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Item 7. Management’s Discussion and Analysis

2024-02-12 compared with 2023-02-14 · 333 added, 344 removed, 559 unchanged (55% of the section changed)

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• APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

• RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

• RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

The following is the discussion and analysis of changes in the financial condition and results of operations for fiscal year 2023 compared to fiscal year 2022.

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EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS

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

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

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

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

We serve our customers through a service network of approximately 450 wholly-owned, joint venture and independent distributor locations and more than 19,000 Cummins certified dealer locations in approximately 190 countries and territories.

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

As previously announced, beginning in the first quarter of 2023, we realigned certain businesses and regions within our reportable segments to be consistent with how our segment managers monitor the performance of our segments.

We reorganized the businesses within our Components segment to carve out the electronics business into the newly formed software and electronics business and combined the turbo technologies and fuel systems businesses into the newly formed engine components business.

On May 26, 2023, with the Atmus Filtration Technologies Inc.

(Atmus) initial public offering (IPO), we changed the name of our Components' filtration business to Atmus.

Our Components segment now consists of the following businesses:

axles and brakes, emission solutions, engine components, Atmus, automated transmissions and software and electronics.

In the first quarter of 2023, as a result of the indefinite suspension of operations in Russia, we reorganized the regional management structure of our Distribution segment and moved all Commonwealth of Independent States (CIS) sales into the Europe and Africa and Middle East regions.

The Russian portion of prior period CIS sales moved to the Europe region.

In March 2023, we rebranded our New Power segment as "Accelera" to better represent our commitment to zero-emission technologies.

In addition, we moved our NPROXX joint venture from the Accelera segment to the Engine segment, which adjusted both the equity, royalty and interest income (loss) from investees and segment EBITDA (defined as earnings or losses before interest expense, income taxes, depreciation, amortization and noncontrolling interests) line items for the prior years.

We started to report results for the changes within our operating segments effective January 1, 2023, and reflected these changes in the historical periods presented.

See NOTE 23, "FORMATION OF ATMUS AND IPO," to our Consolidated Financial Statements for additional information about the Atmus IPO.

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

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

The Components segment sells axles, drivelines, brakes and suspension systems for commercial diesel and natural gas applications, aftertreatment systems, turbochargers, fuel systems, valvetrain technologies, filtration products, automated transmissions and electronics.

The Engine segment produces engines (15 liters and smaller) and associated parts for sale to customers in on-highway and various off-highway markets.

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 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 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.

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

The Accelera segment is currently in the early stages of commercializing these technologies with efforts primarily focused on the development of our electrolyzers for hydrogen production and electrified power systems and related components and subsystems.

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

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

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

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

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

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

Meritor Acquisition

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

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

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

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

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

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

Supply Chain Disruptions

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

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

Our customers are also experiencing supply chain issues.

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

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

Russian Operations

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

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

Agreement in Principle

In December 2023, we announced that we reached an agreement in principle with the U.S.

Environmental Protection Agency (EPA), the California Air Resources Board (CARB), the Environmental and Natural Resources Division of the U.S.

Department of Justice (DOJ) and the California Attorney General’s Office (CA AG) to resolve certain regulatory civil claims regarding our emissions certification and compliance process for certain engines primarily used in pick-up truck applications in the U.S.

(collectively, the Agreement in Principle).

As part of the Agreement in Principle, among other things, we agreed to pay civil penalties, complete recall requirements, undertake mitigation projects, provide extended warranties, undertake certain testing, take certain corporate compliance measures and make certain payments.

Failure to comply with the terms and conditions of the Agreement in Principle will subject us to further stipulated penalties.

We recorded a charge of $2.036 billion in the fourth quarter of 2023 to resolve the matters addressed by the Agreement in Principle involving approximately one million of our pick-up truck applications in the U.S.

This charge was in addition to the previously announced charges of $59 million for the recalls of model years 2013 through 2018 RAM 2500 and 3500 trucks and model years 2016 through 2019 Titan trucks.

Of this amount, $1.938 billion relates to payments that are expected to be made in 2024.

See NOTE 2, "AGREEMENT IN PRINCIPLE," to our Consolidated Financial Statements for additional information.

A summary of our results is as follows:

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Diluted 5.15 15.12 14.61

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

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

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

Worldwide revenues improved 21 percent in 2023 compared to 2022, due to increased axles and brakes sales in the Components segment of $2.9 billion from the Meritor acquisition on August 3, 2022, and higher demand in all operating segments and most geographic regions, partially offset by the decrease in Russian sales due to the indefinite suspension of our Russian operations in March 2022.

Net sales in the U.S.

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

and Canada improved by 22 percent primarily due to incremental sales of axles and brakes,

increased demand in all Distribution product lines and stronger demand in heavy-duty and medium-duty truck markets, which positively impacted most Components businesses.

International demand (excludes the U.S.

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

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

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

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

The following table contains sales and EBITDA (defined as earnings or losses before interest expense, income taxes, depreciation and amortization and noncontrolling interests) by operating segment for the years ended December 31, 2022 and 2021.

and Canada) improved by 20 percent, with higher sales in most geographic regions, partially offset by a decrease in Russian sales due to the indefinite suspension of our operations in March 2022.

The increase in international sales was principally due to incremental sales of axles and brakes in Western Europe, Latin America, Asia Pacific and India and higher demand for power generation equipment.

Unfavorable foreign currency fluctuations impacted international sales by 1 percent (mainly the Chinese renminbi and Indian rupee, partially offset by the Euro).

The following table contains sales and EBITDA by operating segment for the years ended December 31, 2023, and 2022.

See NOTE 25, "OPERATING SEGMENTS," to the Consolidated Financial Statements for additional information and a reconciliation of our segment information to the corresponding amounts in our Consolidated Statements of Net Income .

