WITH CUSTOMERS," for segment net sales by geographic area.

6 unchanged sentences

United Kingdom 431 384

Netherlands 314 295

Mexico 429 195

Netherlands 334 314

Brazil 256 76

Canada 168 163

6 unchanged sentences

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 8. Financial Statements and Supplementary Data