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In millions Sales EBITDA Sales EBITDA Sales EBITDA

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

Components $ 13,409 39 % $ 1,840 $ 9,736 34 % $ 1,346 38 % 37 %

Engine 11,684 34 % 1,630 10,945 39 % 1,535 7 % 6 %

Distribution 10,249 30 % 1,209 8,929 32 % 888 15 % 36 %

Power Systems 5,673 17 % 836 5,033 18 % 596 13 % 40 %

New Power 198 1 % (340) 116 1 % (223) 71 % (52) %

Accelera 354 1 % (443) 198 1 % (334) 79 % (33) %

Intersegment eliminations (7,304) (21) % (2,055) (6,767) (24) % (232) 8 % NM

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$ 28,074 100 % $ 3,799 (2)

"NM" - not meaningful information

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

(1) EBITDA includes $2.0 billion related to the Agreement in Principle and $100 million of costs associated with the IPO and separation of Atmus.

See NOTE 2, "AGREEMENT IN PRINCIPLE," to our Consolidated Financial Statements for additional information.

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

See NOTE 22, "RUSSIAN OPERATIONS," to our Consolidated Financial Statements for additional information.

Net income attributable to Cummins Inc.

for 2022 was $2.2 billion, or $15.12 per diluted share, on sales of $28.1 billion, compared to 2021 net income attributable to Cummins Inc.

for 2023 was $735 million, or $5.15 per diluted share, on sales of $34.1 billion, compared to 2022 net income attributable to Cummins Inc.

of $2.2 billion, or $15.12 per diluted share, on sales of $28.1 billion.

The increases in net income attributable to Cummins Inc.

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

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

Diluted earnings per common share for 2022 benefited $0.15 per share from fewer weighted-average shares outstanding, primarily due to the stock repurchase program.

The decreases in net income attributable to Cummins Inc.

and earnings per diluted share were driven by the $2.0 billion charge related to the Agreement in Principle and increased compensation expenses, partially offset by higher net sales and improved gross margins.

The increase in gross margin was mainly due to favorable pricing and higher volumes (including sales of axles and brakes from the Meritor acquisition), partially offset by higher compensation expenses.

We generated $4.0 billion of operating cash flows in 2023, compared to $2.0 billion in 2022.

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Our debt to capital ratio (total capital defined as debt plus equity) at December 31, 2023, was 40.3 percent, compared to 44.1 percent at December 31, 2022.

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

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

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

See NOTE 17, "CUMMINS INC.

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

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

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

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

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

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

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

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

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

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

The decrease was primarily due to lower debt.

At December 31, 2023, we had $2.7 billion in cash and marketable securities on hand and access to our $4.0 billion credit facilities (net of commercial paper outstanding), if necessary, to meet acquisition, working capital, investment and funding needs.

On October 2, 2023, we repaid our $500 million senior notes, due 2023, using a combination of cash on hand and additional commercial paper borrowings.

On October 2, 2023, we purchased all of the equity ownership of Faurecia's U.S.

and Europe commercial vehicle exhaust business from the Forvia Group for $210 million, subject to final working capital and other adjustments.

See NOTE 24, "ACQUISITIONS," to the Consolidated Financial Statements for additional information.

In July 2023, the Board authorized an increase to our quarterly dividend of approximately 7 percent from $1.57 per share to $1.68 per share.

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

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

with a purchase price of $345 million.

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

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

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

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

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

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

On June 29, 2023, a share purchase agreement was executed with the minority shareholders of Hydrogenics Corporation (Hydrogenics) whereby we agreed to pay the minority shareholders $335 million for their 19 percent ownership, including the settlement of shareholder loans of $48 million.

As part of the share purchase agreement, Hydrogenics entered into three non-interest-bearing promissory notes with $175 million paid on July 31, 2023, and the remaining $160 million due in three installments through 2025.

See NOTE 24, "ACQUISITIONS," to the Consolidated Financial Statements for additional information.

On June 5, 2023, we entered into an amended and restated 364-day credit agreement that allows us to borrow up to $2.0 billion of unsecured funds at any time prior to June 3, 2024.

This credit agreement amended and restated the prior $1.5 billion 364-day credit facility that was scheduled to mature on August 16, 2023.

In connection with the 364-day credit agreement, effective June 5, 2023, we terminated our $500 million incremental 364-day credit agreement dated August 17, 2022.

On May 23, 2023, in connection with the Atmus IPO, Cummins issued approximately $350 million of commercial paper with certain lenders.

On May 26, 2023, Atmus shares began trading on the New York Stock Exchange under the symbol "ATMU." The IPO was completed on May 30, 2023, whereby Cummins exchanged 19.5 percent (approximately 16 million shares) of its ownership in Atmus, at $19.50 per share, to retire $299 million of the commercial paper as proceeds from the offering through a non-cash transaction.

As we still own 80.5 percent of Atmus shares, it remains included in our Consolidated Financial Statements .

See NOTE 23, "FORMATION OF ATMUS AND IPO," to the Consolidated Financial Statements for additional information.

On April 3, 2023, we purchased all of the equity ownership interest of Teksid Hierro de Mexico, S.A.

(Teksid MX) and Teksid, Inc.

from Stellantis N.V.

for approximately $143 million, subject to certain adjustments set forth in the agreement.

See NOTE 24, "ACQUISITIONS," to the Consolidated Financial Statements for additional information.

In 2023, the investment gain on our U.S.

pension trusts was 6.81 percent, while our U.K.

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We expect to contribute approximately $67 million in cash to our global pension plans in 2024.

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

In addition, we expect our 2024 net periodic pension cost to approximate $33 million.

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

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

As of the date of this filing, our credit ratings from Moody's Investor Services, Inc.

remain unchanged and the outlook remains stable, while Standard and Poor's Rating Services downgraded our long-term rating to A while our short-term rate remained at A1 and our outlook remained stable .

RESULTS OF OPERATIONS

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Equity, royalty and interest income from investees 483 349 506 134 38 % (157) (31) %

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

Other operating expense, net 2,138 174 31 (1,964) NM (143) NM

OPERATING INCOME 1,761 2,929 2,706 (1,168) (40) % 223 8 %

Interest expense 375 199 111 (176) (88) % (88) (79) %

Other income, net 89 156 169 (67) (43) % (13) (8) %

Other income, net 240 89 156 151 NM (67) (43) %

INCOME BEFORE INCOME TAXES 1,626 2,819 2,751 (1,193) (42) % 68 2 %

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CONSOLIDATED NET INCOME 840 2,183 2,164 (1,343) (62) % 19 1 %

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

Net income attributable to noncontrolling interests 105 32 33 (73) NM 1 3 %

NET INCOME ATTRIBUTABLE TO CUMMINS INC .

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Net sales increased $6.0 billion, primarily driven by the following:

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

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

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

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

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

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

• Components segment sales increased 38 percent largely due to axles and brakes sales from the Meritor acquisition.

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

• Engine segment sales increased 7 percent principally due to stronger heavy-duty and medium-duty truck demand in North America.

• Power Systems segment sales increased 13 percent primarily due to higher demand in power generation markets.

These increases were partially offset by unfavorable foreign currency fluctuations of 1 percent of total sales, primarily in the Chinese renminbi and Indian rupee, partially offset by the Euro.

Sales to international markets (excluding the U.S.

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parts and material consumption, including direct and indirect materials;

salaries, wages and benefits;

depreciation on production equipment and facilities and amortization of technology intangibles;

compensation and related expenses including variable compensation, salaries and fringe benefits;

depreciation on

production equipment and facilities and amortization of technology intangibles;

estimated costs of warranty programs and campaigns;

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Gross margin increased $1.5 billion and increased 0.3 points as a percentage of sales.

The increase in gross margin and gross margin as a percentage of sales was mainly due to favorable pricing and higher volumes (including sales of axles and brakes from the Meritor acquisition), partially offset by higher compensation expenses.

The provision for base warranties issued as a percentage of sales was 1.8 percent in 2023 and 1.8 percent in 2022.

Selling, General and Administrative Expenses

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

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

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

Selling, general and administrative expenses increased $646 million, primarily due to higher compensation expenses and higher consulting expenses.

Compensation and related expenses include variable compensation, salaries and fringe benefits.

Overall, selling, general and administrative expenses, as a percentage of sales, increased to 9.8 percent in 2023 from 9.6 percent in 2022, as selling, general and administrative expenses increased at a faster rate than net sales.

Research, Development and Engineering Expenses

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

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

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

Research, development and engineering expenses increased $222 million, principally due to higher compensation costs.

Compensation and related expenses include variable compensation, salaries and fringe benefits.

Overall, research, development and engineering expenses, as a percentage of sales, decreased to 4.4 percent in 2023 from 4.6 percent in 2022, as research, development and engineering expenses increased at a slower rate than net sales.

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

Equity, Royalty and Interest Income From Investees

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

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

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

Equity, royalty and interest income from investees increased $134 million, mainly due to the absence of the $28 million impairment of our Russian joint venture with KAMAZ, higher earnings at Dongfeng Cummins Engine Co., Ltd., Komatsu Cummins Chile, Ltda.

and Beijing Foton Cummins Engine Co., Ltd., higher royalty and interest income from investees and increased joint venture earnings from the Meritor acquisition.

See NOTE 4, "INVESTMENTS IN EQUITY INVESTEES," and NOTE 22, "RUSSIAN OPERATIONS," to our Consolidated Financial Statements for additional information.

Other Operating Expense, Net

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In millions 2023 2022

Agreement in Principle (1)

$ (2,036) $ —

Amortization of intangible assets (133) (70)

Loss on write-off of assets (9) (7)

Russian suspension costs (2)

Asset impairments and other charges — (36)

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

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

Royalty income, net 29 7

Other, net 11 (5)

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

Total other operating expense, net $ (2,138) $ (174)

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

(2) See NOTE 22, "RUSSIAN OPERATIONS," to our Consolidated Financial Statements for additional information.

Interest Expense

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

Interest expense increased $176 million, primarily due to higher weighted-average term loan borrowings and increased interest rates.

Other Income, Net

Other income, net was as follows:

Other income (expense), net was as follows:

Years ended December 31,

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Interest income 95 49

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

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

Loss on corporate owned life insurance (102) —

Gain (loss) on corporate owned life insurance 26 (102)

Gain (loss) on marketable securities, net 15 (7)

Foreign currency loss, net (30) (8)

Other, net 9 17

Other income, net $ 89 $ 156

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

Total other income, net $ 240 $ 89

Income Tax Expense

Our effective tax rate for 2023 was 48.3 percent compared to 22.6 percent for 2022.

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

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

The change in effective tax rate for the year ended December 31, 2022, versus year ended December 31, 2021, was primarily due to the jurisdictional mix of pre-tax income.

The year ended December 31, 2023, contained unfavorable net discrete items of $397 million, primarily due to $398 million in the fourth quarter related to the $2.0 billion charge from the Agreement in Principle, $22 million of unfavorable adjustments for uncertain tax positions and $3 million of net unfavorable other discrete tax items, partially offset by $21 million of favorable return to provision adjustments and $5 million of favorable share-based compensation tax benefit.

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 Atmus and $15 million of unfavorable return to provision adjustments related to the 2021 filed tax returns.

The change in effective tax rate for the year ended December 31, 2023, versus year ended December 31, 2022, was primarily due to the Agreement in Principle, of which $1.732 billion (primarily related to penalties) was non-deductible for tax purposes, jurisdictional mix of pre-tax income and actual and planned repatriations of earnings back to the U.S.

See NOTE 2, "AGREEMENT IN PRINCIPLE," to our Consolidated Financial Statements for additional information.

Our effective tax rate for 2024 is expected to approximate 24.0 percent, excluding any discrete tax items that may arise.

On August 16, 2022, the U.S.

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

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

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

Net Income Attributable to Noncontrolling Interests

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

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

Noncontrolling interests in income of consolidated subsidiaries increased $73 million principally due to higher earnings at Cummins India Limited and Eaton Cummins Joint Venture, as well as earnings attributable to the divested, noncontrolling interest in Atmus.

For prior year results of operations comparisons to 2021 see the Results of Operations section of our 2022 Form 10-K .

Comprehensive Income - Foreign Currency Translation Adjustment

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

The foreign currency translation adjustment was a net gain of $92 million and net loss of $384 million for the years ended December 31, 2023 and 2022, respectively.

The details were as follows:

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dollar Translation adjustment Primary currency driver vs.

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

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

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

Wholly-owned subsidiaries $ 118 British pound and Brazilian real, partially offset by Chinese renminbi $ (250) Chinese renminbi and Indian rupee

Equity method investments (23) Chinese renminbi, partially offset by Brazilian real (94) Chinese renminbi

Consolidated subsidiaries with a noncontrolling interest (3) Chinese renminbi (40) Indian rupee

Total $ 92 $ (384)

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OPERATING SEGMENT RESULTS

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

On May 26, 2023, with the IPO, we changed the name of our Components' filtration business to Atmus.

Our Components segment now consists of the following businesses:

axles and brakes, emission solutions, engine components, Atmus, automated transmissions and software and electronics.

The Russian portion of prior period CIS sales moved to the Europe region.

In March 2023, we rebranded our New Power segment as "Accelera" to better represent our commitment to zero-emission technologies.

In addition, we moved our NPROXX joint venture from the Accelera segment to the Engine segment, which adjusted both the equity, royalty and interest income from investees and segment EBITDA line items for the current and prior year.

We started to report results for the changes within our operating segments effective January 1, 2023, and reflected these changes in the historical periods presented.

See NOTE 23, "FORMATION OF ATMUS AND IPO," to our Consolidated Financial Statements for additional information about the Atmus IPO.

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

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

We use segment EBITDA as the primary basis for the Chief Operating Decision Maker to evaluate the performance of each of our reportable operating segments.

We use segment EBITDA as the basis for the Chief Operating Decision Maker to evaluate the performance of each of our reportable operating segments.

We believe EBITDA is a useful measure of our operating performance as it assists investors and debt holders in comparing our performance on a consistent basis without regard to financing methods, capital structure, income taxes or depreciation and amortization methods, which can vary significantly depending upon many factors.

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For all prior year segment results comparisons to 2021 see the Results of Operations section of our 2022 Form 10-K .

Components Segment Results

Financial data for the Components segment was as follows:

Favorable/(Unfavorable)

Years ended December 31, 2023 vs.

2022 2022 vs.

In millions 2023 2022 2021 Amount Percent Amount Percent

External sales $ 11,531 $ 7,847 $ 5,932 $ 3,684 47 % $ 1,915 32 %

Intersegment sales 1,878 1,889 1,733 (11) (1) % 156 9 %

Total sales 13,409 9,736 7,665 3,673 38 % 2,071 27 %

Research, development and engineering expenses 387 309 307 (78) (25) % (2) (1) %

Equity, royalty and interest income from investees 97 71 50 26 37 % 21 42 %

Interest income 31 12 5 19 NM 7 NM

Russian suspension costs (1)

— 5 — 5 100 % (5) NM

Segment EBITDA 1,840 (2)

1,180 494 37 % 166 14 %

Percentage Points Percentage Points

Segment EBITDA as a percentage of total sales 13.7 % 13.8 % 15.4 % (0.1) (1.6)

"NM" - not meaningful information

(1) See NOTE 22, "RUSSIAN OPERATIONS," to our Consolidated Financial Statements for additional information.

(2) Includes costs associated with the IPO and separation of Atmus of $78 million.

(3) Includes $83 million of costs related to the acquisition and integration of Meritor and $28 million of costs associated with the separation of Atmus.

As noted above, the descriptions of the two new businesses are as follows:

• Engine components - We design, manufacture and market turbocharger, fuel system and valvetrain technologies for light-duty, mid-range, heavy-duty and high-horsepower markets across North America, China, Europe and India.

• Software and electronics - We develop, supply and remanufacture control units, specialty sensors, power electronics, actuators and software for on-highway, off-highway and power generation applications.

We primarily serve markets in the Americas, China, India and Europe.

Sales for our Components segment by business, including adjusted prior year balances for the changes noted above, were as follows:

Favorable/(Unfavorable)

Years ended December 31, 2023 vs.

2022 2022 vs.

In millions 2023 2022 2021 Amount Percent Amount Percent

Axles and brakes $ 4,822 $ 1,879 $ — $ 2,943 NM $ 1,879 NM

Emission solutions 3,835 3,494 3,499 341 10 % (5) — %

Engine components 2,189 2,007 2,009 182 9 % (2) — %

Atmus 1,629 1,557 1,438 72 5 % 119 8 %

Automated transmissions 714 593 478 121 20 % 115 24 %

Software and electronics 220 206 241 14 7 % (35) (15) %

Total sales $ 13,409 $ 9,736 $ 7,665 $ 3,673 38 % $ 2,071 27 %

"NM" - not meaningful information

Components segment sales increased $3.7 billion across all businesses.

The following were the primary drivers by business:

• Axles and brakes sales increased $2.9 billion mainly due to the Meritor acquisition on August 3, 2022.

• Emission solutions sales increased $341 million principally due to stronger demand in North America and China.

• Engine components sales increased $182 million primarily due to higher demand in China.

Segment EBITDA

Components segment EBITDA increased $494 million, mainly due to higher volumes (including sales of axles and brakes from the Meritor acquisition), favorable pricing, the absence of the Meritor acquisition and integration costs and lower freight costs, partially offset by higher compensation expenses.

Engine Segment Results

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"NM" - not meaningful information

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

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

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

(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 indefinite suspension of our Russian operations.

See NOTE 22, "RUSSIAN OPERATIONS," to our Consolidated Financial Statements for additional information.

(2) See NOTE 22, "RUSSIAN OPERATIONS," to our Consolidated Financial Statements for additional information.

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

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The following were the primary drivers by market:

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

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

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

Segment EBITDA

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

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

Components Segment Results

Financial data for the Components segment was as follows:

Favorable/(Unfavorable)

Years ended December 31, 2022 vs.

2021 2021 vs.

In millions 2022 2021 2020 Amount Percent Amount Percent

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

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

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

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

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

Interest income 12 5 4 7 NM 1 25 %

Russian suspension costs (1)

5 — — 5 NM — — %

Segment EBITDA 1,346 (2)

1,180 961 166 14 % 219 23 %

Percentage Points Percentage Points

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

"NM" - not meaningful information

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

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

Sales for our Components segment by business were as follows:

Favorable/(Unfavorable)

Years ended December 31, 2022 vs.

2021 2021 vs.

In millions 2022 2021 2020 Amount Percent Amount Percent

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

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

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

Turbo technologies 1,421 (1)

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

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

Automated transmissions 593 478 308 115 24 % 170 55 %

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

"NM" - not meaningful information

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

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

Components segment sales increased $2.1 billion across most businesses.

The following were the primary drivers by business:

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

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

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

These increases were partially offset by the following:

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

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

• Heavy-duty truck sales increased $552 million principally due to higher demand, especially in North America (with shipments up 12 percent) and China.

• Medium-duty truck and bus sales increased $210 million mainly due to higher demand, especially in North America with medium-duty truck engine shipments up 11 percent.

The increases were partially offset by decreased off-highway sales of $47 million primarily due to lower demand in global agriculture markets.

Segment EBITDA

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

Engine segment EBITDA increased $95 million, primarily due to favorable pricing, partially offset by higher compensation expenses and unfavorable mix.

Distribution Segment Results

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Equity, royalty and interest income from investees 97 77 63 20 26 % 14 22 %

Interest income 16 7 4 9 NM 3 75 %

Interest income 34 16 7 18 NM 9 NM

Russian suspension costs (1)

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(1) See NOTE 22, "RUSSIAN OPERATIONS," to our Consolidated Financial Statements for additional information.

Sales for our Distribution segment by region were as follows:

Sales for our Distribution segment by region, including adjusted prior year balances for the changes noted above, were as follows:

Favorable/(Unfavorable)

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China 430 355 330 75 21 % 25 8 %

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

Africa and Middle East 294 251 278 43 17 % (27) (10) %

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Parts $ 4,071 $ 3,818 $ 3,145 $ 253 7 % $ 673 21 %

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

Power generation 2,509 1,774 1,762 735 41 % 12 1 %

Engines 1,997 1,776 1,499 221 12 % 277 18 %

Service 1,672 1,561 1,366 111 7 % 195 14 %

Total sales $ 10,249 $ 8,929 $ 7,772 $ 1,320 15 % $ 1,157 15 %

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

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

Distribution segment sales increased $1.3 billion.

The primary driver was an increase in North American sales of $1.1 billion due to higher demand in all product lines, especially in power generation markets due to commercial and data center demand.

The increase was partially offset by unfavorable foreign currency fluctuations, primarily the Australian dollar, Canadian dollar, Chinese renminbi and South African rand.

Segment EBITDA

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

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

Distribution segment EBITDA increased $321 million, primarily due to increased volumes and favorable mix, partially offset by higher compensation expenses.

Power Systems Segment Results

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Research, development and engineering expenses 237 240 234 3 1 % (6) (3) %

Equity, royalty and interest income from investees 43 56 21 (13) (23) % 35 NM

Equity, royalty and interest income from investees 53 43 56 10 23 % (13) (23) %

Interest income 9 7 5 2 29 % 2 40 %

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Power Systems segment sales increased $640 million across all product lines.

The following were the primary drivers:

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

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

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

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

The following were the primary drivers by product line:

• Power generation sales increased $550 million mainly due to higher demand in North America, India, Asia Pacific and the Middle East.

• Industrial sales increased $82 million principally due to higher sales of whole goods, partially offset by lower parts sales, especially in global mining markets.

Segment EBITDA

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

New Power Segment Results

Financial data for the New Power segment was as follows:

Power Systems segment EBITDA increased $240 million, primarily due to favorable pricing and higher volumes, partially offset by higher compensation expenses.

Accelera Segment Results

Financial data for the Accelera segment was as follows:

Favorable/(Unfavorable) Favorable/(Unfavorable)

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External sales $ 336 $ 176 $ 108 $ 160 91 % $ 68 63 %

Intersegment sales 22 8 1 14 NM 7 NM

Intersegment sales 18 22 8 (4) (18) % 14 NM

Total sales 354 198 116 156 79 % 82 71 %

Research, development and engineering expenses 203 171 102 (32) (19) % (69) (68) %

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

Equity, royalty and interest (loss) income from investees (15) (2) 2 (13) NM (4) NM

Interest income 2 — — 2 NM — — %

Segment EBITDA (443) (334) (218) (109) (33) % (116) (53) %

"NM" - not meaningful information

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

Supply Chain Disruptions

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

Our customers are also experiencing supply chain issues.

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

Business Outlook

Accelera segment sales increased 79 percent mainly due to incremental sales of central drive systems, e-axles and accessory systems since the acquisitions of Siemens' Commercial Vehicle Propulsion business and Meritor's electric powertrain business, as well as improved electrified components sales.

Our outlook reflects the following positive trends and challenges to our business that could impact our revenue and earnings potential in 2024.

Positive Trends

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

• We expect demand for medium-duty trucks in North America to remain strong.

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

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

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

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

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

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

• We anticipate demand in our aftermarket business will continue to be robust, driven primarily by strong demand in our Engine business and Power Systems business.

We expect to be largely through the inventory management efforts and destocking that happened throughout the industry in the second half of 2023.

• We expect demand for trucks in China to remain stable or improve in 2024.

• We expect demand for heavy-duty trucks in North America to weaken modestly, particularly in the second half of 2024.

• Continued increases in material and labor costs, as well as other inflationary pressures, could negatively impact earnings.

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

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

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

• The completion of the Meritor, Inc.

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

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

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

• The financial implications resulting from our Agreement in Principle will negatively impact our liquidity in 2024 and will result in incremental interest expense for debt utilized in funding the civil penalty.

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

LIQUIDITY AND CAPITAL RESOURCES

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Net cash used in investing activities (1,643) (4,172) (873) 2,529 (3,299)

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

Net cash (used in) provided by financing activities (2,177) 1,669 (2,227) (3,846) 3,896

Effect of exchange rate changes on cash and cash equivalents (68) 50 35 (118) 15

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

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

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

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

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

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

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

Net increase (decrease) in cash and cash equivalents $ 78 $ (491) $ (809) $ 569 $ 318

Net cash provided by operating activities increased $2.0 billion, primarily due to lower working capital requirements of $3.4 billion, partially offset by lower net income of $1.3 billion.

The lower working capital requirements resulted in a cash inflow of $2.4 billion compared to a cash outflow of $1.0 billion in the comparable period in 2022, mainly due to increased accrued expenses (resulting from the Agreement in Principle and higher variable compensation accruals) and favorable changes in inventories and accounts receivable, partially offset by unfavorable changes in accounts payable.

Net cash used in investing activities decreased $2.5 billion, principally due to lower acquisition activity of $2.9 billion, partially offset by higher capital expenditures of $297 million.

Net cash used in financing activities increased $3.8 billion, primarily due to higher net payments of commercial paper of $3.0 billion and lower proceeds from borrowings of $1.2 billion, partially offset by lower payments on borrowings and finance lease obligations of $414 million and the absence of repurchases of common stock of $374 million.

The effect of exchange rate changes on cash and cash equivalents decreased $118 million, primarily due to unfavorable fluctuations in the British pound, partially offset by the Chinese renminbi.

For prior year liquidity comparisons see the Liquidity and Capital Resources section of our 2022 Form 10-K .

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International Primary location of international balances

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

Cash and cash equivalents $ 2,179 $ 971 $ 1,208 Australia, Belgium, China, Singapore Canada, Mexico

Marketable securities (1)

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Revolving credit facilities (2)

Atmus revolving credit facility (3)

International and other uncommitted domestic credit facilities $ 393

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

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

(2) The five-year credit facility for $2.0 billion and the 364-day credit facility for $2.0 billion, maturing August 2026 and June 2024, respectively, are maintained primarily to provide backup liquidity for our commercial paper borrowings and general corporate purposes.

At December 31, 2023, we had $1.496 billion of commercial paper outstanding, which effectively reduced our available capacity under our revolving credit facilities to $2.504 billion.

(3) In February 2023, Atmus entered into a $400 million revolving credit facility, and at December 31, 2023, they had no outstanding borrowings under this facility.

Cash, Cash Equivalents and Marketable Securities

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or other international subsidiaries as they arise, we repatriate available cash from certain foreign subsidiaries whose earnings are not permanently reinvested when it is cost effective to do so.

On May 23, 2023, in connection with the Atmus IPO, Cummins issued approximately $350 million of commercial paper with certain lenders.

In exchange for the filtration business, Atmus also transferred to Cummins consideration of approximately $650 million.

The commercial paper issued and retired through the IPO proceeds, coupled with the $650 million received, was used for the retirement of our historical debt and payment of dividends.

See NOTE 23, "FORMATION OF ATMUS AND IPO," to the Consolidated Financial Statements for additional information.

Debt Facilities and Other Sources of Liquidity

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

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

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

The loan will mature on August 1, 2025.

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

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

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

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

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

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

On June 5, 2023, we entered into an amended and restated 364-day credit agreement that allows us to borrow up to $2.0 billion of unsecured funds at any time prior to June 3, 2024.

This credit agreement amended and restated the prior $1.5 billion 364-day credit facility that was scheduled to mature on August 16, 2023.

In connection with the 364-day credit agreement, effective June 5, 2023, we terminated our $500 million incremental 364-day credit agreement dated August 17, 2022.

Our committed credit facilities provide access up to $4.0 billion, including our $2.0 billion 364-day facility that expires June 3, 2024, and our $2.0 billion five-year facility that expires on August 18, 2026.

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

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

replacing these facilities at or before expiration.

We intend to maintain credit facilities

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

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

1 unchanged sentence

There were no outstanding borrowings under these facilities at December 31, 2023.

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

Our committed credit facilities provide access up to $4.0 billion of unsecured, short-term promissory notes (commercial paper) pursuant to the Board authorized commercial paper programs.

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

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

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

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

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

In September 2023, we entered into a series of interest rate swaps with a total notional value of $500 million in order to trade a portion of the floating rate into a fixed rate on our term loan, due in 2025.

The maturity date of the interest rate swaps is August 1, 2025.

We designated the swaps as cash flow hedges.

The gains and losses on these derivative instruments are initially recorded in other comprehensive income and reclassified into earnings as interest expense in the Consolidated Financial Statements as each interest payment is accrued.

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

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

The fallback protocol in our derivative agreements allowed for a transition from LIBOR to Secured Overnight Financing Rate (SOFR) in 2023.

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

In 2019 we entered into $350 million of interest rate lock agreements, and in 2020 we entered into an additional $150 million of lock agreements to reduce the variability of the cash flows of the interest payments on a total of $500 million of fixed rate debt forecast to be issued in 2023 to replace our senior notes at maturity.

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

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

In March 2023, we settled a portion of our 2021 interest rate swaps with a notional amount of $100 million.

The $7 million loss on settlement will be amortized over the remaining term of the related debt.

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 originally forecast to be issued in 2023 to replace our senior notes at maturity.

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

In 2023, we settled all remaining rate lock agreements with notional amounts totaling $350 million for $101 million.

The majority of the $150 million of gains on settlements will remain in other comprehensive income and will be amortized over the term of the debt anticipated to be issued in early 2024.

On February 15, 2023, certain of our subsidiaries entered into an amendment to the $1.0 billion credit agreement (Credit Agreement), consisting of a $400 million revolving credit facility and a $600 million term loan facility, in anticipation of the separation of our filtration business, extending the Credit Agreement termination date from March 30, 2023, to June 30, 2023.

On May 26, 2023, Atmus drew down the entire $600 million term loan facility and borrowed $50 million under the revolving credit facility for use as partial consideration for the filtration business.

Borrowings under the Credit Agreement mature in September 2027 (with quarterly payments on the term loan beginning in September 2024) and 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 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.

The Credit Agreement contains customary events of default and financial and other covenants, including maintaining a net leverage ratio of 4.0 to 1.0 and a minimum interest coverage ratio of 3.0 to 1.0.

At December 31, 2023, there were no outstanding borrowings under the revolving credit facility and $600 million outstanding under the term loan facility.

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

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

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

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

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

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

dollar LIBOR.

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

Treasury securities, and is based on directly observable U.S.

Treasury-backed repurchase transactions.

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

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

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

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

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

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

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

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

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

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

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

Generally, U.S.

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

Supply Chain Financing

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When a vendor utilizes the program and receives an early payment from a financial intermediary, they take a discount on the invoice.

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

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

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

completely voluntary.

We then pay the financial intermediary the face amount of the invoice on the original due date, which generally have 60 to 90 day payment terms.

The maximum amount that we could have outstanding under the program was $512 million at December 31, 2023.

We do not reimburse vendors for any costs they incur for participation in the program, their participation is completely voluntary and there are no assets pledged as security or other forms of guarantees provided for the committed payment to the finance provider or intermediary.

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

Amounts due to the financial intermediaries reflected in accounts payable at December 31, 2022, were $331 million.

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

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

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

Meritor, Inc.

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

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

Westport JV 02/07/22 50% 42 — 42

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

Amounts due to the financial

intermediaries reflected in accounts payable at December 31, 2023, were $199 million.

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

Agreement in Principle

In December 2023, we announced that we reached the Agreement in Principle with the EPA, CARB, DOJ and CA AG to resolve certain regulatory civil claims regarding our emissions certification and compliance process for certain engines primarily used in pick-up truck applications in the U.S.

Failure to comply with the terms and conditions of the Agreement in Principle will subject us to further stipulated penalties.

Of this amount, $1.938 billion relates to payments that are expected to be made in 2024.

See NOTE 2, "AGREEMENT IN PRINCIPLE," to our Consolidated Financial Statements for additional information.

Total dividends paid to common shareholders in 2023, 2022 and 2021 were $921 million, $855 million and $809 million, respectively.

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Total $ 6.50 $ 6.04 $ 5.60

Stock Repurchases

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

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

In millions (except per share amounts)

For each quarter ended Shares

Purchased Average Cost

Per Share Total Cost of

Repurchases Remaining

March 31 1.6 $ 199.27 $ 311 $ 2,281

June 30 0.1 194.00 36 2,245

September 30 0.2 197.72 23 2,222

December 31 0.0 (2)

206.12 4 2,218

Total 1.9 198.74 $ 374

(1) The remaining $218 million authorized capacity under the 2019 plan was calculated based on the cost to purchase the shares, but excludes commission expenses in accordance with the authorized plan.

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

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

Capital Expenditures

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

Capital expenditures were $1.2 billion, $916 million and $734 million in 2023, 2022 and 2021, respectively.

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

We plan to spend an estimated $1.2 billion to $1.3 billion in 2024 on capital expenditures with over 65 percent of these expenditures expected to be invested in North America.

Acquisitions for the year ended December 31, 2023, 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

Cummins France SA 10/31/23 100% $ 25 $ 5 $ 30

Faurecia 10/02/23 100% 210 — 210 (1)

Hydrogenics Corporation (Hydrogenics) 06/29/23 19% 287 48 335 (2)

Teksid Hierro de Mexico, S.A.

(Teksid MX) 04/03/23 100% 143 — 143 (3)

(1) Total purchase consideration included $30 million for the settlement of accounts payable that were treated as an operating cash outflow.

(2) Hydrogenics entered into three non-interest-bearing promissory notes with $175 million paid on July 31, 2023, and the remaining $160 million due in three installments through 2025.

(3) Total purchase consideration included $32 million for the settlement of accounts payable that were treated as an operating cash outflow.

See NOTE 24, "ACQUISITIONS," to our Consolidated Financial Statements for additional information.

Current Maturities of Short and Long-Term Debt

We had $1.5 billion of commercial paper outstanding at December 31, 2023, that matures in less than one year.

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

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

Required annual long-term debt principal payments range from $67 million to $1.8 billion over the next five years.

We intend to retain our strong investment credit ratings.

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

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

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

In 2023, the investment gain on our U.S.

pension trusts was 6.81 percent, while our U.K.

pension trusts' loss was 4.37 percent.

To better hedge its liabilities, our U.K.

pension plan sold a substantial portion of its private markets assets at a discount, which detracted from the investment performance.

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

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Expected contributions to our defined benefit pension plans in 2024 will meet or exceed the current funding requirements.

Stock Repurchases

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

For the year ended December 31, 2023, we did not make any repurchases of common stock.

The dollar value remaining available for future purchases under the 2019 program at December 31, 2023, was $218 million.

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

Future Uses of Cash

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

Redeemable Noncontrolling Interests

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

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

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

Credit Ratings

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

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

We believe our access to capital markets, our existing cash and marketable securities, operating cash flow and revolving credit facilities provide us with the financial flexibility needed to make payments required by the Agreement in Principle, targeted capital expenditures, dividend payments, debt service obligations, projected pension obligations, common stock repurchases and fund acquisitions through 2024 and beyond.

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

We anticipate making $1.938 billion of the payments required by the Agreement in Principle during 2024 through the use of our existing liquidity and access to debt markets.

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

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We estimate and record a liability for base warranty programs at the time our products are sold.

Our estimates are based on historical experience and reflect management's best estimates of expected costs at the time products are sold and subsequent adjustment to those expected costs when actual costs differ.

As a result of the uncertainty surrounding the nature and frequency of product recall programs, the liability for such programs is recorded when we commit to a recall action or when a recall becomes probable and estimable, which generally occurs when management internally approves or commits to the action.

Our warranty liability is generally affected by component failure rates, repair costs and the point of failure within the product life cycle.

Our estimates are based on historical experience and reflect management's best estimates of costs to be incurred over the warranty period.

Adjustments may be required to the liability when actual or projected costs differ.

Variations in component failure rates, repair costs and the point of failure within the product life cycle are key drivers that impact our periodic re-assessment of the warranty liability.

Future events and circumstances related to these factors could materially change our estimates and require adjustments to our liability.

New product launches require a greater use of judgment in developing estimates until historical experience becomes available.

Product specific experience is typically available four or five quarters after product launch, with a clear experience trend evident eight quarters after launch.

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

We generally estimate warranty accruals for new products using a methodology that includes the preceding product's warranty history and a multiplicative factor derived from prior product launch experience and new product assessments until sufficient new product data is available for warranty estimation.

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

Product specific experience is typically available five or six quarters after product launch, with a clear experience trend evident eight quarters after launch.

As a result of the uncertainty surrounding the nature and frequency of product recall programs, the liability for such programs is recorded when management commits to a recall action or when a recall becomes probable and estimable.

NOTE 14, "PRODUCT WARRANTY LIABILITY," to our Consolidated Financial Statements contains a summary of the activity in our warranty liability account for 2023, 2022 and 2021 including adjustments to pre-existing warranties.

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

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

We estimate the fair value of acquisition-related intangible assets principally based on projections of cash flows that will arise from identifiable intangible assets of acquired businesses, which includes estimates of discount rates, revenue growth rates, EBITDA, royalty rates, customer attrition rates, customer renewal rates and technology obsolesce rates.

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

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

We elected this option on certain reporting units.

We have elected this option on certain reporting units.

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

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The discounted cash flows are compared to the carrying value of the reporting unit and, if less than the carrying value, the difference is recorded as a goodwill impairment loss.

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.

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

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

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

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

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

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

We perform the goodwill impairment assessment as of the end of our fiscal third quarter.

While none of our reporting units recorded a goodwill impairment in 2023, we have two reporting units with material goodwill balances where the estimated fair value does not significantly exceed the carrying value, both of which are in our Components segment.

Our automated transmissions reporting unit (consisting solely of our joint venture with Eaton) has an estimated fair value that exceeds its carrying amount of $1.1 billion by approximately 7 percent.

Total goodwill in this reporting unit is $544 million at December 31, 2023.

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

The critical assumptions that factored into the valuation are the projections of revenue and gross margin of the business as well as the discount rate used to present value these future cash flows.

A 50 basis point increase in the discount rate would result in a 5 percent decline in the fair value of the reporting unit.

Our axles and brakes reporting unit, which consists of the legacy business acquired from Meritor in August 2022, has an estimated fair value that exceeds its carrying amount of $4.2 billion by approximately 12 percent.

Total goodwill in this reporting unit is $764 million at December 31, 2023.

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

The critical assumptions that factored into the valuation are the projections of revenue and gross margin of the business as well as the discount rate used to present value these future cash flows.

A 50 basis point increase in the discount rate would result in a 5 percent decline in the fair value of the reporting unit.

Accounting for Income Taxes

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

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

At December 31, 2023, we recorded a net deferred tax asset of $552 million.

The net deferred tax assets included $881 million for the value of net operating loss and credit carryforwards.

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The one-year return for our U.S.

plans was a 5.7 percent loss for 2022.

plans was a 6.81 percent gain for 2023.

plan assets averaged annualized returns of 6.50 percent over the prior ten years and resulted in approximately $223 million of actuarial losses in accumulated other comprehensive loss (AOCL) in the same period.

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plans was a 4.37 percent loss for 2023.

The majority of the Cummins U.K.

plan’s assets and certain Meritor U.K.

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

government gilts in order to hedge movements in the liabilities.

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

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

We generated average annualized returns of 1.25 percent over ten years, resulting in approximately $532 million of actuarial losses in AOCL.

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

Based on the historical returns and forward-looking

return expectations as the plan assets continue to be de-risked, we believe that an investment return assumption of 5.00 percent in 2023 for U.K.

Based on the historical returns and forward-looking return expectations, we believe that an investment return assumption of 5.00 percent in 2024 for U.K.

pension assets is reasonable and attainable.

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

Plan Cummins U.K.

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

Investment description 2023 2022 2021 2023 2022 2021

Liability matching 72.0 % 70.0 % 70.0 % 65.0 % 48.0 % 52.0 %

Risk seeking 28.0 % 30.0 % 30.0 % 35.0 % 52.0 % 48.0 %

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

Meritor’s investment policies in the U.S.

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

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

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

Plan Meritor U.K.

Our target allocation for 2024 and pension plan asset allocations, at December 31, 2023 and 2022 are as follows:

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

Investment description 2024 2023 2022 (1)

2024 2023 2022 (1)

Liability matching 71.0 % 71.0 % 70.0 % 80.0 % 80.8 % 48.0 %

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

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

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

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

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

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

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

The table below sets forth our expected rate of return for 2023 and the expected return assumptions used to develop our pension cost for the period 2020-2022.

(1) Pension plan assets allocations for 2022 exclude Meritor.

The Meritor U.S.

plan asset allocations at December 31, 2022, were 100 percent risk seeking.

The Meritor U.K.

plan asset allocations at December 31, 2022, were 70 percent liability matching and 30 percent risk seeking.

See NOTE 24, "ACQUISITIONS," to the Consolidated Financial Statements for additional information.

The differences between the actual return on plan assets and expected long-term return on plan assets are recognized in the asset value

used to calculate net periodic cost over five years.

The table below sets forth our expected rate of return for 2024 and the expected

return assumptions used to develop our pension cost for the period 2021-2023 .

Long-term Expected Return Assumptions

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We have chosen to delay recognition and amortize actuarial differences over future periods.

If we adopted the immediate recognition approach, we would record a loss of $693 million ($525 million after-tax) from cumulative actuarial net losses for our U.S.

If we adopted the immediate recognition approach, we would record a loss of $1.1 billion ($0.8 billion after-tax) from cumulative actuarial net losses for our U.S.

pension plans.

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Net actuarial losses decreased our shareholders' equity by $329 million after-tax in 2023.

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

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

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

The table below sets forth the net periodic pension cost for the years ended December 31 and our expected cost for 2024.

In millions 2024 2023 2022 2021

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

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

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

Net periodic pension cost $ 33 $ 1 $ 19 $ 78

We expect 2024 net periodic pension cost to increase compared to 2023, primarily due to unfavorable asset returns in the U.K., lower discount rates in the U.S.

and increased headcount from recent acquisitions, partially offset by a higher expected rate of return on assets in the U.S.

The decrease in net periodic pension cost in 2023 compared to 2022 was primarily due to the full year benefit of the Meritor pension plans added during the acquisition and a higher estimated return on assets in the U.S.

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

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

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

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

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The resulting discount rate is reflective of both the current interest rate environment and the plan's distinct liability characteristics.

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

In millions Impact on Pension Income Increase/(Decrease)

The table below sets forth the estimated impact on our 2024 net periodic pension cost relative to a change in the discount rate and a change in the expected rate of return on plan assets.

In millions Impact on Pension Cost Increase/(Decrease)

Discount rate used to value liabilities

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NOTE 11, "PENSIONS AND OTHER POSTRETIREMENT BENEFITS," to our Consolidated Financial Statements provides a summary of our pension benefit plan activity, the funded status of our plans and the amounts recognized in our Consolidated Financial Statements .

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis