UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended October 3, 2021June 30, 2022
Commission File Number 1-4949
CUMMINS INC.
(Exact name of registrant as specified in its charter) | | | | | | | | |
Indiana | | 35-0257090 |
(State of Incorporation) | | (IRS Employer Identification No.) |
500 Jackson Street
Box 3005
Columbus, Indiana 47202-3005
(Address of principal executive offices)
Telephone (812) 377-5000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | | | | | | | |
Title of each class | | Trading symbol(s) | | Name of each exchange on which registered |
Common stock, $2.50 par value | | CMI | | New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit such files). Yes x No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one): | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Large Accelerated Filer | x | | Accelerated filer | ☐ | | Non-accelerated filer | ☐ | | | | |
Smaller reporting company | ☐ | | Emerging growth company | ☐ | | | | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
As of October 3, 2021,June 30, 2022, there were 143,031,848140,992,323 shares of common stock outstanding with a par value of $2.50 per share.
CUMMINS INC. AND SUBSIDIARIES
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
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| Condensed Consolidated Statements of Net Income for the three and ninesix months ended October 3,June 30, 2022 and July 4, 2021 and September 27, 2020 | |
| Condensed Consolidated Statements of Comprehensive Income for the three and ninesix months ended October 3,June 30, 2022 and July 4, 2021 and September 27, 2020 | |
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| Condensed Consolidated Balance Sheets at October 3, 2021June 30, 2022 and December 31, 20202021 | |
| Condensed Consolidated Statements of Cash Flows for the ninesix months ended October 3,June 30, 2022 and July 4, 2021 and September 27, 2020 | |
| Condensed Consolidated Statements of Changes in Equity for the three and ninesix months ended October 3,June 30, 2022 and July 4, 2021 and September 27, 2020 | |
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PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF NET INCOME
(Unaudited)
| | | | | Three months ended | | Nine months ended | | | Three months ended | | Six months ended |
In millions, except per share amounts | In millions, except per share amounts | | October 3, 2021 | | September 27, 2020 | | October 3, 2021 | | September 27, 2020 | In millions, except per share amounts | | June 30, 2022 | | July 4, 2021 | | June 30, 2022 | | July 4, 2021 |
NET SALES (a) (Note 2) | NET SALES (a) (Note 2) | | $ | 5,968 | | | $ | 5,118 | | | $ | 18,171 | | | $ | 13,981 | | NET SALES (a) (Note 2) | | $ | 6,586 | | | $ | 6,111 | | | $ | 12,971 | | | $ | 12,203 | |
Cost of sales | | 4,554 | | | 3,769 | | | 13,793 | | | 10,448 | | |
Cost of sales (Note 3) | | Cost of sales (Note 3) | | 4,860 | | | 4,633 | | | 9,713 | | | 9,239 | |
GROSS MARGIN | GROSS MARGIN | | 1,414 | | | 1,349 | | | 4,378 | | | 3,533 | | GROSS MARGIN | | 1,726 | | | 1,478 | | | 3,258 | | | 2,964 | |
| OPERATING EXPENSES AND INCOME | OPERATING EXPENSES AND INCOME | | | | | | | | | OPERATING EXPENSES AND INCOME | | | | | | | | |
Selling, general and administrative expenses | Selling, general and administrative expenses | | 571 | | | 533 | | | 1,745 | | | 1,549 | | Selling, general and administrative expenses | | 622 | | | 600 | | | 1,237 | | | 1,174 | |
Research, development and engineering expenses | Research, development and engineering expenses | | 266 | | | 224 | | | 802 | | | 651 | | Research, development and engineering expenses | | 299 | | | 276 | | | 597 | | | 536 | |
Equity, royalty and interest income from investees (Note 4) | | 94 | | | 98 | | | 397 | | | 342 | | |
Equity, royalty and interest income from investees (Notes 3 and 5) | | Equity, royalty and interest income from investees (Notes 3 and 5) | | 95 | | | 137 | | | 191 | | | 303 | |
| Other operating expense, net | | (5) | | | (20) | | | (17) | | | (35) | | |
Other operating expense, net (Note 3) | | Other operating expense, net (Note 3) | | 3 | | | 4 | | | 114 | | | 12 | |
OPERATING INCOME | OPERATING INCOME | | 666 | | | 670 | | | 2,211 | | | 1,640 | | OPERATING INCOME | | 897 | | | 735 | | | 1,501 | | | 1,545 | |
| Interest expense | Interest expense | | 28 | | | 25 | | | 85 | | | 71 | | Interest expense | | 34 | | | 29 | | | 51 | | | 57 | |
Other income, net | | 37 | | | 41 | | | 111 | | | 134 | | |
Other (expense) income, net | | Other (expense) income, net | | (8) | | | 73 | | | (17) | | | 74 | |
INCOME BEFORE INCOME TAXES | INCOME BEFORE INCOME TAXES | | 675 | | | 686 | | | 2,237 | | | 1,703 | | INCOME BEFORE INCOME TAXES | | 855 | | | 779 | | | 1,433 | | | 1,562 | |
| Income tax expense (Note 5) | | 134 | | | 182 | | | 473 | | | 402 | | |
Income tax expense (Note 6) | | Income tax expense (Note 6) | | 148 | | | 167 | | | 303 | | | 339 | |
CONSOLIDATED NET INCOME | CONSOLIDATED NET INCOME | | 541 | | | 504 | | | 1,764 | | | 1,301 | | CONSOLIDATED NET INCOME | | 707 | | | 612 | | | 1,130 | | | 1,223 | |
| Less: Net income attributable to noncontrolling interests | Less: Net income attributable to noncontrolling interests | | 7 | | | 3 | | | 27 | | | 13 | | Less: Net income attributable to noncontrolling interests | | 5 | | | 12 | | | 10 | | | 20 | |
NET INCOME ATTRIBUTABLE TO CUMMINS INC. | NET INCOME ATTRIBUTABLE TO CUMMINS INC. | | $ | 534 | | | $ | 501 | | | $ | 1,737 | | | $ | 1,288 | | NET INCOME ATTRIBUTABLE TO CUMMINS INC. | | $ | 702 | | | $ | 600 | | | $ | 1,120 | | | $ | 1,203 | |
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EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC. | EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC. | | | | | | | | | EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC. | | | | | | | | |
Basic | Basic | | $ | 3.72 | | | $ | 3.39 | | | $ | 11.96 | | | $ | 8.69 | | Basic | | $ | 4.97 | | | $ | 4.14 | | | $ | 7.90 | | | $ | 8.24 | |
Diluted | Diluted | | $ | 3.69 | | | $ | 3.36 | | | $ | 11.86 | | | $ | 8.65 | | Diluted | | $ | 4.94 | | | $ | 4.10 | | | $ | 7.86 | | | $ | 8.16 | |
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WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING | WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING | | | | | | | | | WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING | | | | | | | | |
Basic | Basic | | 143.5 | | | 147.9 | | | 145.2 | | | 148.3 | | Basic | | 141.2 | | | 145.1 | | | 141.7 | | | 146.0 | |
Dilutive effect of stock compensation awards | Dilutive effect of stock compensation awards | | 1.2 | | | 1.0 | | | 1.3 | | | 0.6 | | Dilutive effect of stock compensation awards | | 0.8 | | | 1.4 | | | 0.8 | | | 1.4 | |
Diluted | Diluted | | 144.7 | | | 148.9 | | | 146.5 | | | 148.9 | | Diluted | | 142.0 | | | 146.5 | | | 142.5 | | | 147.4 | |
| | (a) Includes sales to nonconsolidated equity investees of $385 million and $1,286 million for the three and nine months ended October 3, 2021, compared with $311 million and $906 million for the comparable periods in 2020. | |
(a) Includes sales to nonconsolidated equity investees of $281 million and $625 million for the three and six months ended June 30, 2022, compared with $423 million and $901 million for the comparable periods in 2021. | | (a) Includes sales to nonconsolidated equity investees of $281 million and $625 million for the three and six months ended June 30, 2022, compared with $423 million and $901 million for the comparable periods in 2021. |
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
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| | | Three months ended | | Nine months ended | |
| In millions | | October 3, 2021 | | September 27, 2020 | | October 3, 2021 | | September 27, 2020 | |
| CONSOLIDATED NET INCOME | | $ | 541 | | | $ | 504 | | | $ | 1,764 | | | $ | 1,301 | | |
| Other comprehensive income (loss), net of tax (Note 12) | | | | | | | | | |
| Change in pension and other postretirement defined benefit plans | | 17 | | | 16 | | | 63 | | | 34 | | |
| Foreign currency translation adjustments | | — | | | 111 | | | (34) | | | (62) | | |
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| Unrealized gain (loss) on derivatives | | 3 | | | 18 | | | 37 | | | (63) | | |
| Total other comprehensive income (loss), net of tax | | 20 | | | 145 | | | 66 | | | (91) | | |
| COMPREHENSIVE INCOME | | 561 | | | 649 | | | 1,830 | | | 1,210 | | |
| Less: Comprehensive income attributable to noncontrolling interests | | 9 | | | 13 | | | 22 | | | 1 | | |
| COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC. | | $ | 552 | | | $ | 636 | | | $ | 1,808 | | | $ | 1,209 | | |
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| | | Three months ended | | Six months ended | |
| In millions | | June 30, 2022 | | July 4, 2021 | | June 30, 2022 | | July 4, 2021 | |
| CONSOLIDATED NET INCOME | | $ | 707 | | | $ | 612 | | | $ | 1,130 | | | $ | 1,223 | | |
| Other comprehensive income (loss), net of tax (Note 13) | | | | | | | | | |
| Change in pension and other postretirement defined benefit plans | | 6 | | | 17 | | | 22 | | | 46 | | |
| Foreign currency translation adjustments | | (245) | | | 22 | | | (241) | | | (34) | | |
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| Unrealized gain (loss) on derivatives | | 43 | | | (38) | | | 71 | | | 34 | | |
| Total other comprehensive (loss) income, net of tax | | (196) | | | 1 | | | (148) | | | 46 | | |
| COMPREHENSIVE INCOME | | 511 | | | 613 | | | 982 | | | 1,269 | | |
| Less: Comprehensive (loss) income attributable to noncontrolling interests | | (10) | | | 5 | | | (13) | | | 13 | | |
| COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC. | | $ | 521 | | | $ | 608 | | | $ | 995 | | | $ | 1,256 | | |
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| In millions, except par value | In millions, except par value | | October 3, 2021 | | December 31, 2020 | In millions, except par value | | June 30, 2022 | | December 31, 2021 |
ASSETS | ASSETS | | | | | ASSETS | | | | |
Current assets | Current assets | | | | | Current assets | | | | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 2,588 | | | $ | 3,401 | | Cash and cash equivalents | | $ | 2,462 | | | $ | 2,592 | |
| Marketable securities (Note 6) | | 430 | | | 461 | | |
Marketable securities (Note 7) | | Marketable securities (Note 7) | | 536 | | | 595 | |
Total cash, cash equivalents and marketable securities | Total cash, cash equivalents and marketable securities | | 3,018 | | | 3,862 | | Total cash, cash equivalents and marketable securities | | 2,998 | | | 3,187 | |
Accounts and notes receivable, net | Accounts and notes receivable, net | | Accounts and notes receivable, net | |
Trade and other | Trade and other | | 3,752 | | | 3,440 | | Trade and other | | 3,869 | | | 3,565 | |
Nonconsolidated equity investees | Nonconsolidated equity investees | | 400 | | | 380 | | Nonconsolidated equity investees | | 287 | | | 425 | |
Inventories (Note 7) | | 4,322 | | | 3,425 | | |
Inventories (Note 8) | | Inventories (Note 8) | | 4,765 | | | 4,355 | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | | 828 | | | 790 | | Prepaid expenses and other current assets | | 843 | | | 777 | |
Total current assets | Total current assets | | 12,320 | | | 11,897 | | Total current assets | | 12,762 | | | 12,309 | |
Long-term assets | Long-term assets | | | | | Long-term assets | | | | |
Property, plant and equipment | Property, plant and equipment | | 9,156 | | | 9,011 | | Property, plant and equipment | | 9,374 | | | 9,358 | |
Accumulated depreciation | Accumulated depreciation | | (4,971) | | | (4,756) | | Accumulated depreciation | | (4,985) | | | (4,936) | |
Property, plant and equipment, net | Property, plant and equipment, net | | 4,185 | | | 4,255 | | Property, plant and equipment, net | | 4,389 | | | 4,422 | |
Investments and advances related to equity method investees (Note 4) | | 1,543 | | | 1,441 | | |
Investments and advances related to equity method investees | | Investments and advances related to equity method investees | | 1,544 | | | 1,538 | |
Goodwill | Goodwill | | 1,289 | | | 1,293 | | Goodwill | | 1,391 | | | 1,287 | |
Other intangible assets, net | Other intangible assets, net | | 921 | | | 963 | | Other intangible assets, net | | 1,054 | | | 900 | |
Pension assets (Note 3) | | 1,100 | | | 1,042 | | |
Other assets (Note 8) | | 1,705 | | | 1,733 | | |
Pension assets (Note 4) | | Pension assets (Note 4) | | 1,461 | | | 1,488 | |
Other assets (Note 9) | | Other assets (Note 9) | | 1,876 | | | 1,766 | |
Total assets | Total assets | | $ | 23,063 | | | $ | 22,624 | | Total assets | | $ | 24,477 | | | $ | 23,710 | |
| LIABILITIES | LIABILITIES | | | | | LIABILITIES | | | | |
Current liabilities | Current liabilities | | | | | Current liabilities | | | | |
Accounts payable (principally trade) | Accounts payable (principally trade) | | $ | 3,210 | | | $ | 2,820 | | Accounts payable (principally trade) | | $ | 3,405 | | | $ | 3,021 | |
Loans payable (Note 9) | | 85 | | | 169 | | |
Commercial paper (Note 9) | | 200 | | | 323 | | |
Loans payable (Note 10) | | Loans payable (Note 10) | | 165 | | | 208 | |
Commercial paper (Note 10) | | Commercial paper (Note 10) | | 705 | | | 313 | |
Accrued compensation, benefits and retirement costs | Accrued compensation, benefits and retirement costs | | 626 | | | 484 | | Accrued compensation, benefits and retirement costs | | 443 | | | 683 | |
Current portion of accrued product warranty (Note 10) | | 694 | | | 674 | | |
Current portion of accrued product warranty (Note 11) | | Current portion of accrued product warranty (Note 11) | | 796 | | | 755 | |
Current portion of deferred revenue (Note 2) | Current portion of deferred revenue (Note 2) | | 806 | | | 691 | | Current portion of deferred revenue (Note 2) | | 871 | | | 855 | |
| Other accrued expenses (Note 8) | | 1,185 | | | 1,112 | | |
Current maturities of long-term debt (Note 9) | | 55 | | | 62 | | |
Other accrued expenses (Note 9) | | Other accrued expenses (Note 9) | | 1,221 | | | 1,190 | |
Current maturities of long-term debt (Note 10) | | Current maturities of long-term debt (Note 10) | | 65 | | | 59 | |
Total current liabilities | Total current liabilities | | 6,861 | | | 6,335 | | Total current liabilities | | 7,671 | | | 7,084 | |
Long-term liabilities | Long-term liabilities | | | | | Long-term liabilities | | | | |
Long-term debt (Note 9) | | 3,602 | | | 3,610 | | |
Pensions and other postretirement benefits (Note 3) | | 623 | | | 630 | | |
Accrued product warranty (Note 10) | | 703 | | | 672 | | |
Long-term debt (Note 10) | | Long-term debt (Note 10) | | 3,490 | | | 3,579 | |
Pensions and other postretirement benefits (Note 4) | | Pensions and other postretirement benefits (Note 4) | | 589 | | | 604 | |
Accrued product warranty (Note 11) | | Accrued product warranty (Note 11) | | 714 | | | 684 | |
Deferred revenue (Note 2) | Deferred revenue (Note 2) | | 836 | | | 840 | | Deferred revenue (Note 2) | | 852 | | | 850 | |
Other liabilities (Note 8) | | 1,435 | | | 1,548 | | |
Other liabilities (Note 9) | | Other liabilities (Note 9) | | 1,506 | | | 1,508 | |
Total liabilities | Total liabilities | | $ | 14,060 | | | $ | 13,635 | | Total liabilities | | $ | 14,822 | | | $ | 14,309 | |
| Commitments and contingencies (Note 11) | | 0 | | 0 | |
Commitments and contingencies (Note 12) | | Commitments and contingencies (Note 12) | | 0 | | 0 |
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EQUITY | EQUITY | | EQUITY | |
Cummins Inc. shareholders’ equity | Cummins Inc. shareholders’ equity | | | | | Cummins Inc. shareholders’ equity | | | | |
Common stock, $2.50 par value, 500 shares authorized, 222.5 and 222.4 shares issued | | $ | 2,412 | | | $ | 2,404 | | |
Common stock, $2.50 par value, 500 shares authorized, 222.5 and 222.5 shares issued | | Common stock, $2.50 par value, 500 shares authorized, 222.5 and 222.5 shares issued | | $ | 2,423 | | | $ | 2,427 | |
Retained earnings | Retained earnings | | 16,555 | | | 15,419 | | Retained earnings | | 17,450 | | | 16,741 | |
Treasury stock, at cost, 79.4 and 74.8 shares | | (8,974) | | | (7,779) | | |
Treasury stock, at cost, 81.5 and 80.0 shares | | Treasury stock, at cost, 81.5 and 80.0 shares | | (9,439) | | | (9,123) | |
| Accumulated other comprehensive loss (Note 12) | | (1,911) | | | (1,982) | | |
Accumulated other comprehensive loss (Note 13) | | Accumulated other comprehensive loss (Note 13) | | (1,696) | | | (1,571) | |
| Total Cummins Inc. shareholders’ equity | Total Cummins Inc. shareholders’ equity | | 8,082 | | | 8,062 | | Total Cummins Inc. shareholders’ equity | | 8,738 | | | 8,474 | |
Noncontrolling interests | Noncontrolling interests | | 921 | | | 927 | | Noncontrolling interests | | 917 | | | 927 | |
Total equity | Total equity | | $ | 9,003 | | | $ | 8,989 | | Total equity | | $ | 9,655 | | | $ | 9,401 | |
Total liabilities and equity | Total liabilities and equity | | $ | 23,063 | | | $ | 22,624 | | Total liabilities and equity | | $ | 24,477 | | | $ | 23,710 | |
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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| | Nine months ended |
In millions | | October 3, 2021 | | September 27, 2020 |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | |
Consolidated net income | | $ | 1,764 | | | $ | 1,301 | |
Adjustments to reconcile consolidated net income to net cash provided by operating activities | | | | |
Depreciation and amortization | | 497 | | | 499 | |
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Deferred income taxes | | 44 | | | (7) | |
Equity in income of investees, net of dividends | | (150) | | | (136) | |
Pension and OPEB expense (Note 3) | | 62 | | | 81 | |
Pension contributions and OPEB payments (Note 3) | | (86) | | | (102) | |
Share-based compensation expense | | 25 | | | 22 | |
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Restructuring payments | | (1) | | | (100) | |
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Loss (gain) on corporate owned life insurance | | 11 | | | (50) | |
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Foreign currency remeasurement and transaction exposure | | 27 | | | (7) | |
Changes in current assets and liabilities | | | | |
Accounts and notes receivable | | (353) | | | 47 | |
Inventories | | (919) | | | (50) | |
Other current assets | | (45) | | | 73 | |
Accounts payable | | 416 | | | 109 | |
Accrued expenses | | 435 | | | (236) | |
Changes in other liabilities | | (59) | | | 208 | |
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Other, net | | (144) | | | (72) | |
Net cash provided by operating activities | | 1,524 | | | 1,580 | |
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CASH FLOWS FROM INVESTING ACTIVITIES | | | | |
Capital expenditures | | (362) | | | (268) | |
Investments in internal use software | | (36) | | | (33) | |
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Proceeds from sale of land | | 20 | | | — | |
Investments in and advances to equity investees | | 3 | | | (30) | |
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Investments in marketable securities—acquisitions | | (569) | | | (422) | |
Investments in marketable securities—liquidations (Note 6) | | 602 | | | 408 | |
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Cash flows from derivatives not designated as hedges | | 19 | | | (15) | |
Other, net | | 45 | | | 23 | |
Net cash used in investing activities | | (278) | | | (337) | |
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CASH FLOWS FROM FINANCING ACTIVITIES | | | | |
Proceeds from borrowings | | 35 | | | 1,999 | |
Net payments of commercial paper | | (123) | | | (344) | |
Payments on borrowings and finance lease obligations | | (57) | | | (41) | |
Net (payments) borrowings under short-term credit agreements | | (93) | | | 6 | |
Distributions to noncontrolling interests | | (28) | | | (26) | |
Dividend payments on common stock | | (601) | | | (582) | |
Repurchases of common stock | | (1,228) | | | (550) | |
Proceeds from issuing common stock | | 27 | | | 78 | |
| | | | |
Other, net | | (11) | | | 24 | |
Net cash (used in) provided by financing activities | | (2,079) | | | 564 | |
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | | 20 | | | 31 | |
Net (decrease) increase in cash and cash equivalents | | (813) | | | 1,838 | |
Cash and cash equivalents at beginning of year | | 3,401 | | | 1,129 | |
CASH AND CASH EQUIVALENTS AT END OF PERIOD | | $ | 2,588 | | | $ | 2,967 | |
| | | | | | | | | | | | | | |
| | Six months ended |
In millions | | June 30, 2022 | | July 4, 2021 |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | |
Consolidated net income | | $ | 1,130 | | | $ | 1,223 | |
Adjustments to reconcile consolidated net income to net cash provided by operating activities | | | | |
Depreciation and amortization | | 328 | | | 337 | |
| | | | |
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Deferred income taxes | | (112) | | | 17 | |
Equity in income of investees, net of dividends | | (62) | | | (114) | |
Pension and OPEB expense (Note 4) | | 17 | | | 41 | |
Pension contributions and OPEB payments (Note 4) | | (55) | | | (68) | |
Share-based compensation expense | | 14 | | | 18 | |
| | | | |
| | | | |
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Russian suspension costs, net of recoveries (Note 3) | | 111 | | | — | |
Asset impairments and other charges | | 36 | | | — | |
Loss on corporate owned life insurance | | 85 | | | 12 | |
| | | | |
Foreign currency remeasurement and transaction exposure | | (10) | | | 10 | |
Changes in current assets and liabilities, net of acquisitions | | | | |
Accounts and notes receivable | | (252) | | | (331) | |
Inventories | | (498) | | | (628) | |
Other current assets | | (65) | | | (18) | |
Accounts payable | | 426 | | | 377 | |
Accrued expenses | | (281) | | | 169 | |
Changes in other liabilities | | (11) | | | (34) | |
| | | | |
Other, net | | (38) | | | (56) | |
Net cash provided by operating activities | | 763 | | | 955 | |
| | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | |
Capital expenditures | | (251) | | | (212) | |
Investments in internal use software | | (24) | | | (22) | |
| | | | |
Proceeds from sale of land | | — | | | 20 | |
Investments in and net advances (to) from equity investees | | (53) | | | 10 | |
Acquisitions of businesses, net of cash acquired (Note 14) | | (245) | | | — | |
| | | | |
Investments in marketable securities—acquisitions | | (433) | | | (362) | |
Investments in marketable securities—liquidations (Note 7) | | 461 | | | 381 | |
| | | | |
| | | | |
Cash flows from derivatives not designated as hedges | | (32) | | | 12 | |
Other, net | | 1 | | | 27 | |
Net cash used in investing activities | | (576) | | | (146) | |
| | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | |
Proceeds from borrowings | | 56 | | | 20 | |
Net borrowings (payments) of commercial paper | | 392 | | | (123) | |
Payments on borrowings and finance lease obligations | | (71) | | | (33) | |
Net payments under short-term credit agreements | | (24) | | | (102) | |
Distributions to noncontrolling interests | | (14) | | | (13) | |
Dividend payments on common stock | | (411) | | | (394) | |
Repurchases of common stock | | (347) | | | (1,090) | |
Proceeds from issuing common stock | | 19 | | | 26 | |
| | | | |
Other, net | | 9 | | | (13) | |
Net cash used in financing activities | | (391) | | | (1,722) | |
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | | 74 | | | (7) | |
Net decrease in cash and cash equivalents | | (130) | | | (920) | |
Cash and cash equivalents at beginning of year | | 2,592 | | | 3,401 | |
CASH AND CASH EQUIVALENTS AT END OF PERIOD | | $ | 2,462 | | | $ | 2,481 | |
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
| | | Three months ended | | Three months ended |
In millions, except per share amounts | In millions, except per share amounts | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Common Stock Held in Trust | | Accumulated Other Comprehensive Loss | | Total Cummins Inc. Shareholders’ Equity | | Noncontrolling Interests | | Total Equity | In millions, except per share amounts | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | | Accumulated Other Comprehensive Loss | | Total Cummins Inc. Shareholders’ Equity | | Noncontrolling Interests | | Total Equity |
BALANCE AT JULY 4, 2021 | | $ | 556 | | | $ | 1,849 | | | $ | 16,228 | | | $ | (8,838) | | | $ | — | | | $ | (1,929) | | | $ | 7,866 | | | $ | 927 | | | $ | 8,793 | | |
BALANCE AT MARCH 31, 2022 | | BALANCE AT MARCH 31, 2022 | | $ | 556 | | | $ | 1,855 | | | $ | 16,952 | | | $ | (9,412) | | | | $ | (1,515) | | | $ | 8,436 | | | $ | 927 | | | $ | 9,363 | |
| Net income | Net income | | 534 | | | 534 | | | 7 | | | 541 | | Net income | | 702 | | | | | 702 | | | 5 | | | 707 | |
Other comprehensive income, net of tax (Note 12) | | 0 | | 18 | | | 18 | | | 2 | | | 20 | | |
| Other comprehensive loss, net of tax (Note 13) | | Other comprehensive loss, net of tax (Note 13) | | | (181) | | | (181) | | | (15) | | | (196) | |
Issuance of common stock | | Issuance of common stock | | 1 | | | | | 1 | | | — | | | 1 | |
| Repurchases of common stock | Repurchases of common stock | | 0 | | (138) | | | 0 | | (138) | | | — | | | (138) | | Repurchases of common stock | | 0 | | (36) | | | | 0 | | (36) | | | — | | | (36) | |
Cash dividends on common stock, $1.45 per share | Cash dividends on common stock, $1.45 per share | | (207) | | | (207) | | | — | | | (207) | | Cash dividends on common stock, $1.45 per share | | (204) | | | | | (204) | | | — | | | (204) | |
Distributions to noncontrolling interests | | — | | | (15) | | | (15) | | |
| Share-based awards | Share-based awards | | 0 | | 1 | | | 0 | | 1 | | | — | | | 1 | | Share-based awards | | 2 | | | 8 | | | | 0 | | 10 | | | — | | | 10 | |
| Other shareholder transactions | Other shareholder transactions | | 7 | | | 1 | | | 8 | | | — | | | 8 | | Other shareholder transactions | | 9 | | | 1 | | | | | 10 | | | — | | | 10 | |
BALANCE AT OCTOBER 3, 2021 | | $ | 556 | | | $ | 1,856 | | | $ | 16,555 | | | $ | (8,974) | | | $ | — | | | $ | (1,911) | | | $ | 8,082 | | | $ | 921 | | | $ | 9,003 | | |
BALANCE AT JUNE 30, 2022 | | BALANCE AT JUNE 30, 2022 | | $ | 556 | | | $ | 1,867 | | | $ | 17,450 | | | $ | (9,439) | | | | $ | (1,696) | | | $ | 8,738 | | | $ | 917 | | | $ | 9,655 | |
| BALANCE AT JUNE 28, 2020 | | $ | 556 | | | $ | 1,797 | | | $ | 14,811 | | | $ | (7,729) | | | $ | (1) | | | $ | (2,242) | | | $ | 7,192 | | | $ | 938 | | | $ | 8,130 | | |
BALANCE AT APRIL 4, 2021 | | BALANCE AT APRIL 4, 2021 | | $ | 556 | | | $ | 1,837 | | | $ | 15,825 | | | $ | (8,172) | | | | $ | (1,937) | | | $ | 8,109 | | | $ | 922 | | | $ | 9,031 | |
| Net income | Net income | | 501 | | | 501 | | | 3 | | | 504 | | Net income | | 600 | | | | | 600 | | | 12 | | | 612 | |
Other comprehensive income, net of tax (Note 12) | | 0 | | 135 | | | 135 | | | 10 | | | 145 | | |
Other comprehensive income (loss), net of tax (Note 13) | | Other comprehensive income (loss), net of tax (Note 13) | | | 8 | | | 8 | | | (7) | | | 1 | |
Issuance of common stock | | Issuance of common stock | | 1 | | | | | 1 | | | — | | | 1 | |
| Employee benefits trust activity | | 5 | | | 0 | | 1 | | | 6 | | | — | | | 6 | | |
Repurchases of common stock | | Repurchases of common stock | | 0 | | (672) | | | | 0 | | (672) | | | — | | | (672) | |
Cash dividends on common stock, $1.35 per share | | Cash dividends on common stock, $1.35 per share | | (197) | | | | | (197) | | | — | | | (197) | |
| Cash dividends on common stock, $1.311 per share | | (194) | | | (194) | | | — | | | (194) | | |
Distributions to noncontrolling interests | | — | | | (13) | | | (13) | | |
Share-based awards | Share-based awards | | 13 | | | 33 | | | 0 | | 46 | | | — | | | 46 | | Share-based awards | | 2 | | | 6 | | | | 0 | | 8 | | | — | | | 8 | |
| Other shareholder transactions | Other shareholder transactions | | 14 | | | 14 | | | 3 | | | 17 | | Other shareholder transactions | | 9 | | | | | 9 | | | — | | | 9 | |
BALANCE AT SEPTEMBER 27, 2020 | | $ | 556 | | | $ | 1,829 | | | $ | 15,118 | | | $ | (7,696) | | | $ | — | | | $ | (2,107) | | | $ | 7,700 | | | $ | 941 | | | $ | 8,641 | | |
BALANCE AT JULY 4, 2021 | | BALANCE AT JULY 4, 2021 | | $ | 556 | | | $ | 1,849 | | | $ | 16,228 | | | $ | (8,838) | | | | $ | (1,929) | | | $ | 7,866 | | | $ | 927 | | | $ | 8,793 | |
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | Nine months ended |
| In millions, except per share amounts | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Common Stock Held in Trust | | Accumulated Other Comprehensive Loss | | Total Cummins Inc. Shareholders’ Equity | | Noncontrolling Interests | | Total Equity |
| BALANCE AT DECEMBER 31, 2020 | | $ | 556 | | | $ | 1,848 | | | $ | 15,419 | | | $ | (7,779) | | | $ | — | | | $ | (1,982) | | | $ | 8,062 | | | $ | 927 | | | $ | 8,989 | |
| | | | | | | | | | | | | | | | | | | |
| Net income | | | | | | 1,737 | | | | | | | | | 1,737 | | | 27 | | | 1,764 | |
| Other comprehensive income (loss), net of tax (Note 12) | | | | | | | | | | | | 71 | | | 71 | | | (5) | | | 66 | |
| Issuance of common stock | | | | 1 | | | | | | | | | | | 1 | | | — | | | 1 | |
| | | | | | | | | | | | | | | | | | | |
| Repurchases of common stock | | | | 0 | | | | (1,228) | | | | | | | (1,228) | | | — | | | (1,228) | |
| Cash dividends on common stock, $4.15 per share | | | | | | (601) | | | | | | | | | (601) | | | — | | | (601) | |
| Distributions to noncontrolling interests | | | | | | | | | | | | | | — | | | (28) | | | (28) | |
| Share-based awards | | | | (4) | | | | | 31 | | | | | | | 27 | | | — | | | 27 | |
| | | | | | | | | | | | | | | | | | | |
| Other shareholder transactions | | | | 11 | | | | | 2 | | | | | | | 13 | | | — | | | 13 | |
| BALANCE AT OCTOBER 3, 2021 | | $ | 556 | | | $ | 1,856 | | | $ | 16,555 | | | $ | (8,974) | | | $ | — | | | $ | (1,911) | | | $ | 8,082 | | | $ | 921 | | | $ | 9,003 | |
| | | | | | | | | | | | | | | | | | | |
| BALANCE AT DECEMBER 31, 2019 | | $ | 556 | | | $ | 1,790 | | | $ | 14,416 | | | $ | (7,225) | | | $ | (2) | | | $ | (2,028) | | | $ | 7,507 | | | $ | 958 | | | $ | 8,465 | |
| Adoption of new accounting standards | | | | | | (4) | | | | | | | | | (4) | | | — | | | (4) | |
| Net income | | | | | | 1,288 | | | | | | | | | 1,288 | | | 13 | | | 1,301 | |
| Other comprehensive loss, net of tax (Note 12) | | | | | | | | | | | | (79) | | | (79) | | | (12) | | | (91) | |
| Issuance of common stock | | | | 10 | | | | | | | | | | | 10 | | | — | | | 10 | |
| Employee benefits trust activity | | | | 27 | | | | | | | 2 | | | | | 29 | | | — | | | 29 | |
| Repurchases of common stock | | | | 0 | | | | (550) | | | | | | | (550) | | | — | | | (550) | |
| Cash dividends on common stock, $3.933 per share | | | | | | (582) | | | | | | | | | (582) | | | — | | | (582) | |
| Distributions to noncontrolling interests | | | | | | | | | | | | | | — | | | (26) | | | (26) | |
| Share-based awards | | | | (1) | | | | | 79 | | | | | | | 78 | | | — | | | 78 | |
| | | | | | | | | | | | | | | | | | | |
| Other shareholder transactions | | | | 3 | | | | | | | | | | | 3 | | | 8 | | | 11 | |
| BALANCE AT SEPTEMBER 27, 2020 | | $ | 556 | | | $ | 1,829 | | | $ | 15,118 | | | $ | (7,696) | | | $ | — | | | $ | (2,107) | | | $ | 7,700 | | | $ | 941 | | | $ | 8,641 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | Six months ended |
| In millions, except per share amounts | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | | | Accumulated Other Comprehensive Loss | | Total Cummins Inc. Shareholders’ Equity | | Noncontrolling Interests | | Total Equity |
| BALANCE AT DECEMBER 31, 2021 | | $ | 556 | | | $ | 1,871 | | | $ | 16,741 | | | $ | (9,123) | | | | | $ | (1,571) | | | $ | 8,474 | | | $ | 927 | | | $ | 9,401 | |
| | | | | | | | | | | | | | | | | | | |
| Net income | | | | | | 1,120 | | | | | | | | | 1,120 | | | 10 | | | 1,130 | |
| Other comprehensive loss, net of tax (Note 13) | | | | | | | | | | | | (125) | | | (125) | | | (23) | | | (148) | |
| Issuance of common stock | | | | 1 | | | | | | | | | | | 1 | | | — | | | 1 | |
| | | | | | | | | | | | | | | | | | | |
| Repurchases of common stock | | | | 0 | | | | (347) | | | | | | | (347) | | | — | | | (347) | |
| Cash dividends on common stock, $2.90 per share | | | | | | (411) | | | | | | | | | (411) | | | — | | | (411) | |
| Distributions to noncontrolling interests | | | | | | | | | | | | | | — | | | (14) | | | (14) | |
| Share-based awards | | | | (7) | | | | | 26 | | | | | | | 19 | | | — | | | 19 | |
| | | | | | | | | | | | | | | | | | | |
| Other shareholder transactions | | | | 2 | | | | | 5 | | | | | | | 7 | | | 17 | | | 24 | |
| BALANCE AT JUNE 30, 2022 | | $ | 556 | | | $ | 1,867 | | | $ | 17,450 | | | $ | (9,439) | | | | | $ | (1,696) | | | $ | 8,738 | | | $ | 917 | | | $ | 9,655 | |
| | | | | | | | | | | | | | | | | | | |
| BALANCE AT DECEMBER 31, 2020 | | $ | 556 | | | $ | 1,848 | | | $ | 15,419 | | | $ | (7,779) | | | | | $ | (1,982) | | | $ | 8,062 | | | $ | 927 | | | $ | 8,989 | |
| | | | | | | | | | | | | | | | | | | |
| Net income | | | | | | 1,203 | | | | | | | | | 1,203 | | | 20 | | | 1,223 | |
| Other comprehensive income (loss), net of tax (Note 13) | | | | | | | | | | | | 53 | | | 53 | | | (7) | | | 46 | |
| Issuance of common stock | | | | 1 | | | | | | | | | | | 1 | | | — | | | 1 | |
| | | | | | | | | | | | | | | | | | | |
| Repurchases of common stock | | | | 0 | | | | (1,090) | | | | | | | (1,090) | | | — | | | (1,090) | |
| Cash dividends on common stock, $2.70 per share | | | | | | (394) | | | | | | | | | (394) | | | — | | | (394) | |
| Distributions to noncontrolling interests | | | | | | | | | | | | | | — | | | (13) | | | (13) | |
| Share-based awards | | | | (4) | | | | | 30 | | | | | | | 26 | | | — | | | 26 | |
| | | | | | | | | | | | | | | | | | | |
| Other shareholder transactions | | | | 4 | | | | | 1 | | | | | | | 5 | | | — | | | 5 | |
| BALANCE AT JULY 4, 2021 | | $ | 556 | | | $ | 1,849 | | | $ | 16,228 | | | $ | (8,838) | | | | | $ | (1,929) | | | $ | 7,866 | | | $ | 927 | | | $ | 8,793 | |
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Overview
Cummins Inc. (“Cummins,” “we,” “our” or “us”) was founded in 1919 as Cummins Engine Company, a corporation in Columbus, Indiana, and one of the first diesel engine manufacturers. In 2001, we changed our name to Cummins Inc. We are a global power leader that designs, manufactures, distributes and services diesel, natural gas, electric and hybrid powertrains and powertrain-related components including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems, automated transmissions, electric power generation systems, batteries, electrified power systems, hydrogen production and fuel cell products. We sell our products to original equipment manufacturers (OEMs), distributors, dealers and other customers worldwide. We serve our customers through a service network of overapproximately 500 wholly-owned, joint venture and independent distributor locations and over 9,000more than 10,000 Cummins certified dealer locations with service toin approximately 190 countries and territories.
Reporting Period
Beginning in 2022, we transitioned to a Gregorian calendar with our reporting period ending on the last day of the quarterly calendar period. In 2021 and prior, our reporting period ended on the Sunday closest to the last day of the quarterly calendar period. The second quarters of 2022 and 2021 ended on June 30 and July 4, respectively. Our fiscal year ends on December 31, regardless of the day of the week on which December 31 falls.
Interim Condensed Financial Statements
The unaudited Condensed Consolidated Financial Statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of operations, financial position and cash flows. All such adjustments are of a normal recurring nature. The Condensed Consolidated Financial Statements were prepared in accordance with accounting principles in the United States of America (GAAP) pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial information. Certain information and footnote disclosures normally included in annual financial statements were condensed or omitted as permitted by such rules and regulations.
These interim condensed financial statements should be read in conjunction with the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 20202021. Our interim period financial results for the three and ninesix month periods presented are not necessarily indicative of results to be expected for any other interim period or for the entire year. The year-end Condensed Consolidated Balance Sheet data was derived from audited financial statements but does not include all required annual disclosures. Reclassifications
Certain amounts for prior year periods were reclassified to conform to the current year presentation.
Use of Estimates in Preparation of Financial Statements
Preparation of financial statements requires management to make estimates and assumptions that affect reported amounts presented and disclosed in our Condensed Consolidated Financial Statements. Significant estimates and assumptions in these Condensed Consolidated Financial Statements require the exercise of judgment. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be different from these estimates.
Reporting Period
Our reporting period usually ends on the Sunday closest to the last day of the quarterly calendar period. The third quarters of 2021 and 2020 ended on October 3 and September 27, respectively. Our fiscal year ends on December 31, regardless of the day of the week on which December 31 falls.
Weighted-Average Diluted Shares Outstanding
The weighted-average diluted common shares outstanding exclude the anti-dilutive effect of certain stock options. The options excluded from diluted earnings per share were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| October 3, 2021 | | September 27, 2020 | | October 3, 2021 | | September 27, 2020 |
Options excluded | 7,813 | | | 2,405 | | | 4,577 | | | 858,651 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 30, 2022 | | July 4, 2021 | | June 30, 2022 | | July 4, 2021 |
Options excluded | 33,100 | | | 3,137 | | | 26,782 | | | 2,958 | |
NOTE 2. REVENUE FROM CONTRACTS WITH CUSTOMERS
Long-term Contracts
The majority of our contracts are for a period of less than one year. We have certain long-term maintenance agreements, construction contracts and extended warranty coverage arrangements that span a period in excess of one year. The aggregate amount of the transaction price for long-term maintenance agreements and construction contracts allocated to performance obligations that were not satisfied as of October 3, 2021,June 30, 2022, was $774$723 million. We expect to recognize the related revenue of $134$128 million over the next 12 months and $640$595 million over periods up to 10 years. See Note 10,NOTE 11, "PRODUCT WARRANTY LIABILITY," for additional disclosures on extended warranty coverage arrangements. Our other contracts generally are for a duration of less than one year, include payment terms that correspond to the timing of costs incurred when providing goods and services to our customers or represent sales-based royalties.
Deferred and Unbilled Revenue
The following is a summary of our unbilled and deferred revenue and related activity:
| In millions | In millions | | October 3, 2021 | | December 31, 2020 | In millions | | June 30, 2022 | | December 31, 2021 |
Unbilled revenue | Unbilled revenue | | $ | 104 | | | $ | 114 | | Unbilled revenue | | $ | 128 | | | $ | 100 | |
Deferred revenue, primarily extended warranty | Deferred revenue, primarily extended warranty | | 1,642 | | | 1,531 | | Deferred revenue, primarily extended warranty | | 1,723 | | | 1,705 | |
| |
We recognized revenue of $130$176 million and $410$416 million for the three and ninesix months ended October 3, 2021,June 30, 2022, compared with $84$133 million and $290$302 million for the comparable periods in 2020,2021, that was included in the deferred revenue balance at the beginning of each year. We did not record any impairment losses on our unbilled revenues during the three and ninesix months ended October 3, 2021June 30, 2022 or September 27, 2020.July 4, 2021.
Disaggregation of Revenue
Consolidated Revenue
The table below presents our consolidated sales by geographic area. Net sales attributed to geographic areas were based on the location of the customer.
| | | | Three months ended | | Nine months ended | | | Three months ended | | Six months ended |
In millions | In millions | | October 3, 2021 | | September 27, 2020 | | October 3, 2021 | | September 27, 2020 | In millions | | June 30, 2022 | | July 4, 2021 | | June 30, 2022 | | July 4, 2021 |
United States | United States | | $ | 3,177 | | | $ | 2,805 | | | $ | 9,500 | | | $ | 7,522 | | United States | | $ | 3,788 | | | $ | 3,263 | | | $ | 7,245 | | | $ | 6,323 | |
| China | China | | 679 | | | 705 | | | 2,468 | | | 2,037 | | China | | 520 | | | 832 | | | 1,173 | | | 1,789 | |
| India | India | | 294 | | | 166 | | | 841 | | | 406 | | India | | 311 | | | 217 | | | 620 | | | 547 | |
| Other international | Other international | | 1,818 | | | 1,442 | | | 5,362 | | | 4,016 | | Other international | | 1,967 | | | 1,799 | | | 3,933 | | | 3,544 | |
Total net sales | Total net sales | | $ | 5,968 | | | $ | 5,118 | | | $ | 18,171 | | | $ | 13,981 | | Total net sales | | $ | 6,586 | | | $ | 6,111 | | | $ | 12,971 | | | $ | 12,203 | |
|
Segment Revenue
Engine segment external sales by market were as follows:
| | | Three months ended | | Nine months ended | | Three months ended | | Six months ended |
In millions | In millions | | October 3, 2021 | | September 27, 2020 | | October 3, 2021 | | September 27, 2020 | In millions | | June 30, 2022 | | July 4, 2021 | | June 30, 2022 | | July 4, 2021 |
Heavy-duty truck | Heavy-duty truck | | $ | 662 | | | $ | 486 | | | $ | 1,941 | | | $ | 1,226 | | Heavy-duty truck | | $ | 797 | | | $ | 666 | | | $ | 1,481 | | | $ | 1,279 | |
Medium-duty truck and bus | Medium-duty truck and bus | | 501 | | | 389 | | | 1,461 | | | 1,177 | | Medium-duty truck and bus | | 620 | | | 477 | | | 1,211 | | | 960 | |
Light-duty automotive | Light-duty automotive | | 492 | | | 502 | | | 1,432 | | | 975 | | Light-duty automotive | | 425 | | | 466 | | | 912 | | | 940 | |
Total on-highway | Total on-highway | | 1,655 | | | 1,377 | | | 4,834 | | | 3,378 | | Total on-highway | | 1,842 | | | 1,609 | | | 3,604 | | | 3,179 | |
Off-highway | Off-highway | | 306 | | | 240 | | | 942 | | | 755 | | Off-highway | | 250 | | | 311 | | | 537 | | | 636 | |
Total sales | Total sales | | $ | 1,961 | | | $ | 1,617 | | | $ | 5,776 | | | $ | 4,133 | | Total sales | | $ | 2,092 | | | $ | 1,920 | | | $ | 4,141 | | | $ | 3,815 | |
|
Distribution segment external sales by region were as follows:
| | | Three months ended | | Nine months ended | | Three months ended | | Six months ended |
In millions | In millions | | October 3, 2021 | | September 27, 2020 | | October 3, 2021 | | September 27, 2020 | In millions | | June 30, 2022 | | July 4, 2021 | | June 30, 2022 | | July 4, 2021 |
North America | North America | | $ | 1,237 | | | $ | 1,126 | | | $ | 3,631 | | | $ | 3,409 | | North America | | $ | 1,491 | | | $ | 1,228 | | | $ | 2,862 | | | $ | 2,394 | |
Asia Pacific | Asia Pacific | | 236 | | | 195 | | | 675 | | | 577 | | Asia Pacific | | 242 | | | 226 | | | 486 | | | 439 | |
Europe | Europe | | 143 | | | 153 | | | 467 | | | 424 | | Europe | | 177 | | | 161 | | | 320 | | | 324 | |
China | | China | | 99 | | | 74 | | | 181 | | | 159 | |
Russia | Russia | | 86 | | | 41 | | | 209 | | | 126 | | Russia | | 75 | | | 66 | | | 211 | | | 123 | |
China | | 80 | | | 74 | | | 239 | | | 242 | | |
Latin America | | Latin America | | 56 | | | 48 | | | 97 | | | 88 | |
Africa and Middle East | Africa and Middle East | | 74 | | | 47 | | | 197 | | | 136 | | Africa and Middle East | | 55 | | | 69 | | | 101 | | | 123 | |
India | India | | 48 | | | 42 | | | 138 | | | 101 | | India | | 52 | | | 41 | | | 100 | | | 90 | |
Latin America | | 48 | | | 37 | | | 136 | | | 108 | | |
Total sales | Total sales | | $ | 1,952 | | | $ | 1,715 | | | $ | 5,692 | | | $ | 5,123 | | Total sales | | $ | 2,247 | | | $ | 1,913 | | | $ | 4,358 | | | $ | 3,740 | |
| |
Distribution segment external sales by product line were as follows:
| | | Three months ended | | Nine months ended | | Three months ended | | Six months ended |
In millions | In millions | | October 3, 2021 | | September 27, 2020 | | October 3, 2021 | | September 27, 2020 | In millions | | June 30, 2022 | | July 4, 2021 | | June 30, 2022 | | July 4, 2021 |
Parts | Parts | | $ | 796 | | | $ | 719 | | | $ | 2,313 | | | $ | 2,155 | | Parts | | $ | 987 | | | $ | 763 | | | $ | 1,913 | | | $ | 1,517 | |
Power generation | Power generation | | 437 | | | 415 | | | 1,305 | | | 1,166 | | Power generation | | 440 | | | 452 | | | 838 | | | 868 | |
Engines | Engines | | 376 | | | 278 | | | 1,058 | | | 876 | | Engines | | 428 | | | 349 | | | 866 | | | 682 | |
Service | Service | | 343 | | | 303 | | | 1,016 | | | 926 | | Service | | 392 | | | 349 | | | 741 | | | 673 | |
Total sales | Total sales | | $ | 1,952 | | | $ | 1,715 | | | $ | 5,692 | | | $ | 5,123 | | Total sales | | $ | 2,247 | | | $ | 1,913 | | | $ | 4,358 | | | $ | 3,740 | |
|
Components segment external sales by business were as follows:
| | | Three months ended | | Nine months ended | | Three months ended | | Six months ended |
In millions | In millions | | October 3, 2021 | | September 27, 2020 | | October 3, 2021 | | September 27, 2020 | In millions | | June 30, 2022 | | July 4, 2021 | | June 30, 2022 | | July 4, 2021 |
Emission solutions | Emission solutions | | $ | 699 | | | $ | 612 | | | $ | 2,466 | | | $ | 1,576 | | Emission solutions | | $ | 767 | | | $ | 801 | | | $ | 1,575 | | | $ | 1,767 | |
Filtration | Filtration | | 288 | | | 260 | | | 892 | | | 715 | | Filtration | | 319 | | | 303 | | | 627 | | | 604 | |
Turbo technologies | Turbo technologies | | 177 | | | 163 | | | 609 | | | 463 | | Turbo technologies | | 195 | | | 207 | | | 392 | | | 432 | |
Automated transmissions | Automated transmissions | | 112 | | | 90 | | | 374 | | | 215 | | Automated transmissions | | 143 | | | 147 | | | 277 | | | 262 | |
Electronics and fuel systems | Electronics and fuel systems | | 71 | | | 76 | | | 286 | | | 223 | | Electronics and fuel systems | | 53 | | | 98 | | | 123 | | | 215 | |
Total sales | Total sales | | $ | 1,347 | | | $ | 1,201 | | | $ | 4,627 | | | $ | 3,192 | | Total sales | | $ | 1,477 | | | $ | 1,556 | | | $ | 2,994 | | | $ | 3,280 | |
|
Power Systems segment external sales by product line were as follows:
| | | Three months ended | | Nine months ended | | Three months ended | | Six months ended |
In millions | In millions | | October 3, 2021 | | September 27, 2020 | | October 3, 2021 | | September 27, 2020 | In millions | | June 30, 2022 | | July 4, 2021 | | June 30, 2022 | | July 4, 2021 |
Power generation | Power generation | | $ | 395 | | | $ | 334 | | | $ | 1,127 | | | $ | 827 | | Power generation | | $ | 408 | | | $ | 381 | | | $ | 807 | | | $ | 732 | |
Industrial | Industrial | | 209 | | | 167 | | | 621 | | | 477 | | Industrial | | 213 | | | 233 | | | 401 | | | 412 | |
Generator technologies | Generator technologies | | 84 | | | 66 | | | 251 | | | 191 | | Generator technologies | | 113 | | | 85 | | | 209 | | | 167 | |
Total sales | Total sales | | $ | 688 | | | $ | 567 | | | $ | 1,999 | | | $ | 1,495 | | Total sales | | $ | 734 | | | $ | 699 | | | $ | 1,417 | | | $ | 1,311 | |
|
NOTE 3. RUSSIAN OPERATIONS
On March 17, 2022, the Board of Directors (the Board) decided to indefinitely suspend our operations in Russia due to the ongoing conflict in Ukraine. At the time of suspension, our Russian operations included a wholly-owned distributor in Russia, an unconsolidated joint venture (the Unconsolidated JV) with KAMAZ Publicly Traded Company (KAMAZ), a Russian truck manufacturer with whom we share the Unconsolidated JV, and direct sales into Russia from our other business segments. As a result of the suspension of operations, we evaluated the recoverability of assets in Russia and assessed other potential liabilities. We experienced and expect to continue to experience, an inability to collect customer receivables and may be the subject of litigation as a consequence of our suspension of commercial operations in Russia. We recorded a charge of $158 million in the first quarter related to these actions. In the second quarter, we recovered certain inventory and other expense amounts reserved in the first quarter and incurred some small additional charges resulting in a net recovery of $47 million. As of June 30, 2022, we had approximately $17 million of inventory and $26 million of receivables in Russia, all of which are fully reserved. In addition, we have cash balances of $84 million, some of which will be used to fund ongoing employee, tax and contract settlement obligations. The following summarizes the costs (recoveries) associated with the suspension of our Russian operations in our Condensed Consolidated Statements of Net Income:
| | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Six months ended | | |
In millions | | June 30, 2022 | | June 30, 2022 | | Statement of Net Income Location |
Inventory write-downs | | $ | (40) | | | $ | 19 | | | Cost of sales |
Accounts receivable reserves | | — | | | 43 | | | Other operating expense, net |
Impairment and other joint venture costs | | — | | | 31 | | | Equity, royalty and interest income from investees |
| | | | | | |
Other | | (7) | | | 18 | | | Other operating expense, net |
Total | | $ | (47) | | | $ | 111 | | | |
| | | | | | |
We will continue to evaluate the situation as conditions evolve and may take additional actions as deemed necessary in future periods.
NOTE 3.4. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
We sponsor funded and unfunded domestic and foreign defined benefit pension and other postretirement benefit (OPEB) plans. Contributions to these plans were as follows:
| | | | Three months ended | | Nine months ended | | | Three months ended | | Six months ended |
In millions | In millions | | October 3, 2021 | | September 27, 2020 | | October 3, 2021 | | September 27, 2020 | In millions | | June 30, 2022 | | July 4, 2021 | | June 30, 2022 | | July 4, 2021 |
| Defined benefit pension contributions | Defined benefit pension contributions | | $ | 13 | | | $ | 11 | | | $ | 67 | | | $ | 77 | | Defined benefit pension contributions | | $ | 6 | | | $ | 12 | | | $ | 39 | | | $ | 54 | |
| OPEB payments, net | OPEB payments, net | | 5 | | | 9 | | | 19 | | | 25 | | OPEB payments, net | | 6 | | | 5 | | | 16 | | | 14 | |
| Defined contribution pension plans | Defined contribution pension plans | | 20 | | | 18 | | | 72 | | | 70 | | Defined contribution pension plans | | 20 | | | 17 | | | 56 | | | 52 | |
|
During the remainder of 2021, weWe anticipate making $6 million in additional defined benefit pension contributions induring the U.K. and $4remainder of 2022 of $10 million in contributions tofor our U.S. and U.K. qualified and non-qualified benefitpension plans. These contributions may be made from trusts or company funds either to increase pension assets or to make direct benefit payments to plan participants. We expect our 20212022 annual net periodic pension cost to approximate $79$31 million.
The components of net periodic pension and OPEB costs under our plans were as follows:
| | | | Pension | | | | | | | Pension | | | | |
| | | U.S. Plans | | U.K. Plans | | OPEB | | | U.S. Plans | | U.K. Plans | | OPEB |
| | | Three months ended | | | Three months ended |
In millions | In millions | | October 3, 2021 | | September 27, 2020 | | October 3, 2021 | | September 27, 2020 | | October 3, 2021 | | September 27, 2020 | In millions | | June 30, 2022 | | July 4, 2021 | | June 30, 2022 | | July 4, 2021 | | June 30, 2022 | | July 4, 2021 |
Service cost | Service cost | | $ | 35 | | | $ | 33 | | | $ | 8 | | | $ | 8 | | | $ | — | | | $ | — | | Service cost | | $ | 34 | | | $ | 35 | | | $ | 8 | | | $ | 9 | | | $ | — | | | $ | — | |
Interest cost | Interest cost | | 20 | | | 24 | | | 8 | | | 8 | | | 1 | | | 2 | | Interest cost | | 22 | | | 20 | | | 9 | | | 7 | | | 1 | | | 1 | |
Expected return on plan assets | Expected return on plan assets | | (49) | | | (49) | | | (22) | | | (19) | | | — | | | — | | Expected return on plan assets | | (52) | | | (50) | | | (20) | | | (22) | | | — | | | — | |
Amortization of prior service cost | Amortization of prior service cost | | — | | | — | | | 1 | | | 1 | | | — | | | — | | Amortization of prior service cost | | — | | | — | | | — | | | 1 | | | — | | | — | |
Recognized net actuarial loss | Recognized net actuarial loss | | 11 | | | 10 | | | 8 | | | 9 | | | — | | | — | | Recognized net actuarial loss | | 6 | | | 12 | | | — | | | 8 | | | — | | | — | |
Net periodic benefit cost | | $ | 17 | | | $ | 18 | | | $ | 3 | | | $ | 7 | | | $ | 1 | | | $ | 2 | | |
Net periodic benefit cost (credit) | | Net periodic benefit cost (credit) | | $ | 10 | | | $ | 17 | | | $ | (3) | | | $ | 3 | | | $ | 1 | | | $ | 1 | |
| | | | | Pension | | | | | | | Pension | | | | |
| | | U.S. Plans | | U.K. Plans | | OPEB | | | U.S. Plans | | U.K. Plans | | OPEB |
| | | Nine months ended | | | Six months ended |
In millions | In millions | | October 3, 2021 | | September 27, 2020 | | October 3, 2021 | | September 27, 2020 | | October 3, 2021 | | September 27, 2020 | In millions | | June 30, 2022 | | July 4, 2021 | | June 30, 2022 | | July 4, 2021 | | June 30, 2022 | | July 4, 2021 |
Service cost | Service cost | | $ | 105 | | | $ | 100 | | | $ | 25 | | | $ | 22 | | | $ | — | | | $ | — | | Service cost | | $ | 68 | | | $ | 70 | | | $ | 16 | | | $ | 17 | | | $ | — | | | $ | — | |
Interest cost | Interest cost | | 59 | | | 71 | | | 23 | | | 26 | | | 3 | | | 5 | | Interest cost | | 44 | | | 39 | | | 18 | | | 15 | | | 2 | | | 2 | |
Expected return on plan assets | Expected return on plan assets | | (149) | | | (146) | | | (65) | | | (56) | | | — | | | — | | Expected return on plan assets | | (104) | | | (100) | | | (40) | | | (43) | | | — | | | — | |
Amortization of prior service cost | Amortization of prior service cost | | — | | | 1 | | | 2 | | | 2 | | | — | | | — | | Amortization of prior service cost | | — | | | — | | | — | | | 1 | | | — | | | — | |
Recognized net actuarial loss | Recognized net actuarial loss | | 35 | | | 30 | | | 24 | | | 26 | | | — | | | — | | Recognized net actuarial loss | | 12 | | | 24 | | | 1 | | | 16 | | | — | | | — | |
Net periodic benefit cost | | $ | 50 | | | $ | 56 | | | $ | 9 | | | $ | 20 | | | $ | 3 | | | $ | 5 | | |
Net periodic benefit cost (credit) | | Net periodic benefit cost (credit) | | $ | 20 | | | $ | 33 | | | $ | (5) | | | $ | 6 | | | $ | 2 | | | $ | 2 | |
NOTE 4.5. EQUITY, ROYALTY AND INTEREST INCOME FROM INVESTEES
Equity, royalty and interest income from investees included in our Condensed Consolidated Statements of Net Income for the reporting periods was as follows:
| | | | Three months ended | | Nine months ended | | | | Three months ended | | Six months ended | |
In millions | In millions | | October 3, 2021 | | September 27, 2020 | | October 3, 2021 | | September 27, 2020 | | In millions | | June 30, 2022 | | July 4, 2021 | | June 30, 2022 | | July 4, 2021 | |
Manufacturing entities | Manufacturing entities | | | | | | | | | | Manufacturing entities | | | | | | | | | |
Beijing Foton Cummins Engine Co., Ltd. | Beijing Foton Cummins Engine Co., Ltd. | | $ | 23 | | | $ | 30 | | | $ | 108 | | | $ | 81 | | | Beijing Foton Cummins Engine Co., Ltd. | | $ | 14 | | | $ | 46 | | | $ | 28 | | | $ | 85 | | |
Dongfeng Cummins Engine Company, Ltd. | Dongfeng Cummins Engine Company, Ltd. | | 11 | | | 20 | | | 63 | | | 54 | | | Dongfeng Cummins Engine Company, Ltd. | | 11 | | | 21 | | | 27 | | | 52 | | |
Chongqing Cummins Engine Company, Ltd. | Chongqing Cummins Engine Company, Ltd. | | 8 | | | 7 | | | 28 | | | 27 | | | Chongqing Cummins Engine Company, Ltd. | | 7 | | | 10 | | | 16 | | | 20 | | |
Tata Cummins, Ltd. | | Tata Cummins, Ltd. | | 5 | | | 1 | | | 14 | | | 7 | | |
All other manufacturers | All other manufacturers | | 27 | |
| 22 | | (1) | 117 | | | 100 | | (1)(2) | All other manufacturers | | 13 | | | 28 | | | 3 | | (1) | 83 | | |
| Distribution entities | Distribution entities | | Distribution entities | | |
Komatsu Cummins Chile, Ltda. | Komatsu Cummins Chile, Ltda. | | 8 | | | 6 | | | 23 | | | 23 | | | Komatsu Cummins Chile, Ltda. | | 12 | | | 9 | | | 19 | | | 15 | | |
All other distributors | All other distributors | | 2 | | | 1 | | | 6 | | | 1 | | | All other distributors | | 3 | | | 1 | | | 5 | | | 4 | | |
| Cummins share of net income | Cummins share of net income | | 79 | | | 86 | | | 345 | | | 286 | | | Cummins share of net income | | 65 | | | 116 | | | 112 | | | 266 | | |
Royalty and interest income | Royalty and interest income | | 15 | | | 12 | | | 52 | | | 56 | | | Royalty and interest income | | 30 | | | 21 | | | 79 | | | 37 | | |
Equity, royalty and interest income from investees | Equity, royalty and interest income from investees | | $ | 94 | | | $ | 98 | | | $ | 397 | | | $ | 342 | | | Equity, royalty and interest income from investees | | $ | 95 | | | $ | 137 | | | $ | 191 | | | $ | 303 | | |
| (1) Includes impairment charges of $10 million and $13 million for the three and nine months ended September 27, 2020, respectively, for a joint venture in the Power Systems segment. | |
| (2) Includes $37 million in favorable adjustments related to tax changes within India's 2020-2021 Union Budget of India (India Tax Law Change) passed in March 2020. | |
(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 Cummins Westport Joint Venture. See NOTE 3, "RUSSIAN OPERATIONS," and NOTE 14, "ACQUISITIONS," to our Condensed 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 suspension of our Russian operations. In addition, on February 7, 2022, we purchased Westport Fuel System Inc.'s stake in Cummins Westport Joint Venture. See NOTE 3, "RUSSIAN OPERATIONS," and NOTE 14, "ACQUISITIONS," to our Condensed Consolidated Financial Statements for additional information. | |
| |
NOTE 5.6. INCOME TAXES
Our effective tax rates for the three and ninesix months ended October 3, 2021,June 30, 2022, were 19.917.3 percent and 21.1 percent, respectively. Our effective tax rates for the three and ninesix months ended September 27, 2020,July 4, 2021, were 26.521.4 percent and 23.621.7 percent, respectively.
The three months ended October 3, 2021,June 30, 2022, contained favorable discrete tax items of $11$36 million, primarily due to $36 million of favorable changes in tax reserves, $10 million of favorable changes associated with uncertainty in our Russian operations and $8 million of net favorable other discrete tax items, partially offset by $18 million of unfavorable tax costs associated with internal restructuring ahead of the planned separation of our filtration business.
The six months ended June 30, 2022, contained favorable net discrete tax items of $5 million, primarily due to $27 million of favorable changes in tax reserves and $4 million of net favorable other discrete tax items, partially offset by $18 million of unfavorable tax costs associated with internal restructuring ahead of the planned separation of our filtration business and $8 million of unfavorable changes associated with uncertainty in our Russian operations.
The three months ended July 4, 2021, contained unfavorable discrete items of $7 million, primarily due to a $16$10 million favorable release ofunfavorable statutory change in tax reserves associated withrates (mostly in the settlement of tax positions,UK), partially offset by $5$3 million of unfavorable return to provision adjustments.other favorable discrete items.
The ninesix months ended October 3,July 4, 2021, contained favorable discrete items of $8 million, primarily due to an $18 million favorable release of tax reserves associated with the settlement of tax positions, partially offset by $10 million of unfavorable statutory changes in tax rates, mostly in the U.K.
The three months ended September 27, 2020, contained unfavorable discrete items of $31$3 million, primarily due to $17a $10 million of changesunfavorable statutory change in tax reserves, $8 million of provision to return adjustments relating to tax returns filed for 2019 and $6 million of net other discrete items.
The nine months ended September 27, 2020, contained $27 million of unfavorable net discrete tax items, primarily due to $34 million of unfavorable changesrates (mostly in tax reserves and $8 million of provision to return adjustments,the UK), partially offset by $15$7 million of other favorable tax changes due to the India Tax Law Change passed in March of 2020. See Note 4, "INCOME TAXES," of the Notes to the Consolidated Financial Statements of our 2020 Form 10-K for additional information on India Tax Law Changes.
NOTE 6.7. MARKETABLE SECURITIES
A summary of marketable securities, all of which were classified as current, was as follows:
| | | | October 3, 2021 | | December 31, 2020 | | | June 30, 2022 | | December 31, 2021 |
In millions | In millions | | Cost | | Gross unrealized gains/(losses)(1) | | Estimated fair value | | Cost | | Gross unrealized gains/(losses)(1) | | Estimated fair value | In millions | | Cost | | Gross unrealized gains/(losses)(1) | | Estimated fair value | | Cost | | Gross unrealized gains/(losses)(1) | | Estimated fair value |
| Equity securities | Equity securities | | | | | | | | | | | | | Equity securities | | | | | | | | | | | | |
| Debt mutual funds | | $ | 196 | | | $ | 2 | | | $ | 198 | | | $ | 267 | | | $ | 5 | | | $ | 272 | | |
Certificates of deposit | Certificates of deposit | | 200 | | | — | | | 200 | | | 164 | | | — | | | 164 | | Certificates of deposit | | $ | 296 | | | $ | — | | | $ | 296 | | | $ | 299 | | | $ | — | | | $ | 299 | |
| Debt mutual funds | | Debt mutual funds | | 220 | | | (5) | | | 215 | | | 254 | | | 2 | | | 256 | |
Equity mutual funds | Equity mutual funds | | 22 | | | 9 | | | 31 | | | 19 | | | 5 | | | 24 | | Equity mutual funds | | 22 | | | 3 | | | 25 | | | 29 | | | 10 | | | 39 | |
| Debt securities | Debt securities | | 1 | | | — | | | 1 | | | 1 | | | — | | | 1 | | Debt securities | | — | | | — | | | — | | | 1 | | | — | | | 1 | |
| Total marketable securities | Total marketable securities | | $ | 419 | | | $ | 11 | | | $ | 430 | | | $ | 451 | | | $ | 10 | | | $ | 461 | | Total marketable securities | | $ | 538 | | | $ | (2) | | | $ | 536 | | | $ | 583 | | | $ | 12 | | | $ | 595 | |
| (1) Unrealized gains and losses for debt securities are recorded in other comprehensive income while unrealized gains and losses for equity securities are recorded in "Other income, net" in our Condensed Consolidated Statements of Net Income. | |
(1) Unrealized gains and losses for debt securities are recorded in other comprehensive income while unrealized gains and losses for equity securities are recorded in other income, net in our Condensed Consolidated Statements of Net Income. | | (1) Unrealized gains and losses for debt securities are recorded in other comprehensive income while unrealized gains and losses for equity securities are recorded in other income, net in our Condensed Consolidated Statements of Net Income. |
|
All debt securities are classified as available-for-sale. All marketable securities presented use a Level 2 fair value measure. The fair value of Level 2 securities is estimated using actively quoted prices for similar instruments from brokers and observable inputs where available, including market transactions and third-party pricing services, or net asset values provided to investors. We do not currently have any Level 3 securities, and there were no transfers between Level 2 or 3 during the ninesix months ended October 3, 2021,June 30, 2022, or the year ended December 31, 2020.2021.
A description of the valuation techniques and inputs used for our Level 2 fair value measures is as follows:
•Debt mutual funds — The fair value measures for the vast majority of these investments are the daily net asset values published on a regulated governmental website. Daily quoted prices are available from the issuing brokerage and are used on a test basis to corroborate this Level 2 input measure.
•Certificates of deposit — These investments provide us with a contractual rate of return and generally range in maturity from three months to five years. The counterparties to these investments are reputable financial institutions with investment grade credit ratings. Since these instruments are not tradable and must be settled directly by us with the respective financial institution, our fair value measure is the financial institution's month-end statement.
•Debt mutual funds — The fair value measures for the vast majority of these investments are the daily net asset values published on a regulated governmental website. Daily quoted prices are available from the issuing brokerage and are used on a test basis to corroborate this Level 2 input measure.
•Equity mutual funds — The fair value measures for these investments are the net asset values published by the issuing brokerage. Daily quoted prices are available from reputable third-party pricing services and are used on a test basis to corroborate this Level 2 input measure.
•Debt securities — The fair value measures for these securities are broker quotes received from reputable firms. These securities are infrequently traded on a national exchange and these values are used on a test basis to corroborate our Level 2 input measure.
The proceeds from sales and maturities of marketable securities were as follows:
| | | | Nine months ended | | | Six months ended |
In millions | In millions | | | October 3, 2021 | | September 27, 2020 | In millions | | | June 30, 2022 | | July 4, 2021 |
Proceeds from sales of marketable securities | Proceeds from sales of marketable securities | | | $ | 428 | | | $ | 283 | | Proceeds from sales of marketable securities | | | $ | 346 | | | $ | 273 | |
Proceeds from maturities of marketable securities | Proceeds from maturities of marketable securities | | | 174 | | | 125 | | Proceeds from maturities of marketable securities | | | 115 | | | 108 | |
Investments in marketable securities - liquidations | Investments in marketable securities - liquidations | | | $ | 602 | | | $ | 408 | | Investments in marketable securities - liquidations | | | $ | 461 | | | $ | 381 | |
|
NOTE 7.8. INVENTORIES
Inventories are stated at the lower of cost or net realizable value. Inventories included the following:
| | | | | | | | | | | | | | |
In millions | | October 3, 2021 | | December 31, 2020 |
Finished products | | $ | 2,494 | | | $ | 2,216 | |
Work-in-process and raw materials | | 1,998 | | | 1,346 | |
Inventories at FIFO cost | | 4,492 | | | 3,562 | |
Excess of FIFO over LIFO | | (170) | | | (137) | |
Total inventories | | $ | 4,322 | | | $ | 3,425 | |
| | | | | | | | | | | | | | |
In millions | | June 30, 2022 | | December 31, 2021 |
Finished products | | $ | 2,635 | | | $ | 2,538 | |
Work-in-process and raw materials | | 2,349 | | | 2,009 | |
Inventories at FIFO cost | | 4,984 | | | 4,547 | |
Excess of FIFO over LIFO | | (219) | | | (192) | |
Total inventories | | $ | 4,765 | | | $ | 4,355 | |
NOTE 8.9. SUPPLEMENTAL BALANCE SHEET DATA
Other assets included the following:
| | | | | | | | | | | | | | | |
| | | | | |
| In millions | | October 3, 2021 | | December 31, 2020 |
| Corporate owned life insurance | | $ | 482 | | | $ | 508 | |
| Operating lease assets | | 455 | | | 438 | |
| Deferred income taxes | | 411 | | | 479 | |
| | | | | |
| Other | | 357 | | | 308 | |
| Other assets | | $ | 1,705 | | | $ | 1,733 | |
| | | | | |
| | | | | | | | | | | | | | | |
| | | | | |
| In millions | | June 30, 2022 | | December 31, 2021 |
| Deferred income taxes | | $ | 525 | | | $ | 428 | |
| Operating lease assets | | 430 | | | 444 | |
| Corporate owned life insurance | | 407 | | | 492 | |
| | | | | |
| Other | | 514 | | | 402 | |
| Other assets | | $ | 1,876 | | | $ | 1,766 | |
| | | | | |
Other accrued expenses included the following:
| | | | | | | | | | | | | | |
| | |
In millions | | October 3, 2021 | | December 31, 2020 |
Marketing accruals | | $ | 290 | | | $ | 242 | |
Other taxes payable | | 268 | | | 256 | |
Current portion of operating lease liabilities | | 127 | | | 128 | |
Income taxes payable | | 92 | | | 82 | |
Other | | 408 | | | 404 | |
Other accrued expenses | | $ | 1,185 | | | $ | 1,112 | |
Other liabilities included the following:
| | | | | | | | | | | | | | |
| | |
In millions | | October 3, 2021 | | December 31, 2020 |
| | | | |
Operating lease liabilities | | $ | 327 | | | $ | 325 | |
Deferred income taxes | | 327 | | | 325 | |
One-time transition tax | | 255 | | | 289 | |
Accrued compensation | | 201 | | | 203 | |
Mark-to-market valuation on interest rate locks | | 5 | | | 41 | |
Other long-term liabilities | | 320 | | | 365 | |
Other liabilities | | $ | 1,435 | | | $ | 1,548 | |
| | | | | | | | | | | | | | |
| | |
In millions | | June 30, 2022 | | December 31, 2021 |
Marketing accruals | | $ | 297 | | | $ | 303 | |
Other taxes payable | | 195 | | | 234 | |
Income taxes payable | | 152 | | | 107 | |
Current portion of operating lease liabilities | | 120 | | | 128 | |
Other | | 457 | | | 418 | |
Other accrued expenses | | $ | 1,221 | | | $ | 1,190 | |
Other liabilities included the following:
| | | | | | | | | | | | | | |
| | |
In millions | | June 30, 2022 | | December 31, 2021 |
| | | | |
Deferred income taxes | | $ | 395 | | | $ | 403 | |
Operating lease liabilities | | 315 | | | 326 | |
Long-term income taxes | | 192 | | | 263 | |
Accrued compensation | | 162 | | | 177 | |
Mark-to-market valuation on interest rate derivatives | | 114 | | | 19 | |
Other long-term liabilities | | 328 | | | 320 | |
Other liabilities | | $ | 1,506 | | | $ | 1,508 | |
NOTE 9.10. DEBT
Loans Payable and Commercial Paper
Loans payable, commercial paper and the related weighted-average interest rates were as follows:
| In millions | In millions | | October 3, 2021 | | | December 31, 2020 | | | In millions | | June 30, 2022 | | | December 31, 2021 | | |
| Loans payable (1) | Loans payable (1) | | $ | 85 | | | | $ | 169 | | | | Loans payable (1) | | $ | 165 | | | | $ | 208 | | | |
| Commercial paper | Commercial paper | | 200 | | | (2) | 323 | | (3) | | Commercial paper | | 705 | | | (2) | 313 | | (3) | |
| | (1) Loans payable consist primarily of notes payable to various domestic and international financial institutions. It is not practicable to aggregate these notes and calculate a quarterly weighted-average interest rate. | (1) Loans payable consist primarily of notes payable to various domestic and international financial institutions. It is not practicable to aggregate these notes and calculate a quarterly weighted-average interest rate. | | | (1) Loans payable consist primarily of notes payable to various domestic and international financial institutions. It is not practicable to aggregate these notes and calculate a quarterly weighted-average interest rate. | | |
(2) The weighted-average interest rate, inclusive of all brokerage fees, was 0.14 percent at October 3, 2021 and included $200 million of borrowings under the U.S. program. | | | |
(3) The weighted-average interest rate, inclusive of all brokerage fees, was negative 0.01 percent at December 31, 2020 and included $123 million of borrowings under the Europe program that were negative 0.34 percent and $200 million of borrowings under the U.S. program at 0.19 percent. | | | |
(2) The weighted-average interest rate, inclusive of all brokerage fees, was 1.33 percent at June 30, 2022. This included $105 million of borrowings under the Europe program that were at a negative weighted-average interest rate of 0.20 percent and $600 million of borrowings under the U.S. program at a weighted-average interest rate of 1.60 percent. | | (2) The weighted-average interest rate, inclusive of all brokerage fees, was 1.33 percent at June 30, 2022. This included $105 million of borrowings under the Europe program that were at a negative weighted-average interest rate of 0.20 percent and $600 million of borrowings under the U.S. program at a weighted-average interest rate of 1.60 percent. | | |
(3) The weighted-average interest rate, inclusive of all brokerage fees, was negative 0.01 percent at December 31, 2021. This included $113 million of borrowings under the Europe program that were at a negative weighted-average interest rate of 0.39 percent and $200 million of borrowings under the U.S. program at a weighted-average interest rate of 0.21 percent. | | (3) The weighted-average interest rate, inclusive of all brokerage fees, was negative 0.01 percent at December 31, 2021. This included $113 million of borrowings under the Europe program that were at a negative weighted-average interest rate of 0.39 percent and $200 million of borrowings under the U.S. program at a weighted-average interest rate of 0.21 percent. | | |
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We can issue up to $3.5 billion of unsecured, short-term promissory notes (commercial paper) pursuant to the Board of Directors (the Board) authorized commercial paper programs. The programs facilitate the private placement of unsecured short-term debt through third-party brokers. We intend to use the net proceeds from the commercial paper borrowings for acquisitions and general corporate purposes.
Revolving Credit Facilities
On August 18, 2021,As of June 30, 2022, we entered into an amended and restated 5-year revolvinghad access to committed credit agreement with a syndicate of lenders. The amended and restated credit agreement provides us with a $2facilities totaling $3.5 billion, senior unsecured revolving credit facility until August 18, 2026. This credit agreement replacesincluding the prior $2 billion 5-year credit agreement that would have matured on August 22, 2023. Amounts payable under our revolving credit facility will rank pro rata with all of our unsecured, unsubordinated indebtedness. Up to $300 million under this credit facility is available for swingline loans. Based on our current long-term debt ratings, the applicable margin on LIBOR rate loans was 0.75 percent per annum as of October 3, 2021. Advances under the facility may be prepaid without premium or penalty, subject to customary breakage costs.
On August 18, 2021, we entered into an amended and restated 364-day credit agreement that allows us to borrow up to $1.5 billion of unsecured funds at any time prior to August 17, 2022. This credit agreement amended and restated the prior $1.5 billion 364-day credit facility that maturedexpires August 17, 2022 and our $2.0 billion five-year facility that expires on August 18, 2021.
Both credit agreements include various covenants, including, among others, maintaining a net debt to total capital ratio of no more than 0.65 to 1.0. At October 3, 2021, we were in compliance with these covenants. These revolving credit facilities are maintained primarily to provide backup liquidity for our commercial paper borrowings and for general corporate purposes.2026. We intend to maintain credit facilities at the current or higher aggregate amounts by renewing or replacing these facilities at or before expiration. These revolving credit facilities are maintained primarily to provide backup liquidity for our commercial paper borrowings and general corporate purposes. There were no outstanding borrowings under these facilities at October 3, 2021June 30, 2022 and December 31, 2020.2021.
At October 3, 2021,June 30, 2022, the $200$705 million of outstanding commercial paper effectively reduced the $3.5 billion of revolving credit capacity to $3.3$2.8 billion.
At October 3, 2021,June 30, 2022, we also had an additional $268$271 million available for borrowings under our international and other domestic credit facilities.
Long-term Debt
A summary of long-term debt was as follows:
| In millions | In millions | | Interest Rate | | October 3, 2021 | | December 31, 2020 | In millions | | Interest Rate | | June 30, 2022 | | December 31, 2021 |
Long-term debt | Long-term debt | | | | | | | Long-term debt | | | | | | |
Senior notes, due 2023 | Senior notes, due 2023 | | 3.65% | | $ | 500 | | | $ | 500 | | Senior notes, due 2023 | | 3.65% | | $ | 500 | | | $ | 500 | |
Senior notes, due 2025(1) | Senior notes, due 2025(1) | | 0.75% | | 500 | | | 500 | | Senior notes, due 2025(1) | | 0.75% | | 500 | | | 500 | |
Debentures, due 2027 | Debentures, due 2027 | | 6.75% | | 58 | | | 58 | | Debentures, due 2027 | | 6.75% | | 58 | | | 58 | |
Debentures, due 2028 | Debentures, due 2028 | | 7.125% | | 250 | | | 250 | | Debentures, due 2028 | | 7.125% | | 250 | | | 250 | |
Senior notes, due 2030(1) | Senior notes, due 2030(1) | | 1.50% | | 850 | | | 850 | | Senior notes, due 2030(1) | | 1.50% | | 850 | | | 850 | |
Senior notes, due 2043 | Senior notes, due 2043 | | 4.875% | | 500 | | | 500 | | Senior notes, due 2043 | | 4.875% | | 500 | | | 500 | |
Senior notes, due 2050 | Senior notes, due 2050 | | 2.60% | | 650 | | | 650 | | Senior notes, due 2050 | | 2.60% | | 650 | | | 650 | |
Debentures, due 2098(2) | Debentures, due 2098(2) | | 5.65% | | 165 | | | 165 | | Debentures, due 2098(2) | | 5.65% | | 165 | | | 165 | |
| Other debt | Other debt | | 124 | | | 132 | | Other debt | | 149 | | | 110 | |
| Unamortized discount and deferred issuance costs | Unamortized discount and deferred issuance costs | | (68) | | | (72) | | Unamortized discount and deferred issuance costs | | (65) | | | (68) | |
Fair value adjustments due to hedge on indebtedness | Fair value adjustments due to hedge on indebtedness | | 39 | | | 48 | | Fair value adjustments due to hedge on indebtedness | | (85) | | | 34 | |
Finance leases | Finance leases | | 89 | | | 91 | | Finance leases | | 83 | | | 89 | |
Total long-term debt | Total long-term debt | | 3,657 | | | 3,672 | | Total long-term debt | | 3,555 | | | 3,638 | |
Less: Current maturities of long-term debt | Less: Current maturities of long-term debt | | 55 | | | 62 | | Less: Current maturities of long-term debt | | 65 | | | 59 | |
Long-term debt | Long-term debt | | $ | 3,602 | | | $ | 3,610 | | Long-term debt | | $ | 3,490 | | | $ | 3,579 | |
| (1) In the third quarter of 2021, we entered into a series of interest rate swaps to effectively convert from a fixed rate to floating rate. See "Interest Rate Risk" below for additional information. | |
(2) The effective interest rate is 7.48%. | |
(1) In 2021, we entered into a series of interest rate swaps to effectively convert from a fixed rate to floating rate. See "Interest Rate Risk" below for additional information. | | (1) In 2021, we entered into a series of interest rate swaps to effectively convert from a fixed rate to floating rate. See "Interest Rate Risk" below for additional information. |
(2) The effective interest rate is 7.48 percent. | | (2) The effective interest rate is 7.48 percent. |
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Principal payments required on long-term debt during the next five years are as follows:
| | In millions | In millions | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | In millions | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 |
Principal payments | Principal payments | | $ | 16 | | | $ | 58 | | | $ | 536 | | | $ | 31 | | | $ | 507 | | Principal payments | | $ | 44 | | | $ | 545 | | | $ | 41 | | | $ | 508 | | | $ | 54 | |
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Interest Rate Risk
InBeginning in the third quartersecond half of 2021, we entered into a series of interest rate swaps to effectively convert $400 million of our August 2020, $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, and we also entered into a series of interest rate swaps to effectively convert $765 million of our $850 million senior notes, due in 2030, from a fixed rate of 1.50 percent to a floating rate equal to the three-month LIBOR plus a spread.
The swaps were designated,following table summarizes the gains and will be accounted for, as fair value hedges. The gain or loss on these derivative instruments, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, are recognized in current income as "Interest expense." The net swap settlements that accrue each period are also reported in the losses:
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| | Three months ended | | Six months ended |
In millions | | June 30, 2022 | | | | June 30, 2022 | | |
Type of Swap | | Gain (Loss) on Swaps | | Gain (Loss) on Borrowings | | | | | | Gain (Loss) on Swaps | | Gain (Loss) on Borrowings | | | | |
Interest rate swaps(1) | | $ | (39) | | | $ | 34 | | | | | | | $ | (111) | | | $ | 114 | | | | | |
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(1) The difference between the gain (loss) on swaps and borrowings represents hedge ineffectiveness. | | | | |
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Table of ContentsCondensed Consolidated Financial Statements as "Interest expense." The loss on the interest rate swaps was less than $1 million and the offsetting gain on borrowing was less than $1 million for the three and nine month periods ended October 3, 2021. We have interest rate lock agreements to reduce the variability of the cash flows of the interest payments on a total of $500 million of fixed rate debt forecast to be issued in 2023 to replace our senior notes at maturity.
The following table summarizes the gains and (losses),losses, net of tax, recognized in "Otherother comprehensive income":income:
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In millions | | Three months ended | | Nine months ended |
Type of Swap | | October 3, 2021 | | September 27, 2020 | | October 3, 2021 | | September 27, 2020 |
Interest rate locks | | $ | — | | | $ | 17 | | | $ | 28 | | | $ | (52) | |
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In millions | | Three months ended | | Six months ended |
Type of Swap | | June 30, 2022 | | July 4, 2021 | | June 30, 2022 | | July 4, 2021 |
Interest rate locks | | $ | 43 | | | $ | (33) | | | $ | 82 | | | $ | 28 | |
Fair Value of Debt
Based on borrowing rates currently available to us for bank loans with similar terms and average maturities, considering our risk premium, the fair values and carrying values of total debt, including current maturities, were as follows:
| In millions | In millions | | October 3, 2021 | | December 31, 2020 | In millions | | June 30, 2022 | | December 31, 2021 |
Fair value of total debt (1) | Fair value of total debt (1) | | $ | 4,285 | | | $ | 4,665 | | Fair value of total debt (1) | | $ | 4,109 | | | $ | 4,461 | |
Carrying value of total debt | Carrying value of total debt | | 3,942 | | | 4,164 | | Carrying value of total debt | | 4,425 | | | 4,159 | |
| (1) The fair value of debt is derived from Level 2 input measures. | (1) The fair value of debt is derived from Level 2 input measures. | (1) The fair value of debt is derived from Level 2 input measures. |
Shelf Registration
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. 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.
NOTE 10.11. PRODUCT WARRANTY LIABILITY
A tabular reconciliation of the product warranty liability, including the deferred revenue related to our extended warranty coverage and accrued product campaigns, was as follows:
| | | Nine months ended | | Six months ended |
In millions | In millions | | October 3, 2021 | | September 27, 2020 | In millions | | June 30, 2022 | | July 4, 2021 |
Balance, beginning of year | Balance, beginning of year | | $ | 2,307 | | | $ | 2,389 | | Balance, beginning of year | | $ | 2,425 | | | $ | 2,307 | |
Provision for base warranties issued | Provision for base warranties issued | | 431 | | | 277 | | Provision for base warranties issued | | 267 | | | 302 | |
Deferred revenue on extended warranty contracts sold | Deferred revenue on extended warranty contracts sold | | 210 | | | 172 | | Deferred revenue on extended warranty contracts sold | | 145 | | | 136 | |
Provision for product campaigns issued | Provision for product campaigns issued | | 162 | | | 27 | | Provision for product campaigns issued | | 65 | | | 46 | |
Payments made during period | Payments made during period | | (409) | | | (424) | | Payments made during period | | (289) | | | (283) | |
| Amortization of deferred revenue on extended warranty contracts | Amortization of deferred revenue on extended warranty contracts | | (191) | | | (169) | | Amortization of deferred revenue on extended warranty contracts | | (146) | | | (124) | |
Changes in estimates for pre-existing product warranties | Changes in estimates for pre-existing product warranties | | (131) | | | (41) | | Changes in estimates for pre-existing product warranties | | (47) | | | (74) | |
Foreign currency translation and other | Foreign currency translation and other | | (4) | | | (6) | | Foreign currency translation and other | | 106 | | (1) | (6) | |
| Balance, end of period | Balance, end of period | | $ | 2,375 | | | $ | 2,225 | | Balance, end of period | | $ | 2,526 | | | $ | 2,304 | |
| (1) Includes $95 million of product warranty liability related to the acquisition of Cummins Westport Joint Venture. See NOTE 14, "ACQUISITIONS," to our Condensed Consolidated Financial Statements for additional information. | | (1) Includes $95 million of product warranty liability related to the acquisition of Cummins Westport Joint Venture. See NOTE 14, "ACQUISITIONS," to our Condensed Consolidated Financial Statements for additional information. |
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We recognized supplier recoveries of $88$10 million and $97$23 million for the three and ninesix months ended October 3, 2021,June 30, 2022, compared with $5 million and $16$9 million for the comparable periods in 2020.2021.
Warranty related deferred revenues and warranty liabilities on our Condensed Consolidated Balance Sheets were as follows:
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In millions | | October 3, 2021 | | December 31, 2020 | | Balance Sheet Location |
Deferred revenue related to extended coverage programs | | | | | | |
Current portion | | $ | 283 | | | $ | 261 | | | Current portion of deferred revenue |
Long-term portion | | 695 | | | 700 | | | Deferred revenue |
Total | | $ | 978 | | | $ | 961 | | | |
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Product warranty | | | | | | |
Current portion | | $ | 694 | | | $ | 674 | | | Current portion of accrued product warranty |
Long-term portion | | 703 | | | 672 | | | Accrued product warranty |
Total | | $ | 1,397 | | | $ | 1,346 | | | |
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Total warranty accrual | | $ | 2,375 | | | $ | 2,307 | | | |
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In millions | | June 30, 2022 | | December 31, 2021 | | Balance Sheet Location |
Deferred revenue related to extended coverage programs | | | | | | |
Current portion | | $ | 296 | | | $ | 286 | | | Current portion of deferred revenue |
Long-term portion | | 720 | | | 700 | | | Deferred revenue |
Total | | $ | 1,016 | | | $ | 986 | | | |
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Product warranty | | | | | | |
Current portion | | $ | 796 | | | $ | 755 | | | Current portion of accrued product warranty |
Long-term portion | | 714 | | | 684 | | | Accrued product warranty |
Total | | $ | 1,510 | | | $ | 1,439 | | | |
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Total warranty accrual | | $ | 2,526 | | | $ | 2,425 | | | |
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Engine System Campaign Accrual
During 2017, the California Air Resources Board (CARB) and the U.S. Environmental Protection Agency (EPA) selected certain of our pre-2013 model year engine systems for additional emissions testing. Some of these engine systems failed CARB and EPA tests as a result of degradation of an aftertreatment component. In the second quarter of 2018, we reached agreement with the CARB and EPA regarding our plans to address the affected populations. From the fourth quarter of 2017 through the second quarter of 2018, we recorded charges for the expected costs of field campaigns to repair these engine systems.
The campaigns launched in the third quarter of 2018 are being completed in phases across the affected population. The total engine system campaign charge, excluding supplier recoveries, was $410 million. In the fourth quarter of 2020, we recorded an additional $20 million charge related to this campaign, as a change in estimate, to bring the total campaign, excluding supplier recoveries, to $430 million. At October 3, 2021,June 30, 2022, the remaining accrual balance was $94$63 million.
NOTE 11.12. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
We are subject to numerous lawsuits and claims arising out of the ordinary course of our business, including actions related to product liability; personal injury; the use and performance of our products; warranty matters; product recalls; patent, trademark or other intellectual property infringement; contractual liability; the conduct of our business; tax reporting in foreign jurisdictions; distributor termination; workplace safety; and environmental matters. We also have been identified as a potentially responsible party at multiple waste disposal sites under U.S. federal and related state environmental statutes and regulations and may have joint and several liability for any investigation and remediation costs incurred with respect to such sites. We have denied liability with respect to many of these lawsuits, claims and proceedings and are vigorously defending such lawsuits, claims and proceedings. We carry various forms of commercial, property and casualty, product liability and other forms of insurance; however, such insurance may not be applicable or adequate to cover the costs associated with a judgment against us with respect to these lawsuits, claims and proceedings. We do not believe that these lawsuits are material individually or in the aggregate. While we believe we have also established adequate accruals for our expected future liability with respect to pending lawsuits, claims and proceedings, where the nature and extent of any such liability can be reasonably estimated based upon then presently available information, there can be no assurance that the final resolution of any existing or future lawsuits, claims or proceedings will not have a material adverse effect on our business, results of operations, financial condition or cash flows.
We conduct significant business operations in Brazil that are subject to the Brazilian federal, state and local labor, social security, tax and customs laws. While we believe we comply with such laws, they are complex, subject to varying interpretations and we are often engaged in litigation regarding the application of these laws to particular circumstances.
On June 28, 2022, KAMAZ was designated to the List of Specially Designated Nationals and Blocked Persons by the U.S. Department of the Treasury’s Office of Foreign Assets Control. We filed blocked property reports for relevant assets and are seeking relevant authorizations to extricate ourselves from our relationship with KAMAZ and its subsidiaries, including the Unconsolidated JV, in compliance with U.S. law.
On April 29, 2019, we announced that we were conducting a formal internal review of our emissions certification process and compliance with emission standards for our pick-up truck applications, following conversations with the EPA and CARB regarding certification of our engines in model year 2019 RAM 2500 and 3500 trucks. This review is being conducted with external advisors as we strive to ensure the certification and compliance processes for all of our pick-up truck applications are consistent with our internal policies, engineering standards and applicable laws. In addition, we voluntarily disclosed our formal internal review to the regulators and to other government agencies, the Department of Justice (DOJ) and the SEC, and worked cooperatively with them to ensure a complete and thorough review. We fully cooperated with the DOJ's and the SEC's information requests and inquiries and, based on communications with these agencies, we do not expect further inquiries. During conversations with the EPA and CARB about the effectiveness of our pick-up truck applications, the regulators raised concerns that certain aspects of our emissions systems may reduce the effectiveness of our emissions control systems and thereby act as defeat devices. As a result, our internal review focuses, in part, on the regulators’ concerns. We are working closely with the regulators to enhance our emissions systems to improve the effectiveness of all of our pick-up truck applications and to fully address the regulators’ requirements. Based on discussions with the regulators, we have developed a new calibration for the engines in model year 2019 RAM 2500 and 3500 trucks that has been included in all engines shipped since September 2019. During our ongoing discussions, the regulators turned their attention to other model years and other engines, most notably our pick-up truck applications for RAM 2500 and 3500 trucks for model years 2013 through 2018. DueIn connection with these and other ongoing discussions with the EPA and CARB, we are developing a new software calibration and will recall model years 2013 through 2018 RAM 2500 and 3500 trucks. We accrued $30 million for the recall during the first quarter of 2022, an amount that reflects our current estimate of the cost of the recall.
We will continue to work together closely with the continuing naturerelevant regulators to develop and implement recommendations for improvement and seek to reach further resolutions as part of our formal review, our ongoing cooperation with our regulators andcommitment to compliance. Due to the presence of many unknown facts and circumstances, we cannot predictare not yet able to estimate any further financial impact of these matters. It is possible that the final outcomeconsequences of thisany remediation plans resulting from our formal review and these regulatory processes nor whether, or the extent to which, they could have a material adverse impact on our results of operations and cash flows.
Guarantees and Commitments
Periodically, we enter into guarantee arrangements, including guarantees of non-U.S. distributor financings, residual value guarantees on equipment under operating leases and other miscellaneous guarantees of joint ventures or third-party obligations. At October 3, 2021,June 30, 2022, the maximum potential loss related to these guarantees was $49$41 million.
We have arrangements with certain suppliers that require us to purchase minimum volumes or be subject to monetary penalties. At October 3, 2021,June 30, 2022, if we were to stop purchasing from each of these suppliers, the aggregate amount of the penalty would be approximately $90$126 million. These arrangements enable us to secure supplies of critical components and IT services. We do not currently anticipate paying any penalties under these contracts.
We enter into physical forward contracts with suppliers of platinum and palladium to purchase certain volumes of the commodities at contractually stated prices for various periods, which generally fall within two years. At October 3, 2021,June 30, 2022, the total commitments under these contracts were $54$91 million. These arrangements enable us to guarantee the prices of these commodities, which otherwise are subject to market volatility.
We have guarantees with certain customers that require us to satisfactorily honor contractual or regulatory obligations, or compensate for monetary losses related to nonperformance. These performance bonds and other performance-related guarantees were $105$117 million at October 3, 2021.June 30, 2022.
Indemnifications
Periodically, we enter into various contractual arrangements where we agree to indemnify a third-party against certain types of losses. Common types of indemnities include:
•product liability and license, patent or trademark indemnifications;
•asset sale agreements where we agree to indemnify the purchaser against future environmental exposures related to the asset sold; and
•any contractual agreement where we agree to indemnify the counterparty for losses suffered as a result of a misrepresentation in the contract.
We regularly evaluate the probability of having to incur costs associated with these indemnities and accrue for expected losses that are probable. Because the indemnifications are not related to specified known liabilities and due to their uncertain nature, we are unable to estimate the maximum amount of the potential loss associated with these indemnifications.
NOTE 12.13. ACCUMULATED OTHER COMPREHENSIVE LOSS
Following are the changes in accumulated other comprehensive income (loss) by component for the three months ended:
| | In millions | In millions | | Change in pensions and other postretirement defined benefit plans | | Foreign currency translation adjustment | | | Unrealized gain (loss) on derivatives | | Total attributable to Cummins Inc. | | Noncontrolling interests | | Total | In millions | | Change in pensions and other postretirement defined benefit plans | | Foreign currency translation adjustment | | | Unrealized gain (loss) on derivatives | | Total attributable to Cummins Inc. | | Noncontrolling interests | | Total |
Balance at July 4, 2021 | | $ | (689) | | | $ | (1,231) | | | | $ | (9) | | | $ | (1,929) | | | | | | |
Balance at March 31, 2022 | | Balance at March 31, 2022 | | $ | (330) | | | $ | (1,196) | | | | $ | 11 | | | $ | (1,515) | | | | | |
Other comprehensive income before reclassifications | Other comprehensive income before reclassifications | | | | | | | | | | | | | | Other comprehensive income before reclassifications | | | | | | | | | | | | | |
Before-tax amount | Before-tax amount | | 1 | | | (2) | | | | 5 | | | 4 | | | $ | 2 | | | $ | 6 | | Before-tax amount | | — | | | (235) | | | | 59 | | | (176) | | | $ | (15) | | | $ | (191) | |
Tax expense | | (1) | | | — | | | | (3) | | | (4) | | | — | | | (4) | | |
Tax benefit (expense) | | Tax benefit (expense) | | 1 | | | 5 | | | | (15) | | | (9) | | | — | | | (9) | |
After-tax amount | After-tax amount | | — | | | (2) | | | | 2 | | | — | | | 2 | | | 2 | | After-tax amount | | 1 | | | (230) | | | | 44 | | | (185) | | | (15) | | | (200) | |
Amounts reclassified from accumulated other comprehensive income (loss)(1) | Amounts reclassified from accumulated other comprehensive income (loss)(1) | | 17 | | | — | | | | 1 | | | 18 | | | — | | | 18 | | Amounts reclassified from accumulated other comprehensive income (loss)(1) | | 5 | | | — | | | | (1) | | | 4 | | | — | | | 4 | |
| Net current period other comprehensive income (loss) | Net current period other comprehensive income (loss) | | 17 | | | (2) | | | | 3 | | | 18 | | | $ | 2 | | | $ | 20 | | Net current period other comprehensive income (loss) | | 6 | | | (230) | | | | 43 | | (2) | (181) | | | $ | (15) | | | $ | (196) | |
Balance at October 3, 2021 | | $ | (672) | | | $ | (1,233) | | | | $ | (6) | | | $ | (1,911) | | | | | | |
Balance at June 30, 2022 | | Balance at June 30, 2022 | | $ | (324) | | | $ | (1,426) | | | | $ | 54 | | | $ | (1,696) | | | | | |
| Balance at June 28, 2020 | | $ | (716) | | | $ | (1,436) | | | | $ | (90) | | | $ | (2,242) | | | | | | |
Balance at April 4, 2021 | | Balance at April 4, 2021 | | $ | (706) | | | $ | (1,260) | | | | $ | 29 | | | $ | (1,937) | | | | | |
Other comprehensive income before reclassifications | Other comprehensive income before reclassifications | | | | | | | | | | | | | | Other comprehensive income before reclassifications | | | | | | | | | | | | | |
Before-tax amount | Before-tax amount | | — | | | 101 | | | | 23 | | | 124 | | | $ | 10 | | | $ | 134 | | Before-tax amount | | — | | | 29 | | | | (45) | | | (16) | | | $ | (7) | | | $ | (23) | |
Tax expense | | — | | | — | | | | (5) | | | (5) | | | — | | | (5) | | |
Tax benefit | | Tax benefit | | 1 | | | — | | | | 9 | | | 10 | | | — | | | 10 | |
After-tax amount | After-tax amount | | — | | | 101 | | | | 18 | | | 119 | | | 10 | | | 129 | | After-tax amount | | 1 | | | 29 | | | | (36) | | | (6) | | | (7) | | | (13) | |
Amounts reclassified from accumulated other comprehensive income (loss)(1) | Amounts reclassified from accumulated other comprehensive income (loss)(1) | | 16 | | | — | | | | — | | | 16 | | | — | | | 16 | | Amounts reclassified from accumulated other comprehensive income (loss)(1) | | 16 | | | — | | | | (2) | | | 14 | | | — | | | 14 | |
Net current period other comprehensive income | | 16 | | | 101 | | | | 18 | | | 135 | | | $ | 10 | | | $ | 145 | | |
Balance at September 27, 2020 | | $ | (700) | | | $ | (1,335) | | | | $ | (72) | | | $ | (2,107) | | | | | | |
Net current period other comprehensive income (loss) | | Net current period other comprehensive income (loss) | | 17 | | | 29 | | | | (38) | | (2) | 8 | | | $ | (7) | | | $ | 1 | |
Balance at July 4, 2021 | | Balance at July 4, 2021 | | $ | (689) | | | $ | (1,231) | | | | $ | (9) | | | $ | (1,929) | | | | | |
| (1) Amounts are net of tax. Reclassifications out of accumulated other comprehensive income (loss) and the related tax effects are immaterial for separate disclosure. | |
(1) Amounts are net of tax. Reclassifications out of accumulated other comprehensive income and the related tax effects are immaterial for separate disclosure. | | (1) Amounts are net of tax. Reclassifications out of accumulated other comprehensive income and the related tax effects are immaterial for separate disclosure. |
(2) Primarily related to interest rate lock activity. See the Interest Rate Risk section in NOTE 10, "DEBT," for additional information. | | (2) Primarily related to interest rate lock activity. See the Interest Rate Risk section in NOTE 10, "DEBT," for additional information. |
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Following are the changes in accumulated other comprehensive income (loss) by component for the ninesix months ended:
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| In millions | | Change in pensions and other postretirement defined benefit plans | | Foreign currency translation adjustment | | | | Unrealized gain (loss) on derivatives | | Total attributable to Cummins Inc. | | Noncontrolling interests | | Total |
| Balance at December 31, 2020 | | $ | (735) | | | $ | (1,204) | | | | | $ | (43) | | | $ | (1,982) | | | | | |
| Other comprehensive income before reclassifications | | | | | | | | | | | | | | |
| Before-tax amount | | 16 | | | (33) | | | | | 53 | | | 36 | | | $ | (5) | | | $ | 31 | |
| Tax (expense) benefit | | (3) | | | 4 | | | | | (16) | | | (15) | | | — | | | (15) | |
| After-tax amount | | 13 | | | (29) | | | | | 37 | | | 21 | | | (5) | | | 16 | |
| Amounts reclassified from accumulated other comprehensive income (loss)(1) | | 50 | | | — | | | | | — | | | 50 | | | — | | | 50 | |
| Net current period other comprehensive income (loss) | | 63 | | | (29) | | | | | 37 | | (2) | 71 | | | $ | (5) | | | $ | 66 | |
| Balance at October 3, 2021 | | $ | (672) | | | $ | (1,233) | | | | | $ | (6) | | | $ | (1,911) | | | | | |
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| Balance at December 31, 2019 | | $ | (734) | | | $ | (1,285) | | | | | $ | (9) | | | $ | (2,028) | | | | | |
| Other comprehensive income before reclassifications | | | | | | | | | | | | | | |
| Before-tax amount | | (19) | | | (54) | | | | | (75) | | | (148) | | | $ | (12) | | | $ | (160) | |
| Tax benefit | | 5 | | | 4 | | | | | 16 | | | 25 | | | — | | | 25 | |
| After-tax amount | | (14) | | | (50) | | | | | (59) | | | (123) | | | (12) | | | (135) | |
| Amounts reclassified from accumulated other comprehensive income (loss)(1) | | 48 | | | — | | | | | (4) | | | 44 | | | — | | | 44 | |
| Net current period other comprehensive income (loss) | | 34 | | | (50) | | | | | (63) | | (2) | (79) | | | $ | (12) | | | $ | (91) | |
| Balance at September 27, 2020 | | $ | (700) | | | $ | (1,335) | | | | | $ | (72) | | | $ | (2,107) | | | | | |
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| (1) Amounts are net of tax. Reclassifications out of accumulated other comprehensive income (loss) and the related tax effects are immaterial for separate disclosure. |
| (2) Primarily related to interest rate lock activity. See the Interest Rate Risk section in NOTE 9 "DEBT" for additional information. |
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| In millions | | Change in pensions and other postretirement defined benefit plans | | Foreign currency translation adjustment | | | | Unrealized gain (loss) on derivatives | | Total attributable to Cummins Inc. | | Noncontrolling interests | | Total |
| Balance at December 31, 2021 | | $ | (346) | | | $ | (1,208) | | | | | $ | (17) | | | $ | (1,571) | | | | | |
| Other comprehensive income before reclassifications | | | | | | | | | | | | | | |
| Before-tax amount | | 14 | | | (224) | | | | | 95 | | | (115) | | | $ | (23) | | | $ | (138) | |
| Tax (expense) benefit | | (3) | | | 6 | | | | | (22) | | | (19) | | | — | | | (19) | |
| After-tax amount | | 11 | | | (218) | | | | | 73 | | | (134) | | | (23) | | | (157) | |
| Amounts reclassified from accumulated other comprehensive income (loss)(1) | | 11 | | | — | | | | | (2) | | | 9 | | | — | | | 9 | |
| Net current period other comprehensive income (loss) | | 22 | | | (218) | | | | | 71 | | (2) | (125) | | | $ | (23) | | | $ | (148) | |
| Balance at June 30, 2022 | | $ | (324) | | | $ | (1,426) | | | | | $ | 54 | | | $ | (1,696) | | | | | |
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| Balance at December 31, 2020 | | $ | (735) | | | $ | (1,204) | | | | | $ | (43) | | | $ | (1,982) | | | | | |
| Other comprehensive income before reclassifications | | | | | | | | | | | | | | |
| Before-tax amount | | 15 | | | (31) | | | | | 48 | | | 32 | | | $ | (7) | | | $ | 25 | |
| Tax (expense) benefit | | (2) | | | 4 | | | | | (13) | | | (11) | | | — | | | (11) | |
| After-tax amount | | 13 | | | (27) | | | | | 35 | | | 21 | | | (7) | | | 14 | |
| Amounts reclassified from accumulated other comprehensive income (loss)(1) | | 33 | | | — | | | | | (1) | | | 32 | | | — | | | 32 | |
| Net current period other comprehensive income (loss) | | 46 | | | (27) | | | | | 34 | | (2) | 53 | | | $ | (7) | | | $ | 46 | |
| Balance at July 4, 2021 | | $ | (689) | | | $ | (1,231) | | | | | $ | (9) | | | $ | (1,929) | | | | | |
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| (1) Amounts are net of tax. Reclassifications out of accumulated other comprehensive income and the related tax effects are immaterial for separate disclosure. |
| (2) Primarily related to interest rate lock activity. See the Interest Rate Risk section in NOTE 10, "DEBT," for additional information. |
NOTE 14. ACQUISITIONS
On February 7, 2022, we purchased Westport Fuel System Inc.'s stake in the Cummins Westport Joint Venture. We will continue to operate the business as the sole owner. The purchase price was $42 million and was allocated primarily to cash, warranty and deferred revenue related to extended coverage contracts. The results of the business were reported in our Engine segment. Pro forma financial information for the acquisition was not presented as the effects are not material to our Condensed Consolidated Financial Statements.
On April 8, 2022, we completed the acquisition of Jacobs Vehicle Systems business (Jacobs) from Altra Industrial Motion Corp. Sales of this business were $194 million in 2021. The purchase price was $346 million in cash, subject to typical adjustments related to closing working capital and other amounts and does not contain any contingent consideration. Jacobs is a supplier of engine braking, cylinder deactivation and start and stop thermal management technologies. The acquisition furthers our investment in key technologies and capabilities to drive growth, while securing our supply base. The preliminary purchase price allocation was as follows:
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In millions | | |
Cash | | $ | 18 | |
Accounts receivable | | 24 | |
Inventory | | 15 | |
Fixed assets | | 70 | |
Intangible assets | | |
Customer relationships | | 108 | |
Technology | | 31 | |
Trade name | | 25 | |
Goodwill | | 108 | |
Accounts payable | | (21) | |
Deferred tax liability, net | | (27) | |
Other, net | | (5) | |
Total purchase price | | $ | 346 | |
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Customer relationship assets represent the value of the long-term strategic relationship the business has with its significant customers, which we are amortizing over nine years. The assets were valued using an income approach, specifically the "multi-period excess earnings" method, which identifies an estimated stream of revenues and expenses for a particular group of assets from which deductions of portions of the projected economic benefits, attributable to assets other than the subject asset (contributory assets), are deducted in order to isolate the prospective earnings of the subject asset. This value is considered a level 3 measurement under the GAAP fair value hierarchy. Key assumptions used in the valuation of customer relationships include: (1) a rate of return of 18 percent and (2) renewal probability assumptions. Technology assets primarily represent the associated patents and know how related to the engine braking and emission technology, which we are amortizing over a range of 7 to 12 years. Trade name represents the value of Jacobs trade names in the marketplace, which we are amortizing over 14 years. These assets were valued using the "relief-from-royalty" method, which is a combination of both the income approach and market approach that values a subject asset based on an estimate of the "relief" from the royalty expense that would be incurred if the subject asset were licensed from a third party. Key assumptions impacting these values include: (1) market royalty rates of 2 to 7 percent, (2) rates of return of 17 to 18 percent and (3) technology obsolescence of 7 to 10 percent. These values are considered a level 3 measurement under the GAAP fair value hierarchy. Annual amortization of the intangible assets for the next five years is expected to approximate $18 million.
Goodwill was determined based on the residual difference between the fair value of consideration transferred and the value assigned to tangible and intangible assets and liabilities. Approximately $9 million of the goodwill is deductible for tax purposes. Among the factors contributing to a purchase price resulting in the recognition of goodwill are Jacob’s expected future customers, new versions of technologies, an acquired workforce and other economic benefits that are anticipated to arise from future product sales and operational synergies from combining the business with Cummins.
Included in our second quarter results were revenues of $37 million and income of $2 million related to this business. The results of this business were reported in our Components segment. Pro forma financial information for the acquisition was not presented as the effects are not material to our Condensed Consolidated Financial Statements.
On February 21, 2022, we entered into an Agreement and Plan of Merger (the Merger Agreement) with Meritor, Inc. (Meritor) and Rose NewCo Inc. (Merger Sub) pursuant to which we agreed to acquire Meritor, a global leader of drivetrain, mobility, braking, aftermarket and electric powertrain solutions for commercial vehicle and industrial markets. At closing, Merger Sub will merge into Meritor with Meritor as the surviving entity and becoming our wholly-owned subsidiary. This acquisition will be reported in our Components and New Power segments. Pursuant to the terms of the Merger Agreement, we agreed to pay $36.50 in cash per share of Meritor common stock.
On May 26, 2022, Meritor's shareholders voted to approve the Merger Agreement. On August 3, 2022, we completed the acquisition of Meritor with a purchase price of $3.0 billion (including convertible debt). We repaid $250 million of Meritor's debt as part of the acquisition, and we intend to pay off an additional $310 million in the third quarter of 2022. The acquisition was funded with borrowings drawn under the $2.0 billion term loan agreement and $1.3 billion of additional commercial paper borrowings. The integration of Meritor's people, products and capabilities in axle and brake technology will position us as a leading provider of integrated powertrain solutions across internal combustion and electric power applications. See NOTE 16, “SUBSEQUENT EVENTS,” for additional information related to the $2.0 billion loan agreement. Due to the timing of the acquisition, the initial purchase accounting is not yet complete and will follow in the third quarter Form 10-Q filing.
NOTE 13.15. OPERATING SEGMENTS
Operating segments under GAAP are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (CODM), or decision-making group, in deciding how to allocate resources and in assessing performance. Our CODM is the President and Chief OperatingExecutive Officer.
Our reportable operating segments consist of Engine, Distribution, Components, Power Systems and New Power. This reporting structure is organized according to the products and markets each segment serves. 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 Distribution segment includes wholly-owned and partially-owned distributorships engaged in wholesaling engines, generator sets and service parts, as well as performing service and repair activities on our products and maintaining relationships with various OEMs throughout the world. The Components segment sells filtration products, aftertreatment systems, turbochargers, electronics, fuel systems and automated transmissions. The Power Systems segment is an integrated power provider, which designs, manufactures and sells engines (16 liters and larger) for industrial applications (including mining, oil and gas, marine and rail), standby and prime power generator sets, alternators and other power components. The New Power segment designs, manufactures, sells and supports hydrogen production solutions as well as electrified power systems ranging from fully electric to hybrid along with innovative components and subsystems, including battery and fuel cell technologies. The New Power segment is currently in the development phase with a primary focus on research and development activities for our power systems, components and subsystems. 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.
We use segment earnings or losses before interest expense, income taxes, depreciation and amortization and noncontrolling interests (EBITDA) as the primary basis for the CODM 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. Segment amounts exclude certain expenses not specifically identifiable to segments.
The accounting policies of our operating segments are the same as those applied in our Condensed Consolidated Financial Statements. We prepared the financial results of our operating segments on a basis that is consistent with the manner in which we internally disaggregate financial information to assist in making internal operating decisions. We allocate certain common costs and expenses, primarily corporate functions, among segments differently than we would for stand-alone financial information prepared in accordance with GAAP. These include certain costs and expenses of shared services, such as information technology, human resources, legal, finance and supply chain management. We do not allocate gains or losses of corporate owned life insurance to individual segments. EBITDA may not be consistent with measures used by other companies.
Summarized financial information regarding our reportable operating segments for the three months ended is shown in the table below:
| In millions | In millions | | Engine | | Distribution | | Components | | Power Systems | | New Power | | Total Segments | | In millions | | Engine | | Distribution | | Components | | Power Systems | | New Power | | Total Segments | |
Three months ended October 3, 2021 | | | | | | | | | | | | | | |
Three months ended June 30, 2022 | | Three months ended June 30, 2022 | | | | | | | | | | | | | |
External sales | External sales | | $ | 1,961 | | | $ | 1,952 | | | $ | 1,347 | | | $ | 688 | | | $ | 20 | | | $ | 5,968 | | | External sales | | $ | 2,092 | | | $ | 2,247 | | | $ | 1,477 | | | $ | 734 | | | $ | 36 | | | $ | 6,586 | | |
Intersegment sales | Intersegment sales | | 617 | | | 7 | | | 446 | | | 476 | | | 3 | | | 1,549 | | | Intersegment sales | | 683 | | | 6 | | | 473 | | | 469 | | | 6 | | | 1,637 | | |
Total sales | Total sales | | 2,578 | | | 1,959 | | | 1,793 | | | 1,164 | | | 23 | | | 7,517 | | | Total sales | | 2,775 | | | 2,253 | | | 1,950 | | | 1,203 | | | 42 | | | 8,223 | | |
| Research, development and engineering expenses | Research, development and engineering expenses | | 97 | | | 10 | | | 78 | | | 55 | | | 26 | | | 266 | | | Research, development and engineering expenses | | 116 | | | 13 | | | 73 | | | 58 | | | 39 | | | 299 | | |
Equity, royalty and interest income (loss) from investees | Equity, royalty and interest income (loss) from investees | | 61 | | | 15 | | | 10 | | | 11 | | | (3) | | | 94 | | | Equity, royalty and interest income (loss) from investees | | 59 | | | 21 | | | 9 | | | 10 | | | (4) | | | 95 | | |
| Interest income | Interest income | | 3 | | | 2 | | | 1 | | | 1 | | | — | | | 7 | | | Interest income | | 1 | | | 3 | | | 2 | | | 1 | | | — | | | 7 | | |
EBITDA | | 391 | | | 192 | | | 253 | | | 134 | | | (58) | | | 912 | | | |
Depreciation and amortization(1) | | 53 | | | 28 | | | 44 | | | 29 | | | 5 | | | 159 | | | |
| Russian suspension costs (recoveries)(1) | | Russian suspension costs (recoveries)(1) | | 1 | | | (45) | | | (2) | | | (1) | | | — | | | (47) | | |
| Segment EBITDA | | Segment EBITDA | | 422 | | | 297 | | | 352 | | | 128 | | | (80) | | | 1,119 | | |
Depreciation and amortization(2) | | Depreciation and amortization(2) | | 49 | | | 29 | | | 49 | | | 31 | | | 8 | | | 166 | | |
| | Three months ended September 27, 2020 | | | | | | | | | | | |
Three months ended July 4, 2021 | | Three months ended July 4, 2021 | | | | | | | | | | |
External sales | External sales | | $ | 1,617 | | | $ | 1,715 | | | $ | 1,201 | | | $ | 567 | | | $ | 18 | | | $ | 5,118 | | | External sales | | $ | 1,920 | | | $ | 1,913 | | | $ | 1,556 | | | $ | 699 | | | $ | 23 | | | $ | 6,111 | | |
Intersegment sales | Intersegment sales | | 495 | | | 6 | | | 340 | | | 414 | | | — | | | 1,255 | | | Intersegment sales | | 571 | | | 7 | | | 438 | | | 444 | | | 1 | | | 1,461 | | |
Total sales | Total sales | | 2,112 | | | 1,721 | | | 1,541 | | | 981 | | | 18 | | | 6,373 | | | Total sales | | 2,491 | | | 1,920 | | | 1,994 | | | 1,143 | | | 24 | | | 7,572 | | |
| Research, development and engineering expenses | Research, development and engineering expenses | | 72 | | | 9 | | | 64 | | | 53 | | | 26 | | | 224 | | | Research, development and engineering expenses | | 99 | | | 12 | | | 79 | | | 60 | | | 26 | | | 276 | | |
Equity, royalty and interest income (loss) from investees | Equity, royalty and interest income (loss) from investees | | 74 | | | 13 | | | 13 | | | — | | | (2) | | | 98 | | | Equity, royalty and interest income (loss) from investees | | 104 | | | 15 | | | 12 | | | 9 | | | (3) | | | 137 | | |
| Interest income | Interest income | | 1 | | | 1 | | | 1 | | | 1 | | | — | | | 4 | | | Interest income | | 1 | | | 2 | | | 1 | | | 1 | | | — | | | 5 | | |
EBITDA | | 382 | | | 182 | | | 261 | | | 101 | | | (40) | | | 886 | | | |
Depreciation and amortization(1) | | 51 | | | 30 | | | 47 | | | 32 | | | 5 | | | 165 | | | |
Segment EBITDA | | Segment EBITDA | | 402 | | | 201 | | | 301 | | | 139 | | | (60) | | | 983 | | |
Depreciation and amortization(2) | | Depreciation and amortization(2) | | 50 | | | 30 | | | 46 | | | 33 | | | 7 | | | 166 | | |
| | | (1) Depreciation and amortization, as shown on a segment basis, excludes the amortization of debt discount and deferred costs included in the Condensed Consolidated Statements of Net Income as "Interest expense." A portion of depreciation expense is included in "Research, development and engineering expenses." | |
| | | (1) See NOTE 3, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information. | | (1) See NOTE 3, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information. | |
(2) Depreciation and amortization, as shown on a segment basis, excludes the amortization of debt discount and deferred costs included in the Condensed Consolidated Statements of Net Income as Interest expense. A portion of depreciation expense is included in Research, development and engineering expenses. | | (2) Depreciation and amortization, as shown on a segment basis, excludes the amortization of debt discount and deferred costs included in the Condensed Consolidated Statements of Net Income as Interest expense. A portion of depreciation expense is included in Research, development and engineering expenses. |
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Summarized financial information regarding our reportable operating segments for the ninesix months ended is shown in the table below:
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| In millions | | Engine | | Distribution | | Components | | Power Systems | | New Power | | Total Segments | | | | |
| Nine months ended October 3, 2021 | | | | | | | | | | | | | | | | |
| External sales | | $ | 5,776 | | | $ | 5,692 | | | $ | 4,627 | | | $ | 1,999 | | | $ | 77 | | | $ | 18,171 | | | | | |
| Intersegment sales | | 1,752 | | | 22 | | | 1,312 | | | 1,330 | | | 5 | | | 4,421 | | | | | |
| Total sales | | 7,528 | | | 5,714 | | | 5,939 | | | 3,329 | | | 82 | | | 22,592 | | | | | |
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| Research, development and engineering expenses | | 288 | | | 35 | | | 232 | | | 172 | | | 75 | | | 802 | | | | | |
| Equity, royalty and interest income (loss) from investees | | 278 | | | 47 | | | 41 | | | 32 | | | (1) | | | 397 | | | | | |
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| Interest income | | 7 | | | 5 | | | 3 | | | 3 | | | — | | | 18 | | | | | |
| EBITDA | | 1,147 | | | 553 | | | 975 | | | 399 | | | (169) | | | 2,905 | | | | | |
| Depreciation and amortization(1) | | 154 | | | 88 | | | 138 | | | 97 | | | 17 | | | 494 | | | | | |
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| Nine months ended September 27, 2020 | | | | | | | | | | | | | | | | |
| External sales | | $ | 4,133 | | | $ | 5,123 | | | $ | 3,192 | | | $ | 1,495 | | | $ | 38 | | | $ | 13,981 | | | | | |
| Intersegment sales | | 1,560 | | | 17 | | | 1,001 | | | 1,147 | | | — | | | 3,725 | | | | | |
| Total sales | | 5,693 | | | 5,140 | | | 4,193 | | | 2,642 | | | 38 | | | 17,706 | | | | | |
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| Research, development and engineering expenses | | 217 | | | 20 | | | 187 | | | 148 | | | 79 | | | 651 | | | | | |
| Equity, royalty and interest income (loss) from investees | | 236 | | | 45 | | | 46 | | | 18 | | | (3) | | | 342 | | | | | |
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| Interest income | | 6 | | | 3 | | | 3 | | | 3 | | | — | | | 15 | | | | | |
| EBITDA | | 897 | | | 500 | | | 681 | | | 269 | | | (121) | | | 2,226 | | | | | |
| Depreciation and amortization(1) | | 155 | | | 91 | | | 142 | | | 96 | | | 13 | | | 497 | | | | | |
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| (1) Depreciation and amortization, as shown on a segment basis, excludes the amortization of debt discount and deferred costs included in the Condensed Consolidated Statements of Net Income as "Interest expense." The amortization of debt discount and deferred costs was $3 million and $2 million for the nine months ended October 3, 2021 and September 27, 2020, respectively. A portion of depreciation expense is included in "Research, development and engineering expenses." |
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| In millions | | Engine | | Distribution | | Components | | Power Systems | | New Power | | Total Segments | | | | |
| Six months ended June 30, 2022 | | | | | | | | | | | | | | | | |
| External sales | | $ | 4,141 | | | $ | 4,358 | | | $ | 2,994 | | | $ | 1,417 | | | $ | 61 | | | $ | 12,971 | | | | | |
| Intersegment sales | | 1,387 | | | 12 | | | 944 | | | 946 | | | 12 | | | 3,301 | | | | | |
| Total sales | | 5,528 | | | 4,370 | | | 3,938 | | | 2,363 | | | 73 | | | 16,272 | | | | | |
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| Research, development and engineering expenses | | 225 | | | 26 | | | 149 | | | 122 | | | 75 | | | 597 | | | | | |
| Equity, royalty and interest income (loss) from investees | | 103 | | (1) | 37 | | | 37 | | | 21 | | | (7) | | | 191 | | | | | |
| | | | | | | | | | | | | | | | | |
| Interest income | | 5 | | | 5 | | | 3 | | | 2 | | | — | | | 15 | | | | | |
| Russian suspension costs(2) | | 33 | | (3) | 55 | | | 4 | | | 19 | | | — | | | 111 | | | | | |
| Segment EBITDA | | 814 | | | 407 | | | 672 | | | 218 | | | (147) | | | 1,964 | | | | | |
| Depreciation and amortization(4) | | 100 | | | 57 | | | 92 | | | 62 | | | 15 | | | 326 | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Six months ended July 4, 2021 | | | | | | | | | | | | | | | | |
| External sales | | $ | 3,815 | | | $ | 3,740 | | | $ | 3,280 | | | $ | 1,311 | | | $ | 57 | | | $ | 12,203 | | | | | |
| Intersegment sales | | 1,135 | | | 15 | | | 866 | | | 854 | | | 2 | | | 2,872 | | | | | |
| Total sales | | 4,950 | | | 3,755 | | | 4,146 | | | 2,165 | | | 59 | | | 15,075 | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Research, development and engineering expenses | | 191 | | | 25 | | | 154 | | | 117 | | | 49 | | | 536 | | | | | |
| Equity, royalty and interest income from investees | | 217 | | | 32 | | | 31 | | | 21 | | | 2 | | | 303 | | | | | |
| | | | | | | | | | | | | | | | | |
| Interest income | | 4 | | | 3 | | | 2 | | | 2 | | | — | | | 11 | | | | | |
| Segment EBITDA | | 756 | | | 361 | | | 722 | | | 265 | | | (111) | | | 1,993 | | | | | |
| Depreciation and amortization(4) | | 101 | | | 60 | | | 94 | | | 68 | | | 12 | | | 335 | | | | | |
| | | | | | | | | | | | | | | | | |
| |
| (1) Includes a $28 million impairment of our joint venture with KAMAZ and $3 million of royalty charges as part of our costs associated with the suspension of our Russian operations. See NOTE 3, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information. | | | | |
| (2) See NOTE 3, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information. | | | | |
| (3) Includes $31 million of Russian suspension costs reflected in the Equity, royalty and interest income (loss) from investees line above. | | | | |
| (4) Depreciation and amortization, as shown on a segment basis, excludes the amortization of debt discount and deferred costs included in the Condensed Consolidated Statements of Net Income as Interest expense. The amortization of debt discount and deferred costs was $2 million and $2 million for the six months ended June 30, 2022 and July 4, 2021, respectively. A portion of depreciation expense is included in Research, development and engineering expenses. |
| | | | | | | | | | | | | | | | | |
A reconciliation of our total segment sales to total net sales in the Condensed Consolidated Statements of Net Income was as follows:
| | | | Three months ended | | Nine months ended | | | Three months ended | | Six months ended |
In millions | In millions | | October 3, 2021 | | September 27, 2020 | | October 3, 2021 | | September 27, 2020 | In millions | | June 30, 2022 | | July 4, 2021 | | June 30, 2022 | | July 4, 2021 |
Total segment sales | Total segment sales | | $ | 7,517 | | | $ | 6,373 | | | $ | 22,592 | | | $ | 17,706 | | Total segment sales | | $ | 8,223 | | | $ | 7,572 | | | $ | 16,272 | | | $ | 15,075 | |
Elimination of intersegment sales | Elimination of intersegment sales | | (1,549) | | | (1,255) | | | (4,421) | | | (3,725) | | Elimination of intersegment sales | | (1,637) | | | (1,461) | | | (3,301) | | | (2,872) | |
Total net sales | Total net sales | | $ | 5,968 | | | $ | 5,118 | | | $ | 18,171 | | | $ | 13,981 | | Total net sales | | $ | 6,586 | | | $ | 6,111 | | | $ | 12,971 | | | $ | 12,203 | |
|
A reconciliation of our segment information to the corresponding amounts in the Condensed Consolidated Statements of Net Income is shown in the table below:
| | | | Three months ended | | Nine months ended | | | Three months ended | | Six months ended |
In millions | In millions | | October 3, 2021 | | September 27, 2020 | | October 3, 2021 | | September 27, 2020 | In millions | | June 30, 2022 | | July 4, 2021 | | June 30, 2022 | | July 4, 2021 |
TOTAL SEGMENT EBITDA | TOTAL SEGMENT EBITDA | | $ | 912 | | | $ | 886 | | | $ | 2,905 | | | $ | 2,226 | | TOTAL SEGMENT EBITDA | | $ | 1,119 | | | $ | 983 | | | $ | 1,964 | | | $ | 1,993 | |
| Intersegment elimination | | (50) | | | (10) | | | (89) | | | 45 | | |
Intersegment eliminations and other(1) | | Intersegment eliminations and other(1) | | (64) | | | (9) | | | (154) | | | (39) | |
| Less: | Less: | | Less: | |
Interest expense | Interest expense | | 28 | | | 25 | | | 85 | | | 71 | | Interest expense | | 34 | | | 29 | | | 51 | | | 57 | |
Depreciation and amortization | Depreciation and amortization | | 159 | | | 165 | | | 494 | | | 497 | | Depreciation and amortization | | 166 | | | 166 | | | 326 | | | 335 | |
INCOME BEFORE INCOME TAXES | INCOME BEFORE INCOME TAXES | | 675 | | | 686 | | | 2,237 | | | 1,703 | | INCOME BEFORE INCOME TAXES | | 855 | | | 779 | | | 1,433 | | | 1,562 | |
Less: Income tax expense | Less: Income tax expense | | 134 | | | 182 | | | 473 | | | 402 | | Less: Income tax expense | | 148 | | | 167 | | | 303 | | | 339 | |
CONSOLIDATED NET INCOME | CONSOLIDATED NET INCOME | | 541 | | | 504 | | | 1,764 | | | 1,301 | | CONSOLIDATED NET INCOME | | 707 | | | 612 | | | 1,130 | | | 1,223 | |
Less: Net income attributable to noncontrolling interests | Less: Net income attributable to noncontrolling interests | | 7 | | | 3 | | | 27 | | | 13 | | Less: Net income attributable to noncontrolling interests | | 5 | | | 12 | | | 10 | | | 20 | |
NET INCOME ATTRIBUTABLE TO CUMMINS INC. | NET INCOME ATTRIBUTABLE TO CUMMINS INC. | | $ | 534 | | | $ | 501 | | | $ | 1,737 | | | $ | 1,288 | | NET INCOME ATTRIBUTABLE TO CUMMINS INC. | | $ | 702 | | | $ | 600 | | | $ | 1,120 | | | $ | 1,203 | |
| (1)Intersegment eliminations and other included $24 million and $41 million of costs associated with the planned separation of our Filtration business for the three and six months ended June 30, 2022. | | (1)Intersegment eliminations and other included $24 million and $41 million of costs associated with the planned separation of our Filtration business for the three and six months ended June 30, 2022. |
|
NOTE 16. SUBSEQUENT EVENTS
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 initial interest rate, based on the Secured Overnight Financing Rate for the one-month interest period plus the relevant spread, is 3.11 percent. The loan will mature on August 2, 2025.
On August 3, 2022, we completed the acquisition of Meritor with a purchase price of $3.0 billion (including convertible debt). We borrowed an additional $1.3 billion under our commercial paper program to complete the acquisition. The acquisition reduced our borrowing capacity under the revolving credit facilities to $1.43 billion at the time of filing. See NOTE 14, "ACQUISITIONS," for additional information.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cummins Inc. and its consolidated subsidiaries are hereinafter sometimes referred to as “Cummins,” “we,” “our” or “us.”
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
Certain parts of this quarterly report contain forward-looking statements intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include those that are based on current expectations, estimates and projections about the industries in which we operate and management’s beliefs and assumptions. Forward-looking statements are generally accompanied by words such as "anticipates," "expects," "forecasts," "intends," "plans," "believes," "seeks," "estimates," "could," "should," "may" or words of similar meaning. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which we refer to as "future factors," which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Some future factors that could cause our results to differ materially from the results discussed in such forward-looking statements are discussed below and shareholders, potential investors and other readers are urged to consider these future factors carefully in evaluating forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. Future factors that could affect the outcome of forward-looking statements include the following:
GOVERNMENT REGULATION
•any adverse results of our internal review into our emissions certification process and compliance with emission standards;
•increased scrutiny from regulatory agencies, as well as unpredictability in the adoption, implementation and enforcement of emission standards around the world;
•policy changes in international, trade;national and regional trade laws, regulations and policies;
•any adverse effects of the U.S. government's COVID-19 vaccine mandates;
•the U.K.'s exit from the European Union;
•changes in taxation;
•global legal and ethical compliance costs and risks;
•increasingly stringent environmental laws and regulations;
•future bans or limitations on the use of diesel-powered products;
BUSINESSBUSINESS CONDITIONS / DISRUPTIONS
•supply shortages and supplier financial risk, particularly from any of our single-sourced suppliers, including suppliers that may be impacted by the COVID-19 pandemic;
•market slowdown due toany adverse effects of the impacts fromconflict between Russia and Ukraine and the COVID-19 pandemic, other public health crises, epidemicsglobal response (including government bans or pandemics;restrictions on doing business in Russia);
•impactsfailure to manufacturingsuccessfully integrate the acquisition of Meritor, Inc.;
•failure to realize all of the anticipated benefits from our acquisition of Meritor, Inc.;
•raw material, transportation and labor price fluctuations and supply chain abilities from an extended shutdown or disruption of our operations due to the COVID-19 pandemic;shortages;
•aligning our capacity and production with our demand, including impactsdemand;
•the actions of, COVID-19;and income from, joint ventures and other investees that we do not directly control;
•large truck manufacturers' and original equipment manufacturers' customers discontinuing outsourcing their engine supply needs or experiencing financial distress, particularly related to the COVID-19 pandemic, bankruptcy or change in control;
•a slowdown in infrastructure development and/or depressed commodity prices;
•failure to realize expected results from our investment in Eaton Cummins Automated Transmission Technologies joint venture;
•the actions of, and income from, joint ventures and other investees that we do not directly control;
PRODUCTS AND TECHNOLOGY
•product recalls;
•variability in material and commodity costs;
•the development of new technologies that reduce demand for our current products and services;
•lower than expected acceptance of new or existing products or services;
•variability in material and commodity costs;
•product liability claims;
•our sales mix of products;
GENERAL
•disruptions in global credit and financial markets asfailure to complete, adverse results from or failure to realize the resultexpected benefits of the COVID-19 pandemic;
•labor relations or work stoppages;
•reliance onseparation of our executive leadership team and other key personnel;
•climate change and global warming;filtration business;
•our plan to reposition our portfolio of product offerings through exploration of strategic acquisitions and divestitures and related uncertainties of entering such transactions;
•challenging markets for talent and ability to attract, develop and retain key personnel;
•climate change and global warming;
•exposure to potential security breaches or other disruptions to our information technology systemsenvironment and data security;
•political, economic and other risks from operations in numerous countries;countries including political, economic and social uncertainty and the evolving globalization of our business;
•competitor activity;
•increasing competition, including increased global competition among our customers in emerging markets;
•labor relations or work stoppages;
•foreign currency exchange rate changes;
•the performance of our pension plan assets and volatility of discount rates, particularly those related to the sustained slowdown of the global economy due to the COVID-19 pandemic;rates;
•the price and availability of energy;
•the outcome of pending and future litigation and governmental proceedings;
•continued availability of financing, financial instruments and financial resources in the amounts, at the times and on the terms required to support our future business; and
Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are made only as of the date of this quarterly report and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
ORGANIZATION OF INFORMATION
•EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS
•RESULTS OF OPERATIONS
•OPERATING SEGMENT RESULTS
•OUTLOOK
•LIQUIDITY AND CAPITAL RESOURCES
•APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS
Overview
We are a global power leader that designs, manufactures, distributes and services diesel, natural gas, electric and hybrid powertrains and powertrain-related components including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems, automated transmissions, electric power generation systems, batteries, electrified power systems, hydrogen production and fuel cell products. We sell our products to original equipment manufacturers (OEMs), distributors, dealers and other customers worldwide. We have long-standing relationships with many of the leading manufacturers in the markets we serve, including PACCAR Inc, Navistar International Corporation, Daimler Trucks North America and Stellantis N.V. We serve our customers through a service network of overapproximately 500 wholly-owned, joint venture and independent distributor locations and over 9,000more than 10,000 Cummins certified dealer locations with service toin approximately 190 countries and territories.
Our reportable operating segments consist of Engine, Distribution, Components, Power Systems and New Power. This reporting structure is organized according to the products and markets each segment serves. 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 Distribution segment includes wholly-owned and partially-owned distributorships engaged in wholesaling engines, generator sets and service parts, as well as performing service and repair activities on our products and maintaining relationships with various OEMs throughout the world. The Components segment sells filtration products, aftertreatment systems, turbochargers, electronics, fuel systems and automated transmissions. The Power Systems segment is an integrated power provider, which designs, manufactures and sells engines (16 liters and larger) for industrial applications (including mining, oil and gas, marine and rail), standby and prime power generator sets, alternators and other power components. The New Power segment designs, manufactures, sells and supports hydrogen production solutions as well as electrified power systems ranging from fully electric to hybrid along with innovative components and subsystems, including battery and fuel cell technologies. The New Power segment is currently in the development phase with a primary focus on research and development activities for our power systems, components and subsystems. 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.
Our financial performance depends, in large part, on varying conditions in the markets we serve, particularly the on-highway, construction and general industrial markets. Demand in these markets tends to fluctuate in response to overall economic conditions. Our sales may also be impacted by OEM inventory levels, production schedules, stoppages and stoppages.supply chain challenges. Economic downturns in markets we serve generally result in reduced sales of our products and can result in price reductions in certain products and/or markets. As a worldwide business, our operations are also affected by geopolitical risks (such as the conflict between Russia and Ukraine), currency, political, economic, public health crises, epidemics or pandemics and regulatory matters, including adoption and enforcement of environmental and emission standards, in the countries we serve. As part of our growth strategy, we invest in businesses in certain countries that carry high levels of these risks such as China, Brazil, India, Mexico, Russia and countries in the Middle East and Africa. At the same time, our geographic diversity and broad product and service offerings have helped limit the impact from a drop in demand in any one industry or customer or the economy of any single country on our consolidated results.
2021 Quarter-to-DateRussian Operations
On March 17, 2022, the Board of Directors (the Board) decided to indefinitely suspend our operations in Russia due to the ongoing conflict in Ukraine. At the time of suspension, our Russian operations included a wholly-owned distributor in Russia, an unconsolidated joint venture (the Unconsolidated JV) with KAMAZ Publicly Traded Company (KAMAZ), a Russian truck manufacturer with whom we share the Unconsolidated JV, and direct sales into Russia from our other business segments. As a result of the suspension of operations, we evaluated the recoverability of assets in Russia and assessed other potential liabilities. We experienced and expect to continue to experience, an inability to collect customer receivables and may be the subject of litigation as a consequence of our suspension of commercial operations in Russia. We recorded a charge of $158 million in the first quarter related to these actions. In the second quarter, we recovered certain inventory and other expense amounts reserved in the first quarter and incurred some small additional charges resulting in a net recovery of $47 million. As of June 30, 2022, we had approximately $17 million of inventory and $26 million of receivables in Russia, all of which are fully reserved. In addition, we have cash balances of $84 million, some of which will be used to fund ongoing employee, tax and contract settlement obligations. The following summarizes the costs (recoveries) associated with the suspension of our Russian operations in our Condensed Consolidated Statements of Net Income:
| | | | | | | | | | | | | | | | |
| | Three months ended | | Six months ended | | |
In millions | | June 30, 2022 | | June 30, 2022 | | |
Inventory write-downs | | $ | (40) | | | $ | 19 | | | |
Accounts receivable reserves | | — | | | 43 | | | |
Impairment and other joint venture costs | | — | | | 31 | | | |
| | | | | | |
Other | | (7) | | | 18 | | | |
Total | | $ | (47) | | | $ | 111 | | | |
| | | | | | |
We will continue to evaluate the situation as conditions evolve and may take additional actions as deemed necessary in future periods.
Supply Chain Disruptions
We continue to experience supply chain disruptions and related financial impacts reflected as increased cost of sales. Our industry continues to be unfavorably impacted by supply chain constraints leading to shortages across multiple components categories and limiting our collective ability to meet end-user demand. Our customers are also experiencing 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 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.
2022 Second Quarter and Year-to-Date Results
A summary of our results is as follows:
| | | Three months ended | | Nine months ended | | | Three months ended | | Six months ended | |
In millions, except per share amounts | In millions, except per share amounts | | October 3, 2021 | | September 27, 2020 | | October 3, 2021 | | September 27, 2020 | | In millions, except per share amounts | | June 30, 2022 | | July 4, 2021 | | June 30, 2022 | | July 4, 2021 | |
Net sales | Net sales | | $ | 5,968 | | | $ | 5,118 | | | $ | 18,171 | | | $ | 13,981 | | | Net sales | | $ | 6,586 | | | $ | 6,111 | | | $ | 12,971 | | | $ | 12,203 | | |
Net income attributable to Cummins Inc. | Net income attributable to Cummins Inc. | | 534 | | | 501 | | | 1,737 | | | 1,288 | | | Net income attributable to Cummins Inc. | | 702 | | | 600 | | | 1,120 | | | 1,203 | | |
Earnings per common share attributable to Cummins Inc. | Earnings per common share attributable to Cummins Inc. | | | Earnings per common share attributable to Cummins Inc. | | |
Basic | Basic | | $ | 3.72 | | | $ | 3.39 | | | $ | 11.96 | | | $ | 8.69 | | | Basic | | $ | 4.97 | | | $ | 4.14 | | | $ | 7.90 | | | $ | 8.24 | | |
Diluted | Diluted | | 3.69 | | | 3.36 | | | 11.86 | | | 8.65 | | | Diluted | | 4.94 | | | 4.10 | | | 7.86 | | | 8.16 | | |
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Our nine months ended results for 2020 were significantly impacted by COVID-19 and other related targeted shut-downs, which began in late March 2020 in response to both customer plant closures and government actions to slow the spread of the virus. Plants closed in China during the first quarter of 2020 were reopened in late March 2020; however, additional plants and distribution locations around the world were shut down or working at reduced capacities early in the second quarter of 2020. Although these actions did not have a material effect on our results of operations in the first quarter, these actions materially impacted our second quarter and continued to affect third quarter results in 2020.
Worldwide revenues increased 17 percent in the three months ended October 3, 2021, compared to the same period in 2020, due to higher demand in all operating segments and most geographic regions due to an improved economic environment and fewer effects from the COVID-19 pandemic. International demand (excludes the U.S. and Canada) improved 22 percent, with higherindustry's sales in all geographic regions except China. The increase in international sales was principally due to higher demand in industrial (especially mining) and power generation equipment, all distribution product lines, off-highway markets (mainly construction markets in Asia Pacific and Europe) and all components businesses (primarily in Europe, India and Latin America, partially offset by China). Favorable foreign currency fluctuations impacted international sales by 3 percent (primarily the Chinese renminbi, British pound and Australian dollar). Net sales in the U.S. and Canada improved 13 percent, primarily due to increased demand in North American on-highway markets, which positively impacted all components businesses, and most distribution product lines. Our industry continuescontinue to be unfavorably impacted by supply chain constraints leading to shortages across multiple components categories and limiting our collective ability to meet end-user demand. Our customers are also experiencing other supply chain issues slowing production.limiting full production capabilities.
Worldwide revenues increased 308 percent in the ninethree months ended October 3, 2021,June 30, 2022, compared to the same period in 2020, as we experienced2021, due to favorable pricing and higher demand in allmost operating segments and allmost geographic regions due to an improved economic environment and fewer effects from the COVID-19 pandemic. International demand (excludes the U.S. and Canada) improved by 36 percent, with higher sales in all geographic regions. The increase in international sales was principally due to higher demand in all components businesses (primarily emission solutions in India, China and Western Europe), industrial (especially mining) and power generation equipment (mainly in India and China), all distribution product lines and off-highway markets (principally construction markets in China, Europe and Asia Pacific). Favorable foreign currency fluctuations impacted international sales by 4 percent (primarily the Chinese renminbi, Euro, Australian dollar and British pound).except for China. Net sales in the U.S. and Canada improved 2615 percent, primarily due to favorable pricing and increased demand in North American on-highway markets, which positively impacted all components businesses, and most distribution product lines. International demand (excludes the U.S. and Canada) declined 2 percent, with lower sales in China (due to a sharp slowdown in truck and construction markets, exacerbated by COVID lockdowns) and Russia, partially offset by higher sales in all other geographic regions. The decrease in international sales was principally due to lower demand in China as the result of COVID-related lockdowns significantly reducing demand in most businesses. Unfavorable foreign currency fluctuations impacted international sales by 3 percent (primarily the Euro, British pound and Indian rupee).
Worldwide revenues increased 6 percent in the six months ended June 30, 2022, compared to the same period in 2021, due to favorable pricing and higher demand in most operating segments and most geographic regions except for China. Net sales in the U.S. and Canada improved 14 percent, primarily due to favorable pricing and increased demand in North American on-highway markets, which positively impacted all components businesses and all distribution product lines. Our industry continuesInternational demand (excludes the U.S. and Canada) declined by 3 percent, with lower sales in China (due to be unfavorablya sharp slowdown in truck and construction markets, exacerbated by COVID lockdowns), partially offset by higher sales in all other geographic regions. The decrease in international sales was principally due to lower demand in China as the result of COVID-related lockdowns significantly reducing demand in most businesses. Unfavorable foreign currency fluctuations impacted international sales by supply chain constraints leading to shortages across multiple components categories2 percent (primarily the Euro, British pound and limiting our collective ability to meet end-user demand. Our customers are also experiencing other supply chain issues slowing production.Indian rupee).
The following tables contain sales and EBITDA (defined as earnings or losses before interest expense, income taxes, depreciation and amortization and noncontrolling interests) by operating segment for the three and ninesix months ended October 3, 2021June 30, 2022 and September 27, 2020.July 4, 2021. See Note 13,NOTE 15, "OPERATING SEGMENTS," to the Condensed Consolidated Financial Statements for additional information and a reconciliation of our segment information to the corresponding amounts in our Condensed Consolidated Statements of Net Income.
| | | | Three months ended | | | Three months ended |
Operating Segments | Operating Segments | | October 3, 2021 | | September 27, 2020 | | Percent change | Operating Segments | | June 30, 2022 | | July 4, 2021 | | Percent change |
| | | | Percent | | | | | | Percent | | | | 2021 vs. 2020 | | | | Percent | | | | | | Percent | | | | 2022 vs. 2021 |
In millions | In millions | | Sales | | of Total | | EBITDA | | Sales | | of Total | | EBITDA | | Sales | | EBITDA | In millions | | Sales | | of Total | | EBITDA | | Sales | | of Total | | EBITDA | | Sales | | EBITDA |
Engine | Engine | | $ | 2,578 | | | 43 | % | | $ | 391 | | | $ | 2,112 | | | 41 | % | | $ | 382 | | | 22 | % | | 2 | % | Engine | | $ | 2,775 | | | 42 | % | | $ | 422 | | | $ | 2,491 | | | 41 | % | | $ | 402 | | | 11 | % | | 5 | % |
Distribution | Distribution | | 1,959 | | | 33 | % | | 192 | | | 1,721 | | | 34 | % | | 182 | | | 14 | % | | 5 | % | Distribution | | 2,253 | | | 34 | % | | 297 | | | 1,920 | | | 31 | % | | 201 | | | 17 | % | | 48 | % |
Components | Components | | 1,793 | | | 30 | % | | 253 | | | 1,541 | | | 30 | % | | 261 | | | 16 | % | | (3) | % | Components | | 1,950 | | | 30 | % | | 352 | | | 1,994 | | | 33 | % | | 301 | | | (2) | % | | 17 | % |
Power Systems | Power Systems | | 1,164 | | | 20 | % | | 134 | | | 981 | | | 19 | % | | 101 | | | 19 | % | | 33 | % | Power Systems | | 1,203 | | | 18 | % | | 128 | | | 1,143 | | | 19 | % | | 139 | | | 5 | % | | (8) | % |
New Power | New Power | | 23 | | | — | % | | (58) | | | 18 | | | — | % | | (40) | | | 28 | % | | (45) | % | New Power | | 42 | | | 1 | % | | (80) | | | 24 | | | — | % | | (60) | | | 75 | % | | (33) | % |
Intersegment eliminations | Intersegment eliminations | | (1,549) | | | (26) | % | | (50) | | | (1,255) | | | (24) | % | | (10) | | | 23 | % | | NM | Intersegment eliminations | | (1,637) | | | (25) | % | | (64) | | | (1,461) | | | (24) | % | | (9) | | | 12 | % | | NM |
| Total | Total | | $ | 5,968 | | | 100 | % | | $ | 862 | | | $ | 5,118 | | | 100 | % | | $ | 876 | | | 17 | % | | (2) | % | Total | | $ | 6,586 | | | 100 | % | | $ | 1,055 | | (1) | $ | 6,111 | | | 100 | % | | $ | 974 | | | 8 | % | | 8 | % |
| "NM" - not meaningful information | "NM" - not meaningful information | | "NM" - not meaningful information | |
(1) EBITDA includes $47 million of recoveries associated with the suspension of our Russian operations and $29 million of costs associated with the planned separation of our Filtration business. | | (1) EBITDA includes $47 million of recoveries associated with the suspension of our Russian operations and $29 million of costs associated with the planned separation of our Filtration business. |
|
Cost of sales, selling, general and administrative and research development and engineering expenses increased due to higher compensation costs (primarily driven by the restoration of 2020 salary reductions and 2020 salary increases deferred until 2021), which impacted the variances in gross margin and net income as well as all of our reporting segments for the three months ended October 3, 2021.
Net income attributable to Cummins Inc. was $534$702 million, or $3.69$4.94 per diluted share, on sales of $6.0$6.6 billion for the three months ended October 3, 2021,June 30, 2022, versus the comparable prior year period net income attributable to Cummins Inc. of $501$600 million, or $3.36$4.10 per diluted share, on sales of $5.1$6.1 billion. The increases in net income attributable to Cummins Inc. and earnings per diluted share were driven by higher net sales, increased gross margin, a lower effective tax raterecoveries associated with the suspension of our Russian operations and favorable foreign currency fluctuations (primarily the Chinese renminbi and Australian dollar),discrete tax items, partially offset by higher compensationunfavorable changes in corporate owned life insurance, increased consulting expenses driven by acquisitions and incremental costs associated with supply chain constraints.the work towards separation of the filtration business and lower equity, royalty and interest income from investees (primarily in China). See NOTE 3, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information. The increase in gross margin was primarily due to favorable pricing and higher volumes, partially offset by higher compensation expenses, increased freight costs due to supply chain constraints and higher material costs. The 2.7 percentage point decrease in gross margin as a percentage of net sales was principally due to higher compensation expenses, increased freight costs due to supply chain constraints and higher material costs which increased at a faster rate than the increase in net sales.
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| |
| | | Nine months ended |
| Operating Segments | | October 3, 2021 | | September 27, 2020 | | Percent change |
| | | | | Percent | | | | | | Percent | | | | 2021 vs. 2020 |
| In millions | | Sales | | of Total | | EBITDA | | Sales | | of Total | | EBITDA | | Sales | | EBITDA |
| Engine | | $ | 7,528 | | | 41 | % | | $ | 1,147 | | | $ | 5,693 | | | 41 | % | | $ | 897 | | | 32 | % | | 28 | % |
| Distribution | | 5,714 | | | 31 | % | | 553 | | | 5,140 | | | 37 | % | | 500 | | | 11 | % | | 11 | % |
| Components | | 5,939 | | | 33 | % | | 975 | | | 4,193 | | | 30 | % | | 681 | | | 42 | % | | 43 | % |
| Power Systems | | 3,329 | | | 18 | % | | 399 | | | 2,642 | | | 19 | % | | 269 | | | 26 | % | | 48 | % |
| New Power | | 82 | | | 1 | % | | (169) | | | 38 | | | — | % | | (121) | | | NM | | (40) | % |
| Intersegment eliminations | | (4,421) | | | (24) | % | | (89) | | | (3,725) | | | (27) | % | | 45 | | | 19 | % | | NM |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 18,171 | | | 100 | % | | $ | 2,816 | | | $ | 13,981 | | | 100 | % | | $ | 2,271 | | | 30 | % | | 24 | % |
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| "NM" - not meaningful information | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Cost of sales, selling, general and administrative and research development and engineering expenses increased due to higher compensation costs (primarily driven by the restoration of 2020 salary reductions, higher variable compensation and 2020 salary increases deferred until 2021), which impacted the variances in gross margin and net income as well as all of our reporting segments for the nine months ended October 3, 2021.
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| |
| | | Six months ended |
| Operating Segments | | June 30, 2022 | | July 4, 2021 | | Percent change |
| | | | | Percent | | | | | | Percent | | | | 2022 vs. 2021 |
| In millions | | Sales | | of Total | | EBITDA | | Sales | | of Total | | EBITDA | | Sales | | EBITDA |
| Engine | | $ | 5,528 | | | 43 | % | | $ | 814 | | | $ | 4,950 | | | 41 | % | | $ | 756 | | | 12 | % | | 8 | % |
| Distribution | | 4,370 | | | 34 | % | | 407 | | | 3,755 | | | 31 | % | | 361 | | | 16 | % | | 13 | % |
| Components | | 3,938 | | | 30 | % | | 672 | | | 4,146 | | | 34 | % | | 722 | | | (5) | % | | (7) | % |
| Power Systems | | 2,363 | | | 18 | % | | 218 | | | 2,165 | | | 18 | % | | 265 | | | 9 | % | | (18) | % |
| New Power | | 73 | | | 1 | % | | (147) | | | 59 | | | — | % | | (111) | | | 24 | % | | (32) | % |
| Intersegment eliminations | | (3,301) | | | (26) | % | | (154) | | | (2,872) | | | (24) | % | | (39) | | | 15 | % | | NM |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 12,971 | | | 100 | % | | $ | 1,810 | | (1) | $ | 12,203 | | | 100 | % | | $ | 1,954 | | | 6 | % | | (7) | % |
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| "NM" - not meaningful information | | | | | | | | | | | | | | |
| (1) EBITDA includes $111 million of costs associated with the suspension of our Russian operations and $46 million of costs associated with the planned separation of our Filtration business. |
| |
| | | | | | | | | | | | | | | | | |
Net income attributable to Cummins Inc. was $1,737$1,120 million, or $11.86$7.86 per diluted share, on sales of $18.2$13.0 billion for the ninesix months ended October 3, 2021,June 30, 2022, versus the comparable prior year period net income attributable to Cummins Inc. of $1,288$1,203 million, or $8.65$8.16 per diluted share, on sales of $14.0$12.2 billion. The increasesdecreases in net income attributable to Cummins Inc. and earnings per diluted share were driven by higher net sales,costs associated with the suspension of our Russian operations, increased gross margin, higherconsulting expenses driven by acquisitions and the work towards separation of the filtration business, lower equity, royalty and interest income from investees (primarily in China due to stronger demand for trucksChina) and construction equipmentunfavorable changes in the first half of the year), a lower effective tax rate and favorable foreign currency fluctuations (primarily the Chinese renminbi and Australian dollar, partially offset by the Brazilian real),corporate owned life insurance, partially offset by higher compensation expenses, incremental costs associated with supply chain constraintsnet sales and mark-to-market losses on corporate owned life insurance.increased gross margin. See NOTE 3, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information. The increase in gross margin and gross margin as a percentage of sales was primarily due to higherfavorable pricing and increased volumes, partially offset by higher compensation expenses,material costs, increased freight costs due to supply chain constraints and higher material costs. The 1.2 percentage point decrease in gross margin as a percentage of net sales was primarily due to higher compensation expenses, increased freight costs due to supply chain constraints and higher material costs which increased at a faster rate thanunfavorable foreign currency impacts (principally the increase in net sales.Euro). Diluted earnings per common share for the ninesix months ended October 3, 2021,June 30, 2022, benefited $0.23$0.06 from fewer weighted-average shares outstanding due to the stock repurchase program.
We generated $1,524$763 million of cash from operations for the ninesix months ended October 3, 2021,June 30, 2022, compared to $1,580$955 million for the comparable period in 2020. Refer to2021. See the section titled "Cash Flows" in the "LIQUIDITY AND CAPITAL RESOURCES" section for a discussion of items impacting cash flows.
Our debt to capital ratio (total capital defined as debt plus equity) at October 3, 2021,June 30, 2022, was 30.531.4 percent, compared to 31.730.7 percent at December 31, 2020.2021. The decreaseincrease was primarily due to $222 million of lower debt balances since December 31, 2020.2021. At October 3, 2021,June 30, 2022, we had $3.0 billion in cash and marketable securities on hand and access to our $3.5 billion credit facilities, if necessary, to meet currently anticipatedacquisition, working capital, investment and funding needs.
In the first ninesix months of 2021,2022, we purchased $1,228$347 million, or 5.01.7 million shares, of our common stock.
On August 3, 2022, we completed the acquisition of Meritor, Inc. (Meritor) with a purchase price of $3.0 billion (including convertible debt). See NOTE 14, "ACQUISITIONS," to our Condensed Consolidated Financial Statements for additional information.
On July 13, 2022, we entered into a loan agreement under which we may obtain delayed-draw loans in an amount up to $2.0 billion in the aggregate prior to October 13, 2022. We drew down the entire $2.0 billion balance on August 2, 2022, to fund the acquisition of Meritor.
In July 2021,2022, the Board of Directors (the Board) authorized an increase to our quarterly dividend of 7.4approximately 8 percent from $1.35$1.45 per share to $1.45$1.57 per share.
On August 3, 2021,April 8, 2022, we announcedcompleted the acquisition of Jacobs Vehicle Systems business (Jacobs) from Altra Industrial Motion Corp with a purchase price of $346 million.
On April 20, 2022, we filed a confidential registration statement announcing our exploration of strategic alternatives for our filtration business. Potential strategic alternativesintent to be explored includeseparate the separation of our filtration business into a stand-alone company. The execution
As a well-known seasoned issuer, we filed an automatic shelf registration of this exploration process is dependent upon businessan undetermined amount of debt and market conditions, alongequity with a numberthe Securities and Exchange Commission (SEC) on February 8, 2022.
On August 18, 2021, we entered into an amended and restated five-year revolving credit agreement with a syndicate of lenders. The amended and restated credit agreement provides us with a $2 billion senior unsecured revolving credit facility until August 18, 2026. On August 18, 2021, we entered into an amended and restated 364-day credit agreement that allows us to borrow up to $1.5 billion of unsecured funds at any time prior to August 17, 2022. This credit agreement amended and restated the prior $1.5 billion 364-day credit facility that matured on August 18, 2021.
In the first ninesix months of 2021,2022, the investment gainloss on our U.S. pension trust was 6.25.0 percent while our U.K. pension trust gainloss was 0.717.8 percent. During the remainder of 2021, weWe anticipate making $6 million in additional defined benefit pension contributions induring the U.K. and $4remainder of 2022 of $10 million in contributions tofor our U.S. and U.K. qualified and non-qualified benefitpension plans. We expect our 20212022 annual net periodic pension cost to approximate $79$31 million.
As of the date of this filing, our credit ratings and outlooks from the credit rating agencies remain unchanged.
RESULTS OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | Three months ended | | Favorable/ | | Nine months ended | | Favorable/ |
| | | | | October 3, 2021 | | September 27, 2020 | | (Unfavorable) | | October 3, 2021 | | September 27, 2020 | | (Unfavorable) |
| | In millions, except per share amounts | | | | Amount | | Percent | | | | Amount | | Percent |
| | NET SALES | | $ | 5,968 | | | $ | 5,118 | | | $ | 850 | | | 17 | % | | $ | 18,171 | | | $ | 13,981 | | | $ | 4,190 | | | 30 | % |
| | Cost of sales | | 4,554 | | | 3,769 | | | (785) | | | (21) | % | | 13,793 | | | 10,448 | | | (3,345) | | | (32) | % |
| | GROSS MARGIN | | 1,414 | | | 1,349 | | | 65 | | | 5 | % | | 4,378 | | | 3,533 | | | 845 | | | 24 | % |
| | OPERATING EXPENSES AND INCOME | | | | | | | | | | | | | | | | |
| | Selling, general and administrative expenses | | 571 | | | 533 | | | (38) | | | (7) | % | | 1,745 | | | 1,549 | | | (196) | | | (13) | % |
| | Research, development and engineering expenses | | 266 | | | 224 | | | (42) | | | (19) | % | | 802 | | | 651 | | | (151) | | | (23) | % |
| | Equity, royalty and interest income from investees | | 94 | | | 98 | | | (4) | | | (4) | % | | 397 | | | 342 | | | 55 | | | 16 | % |
| | | | | | | | | | | | | | | | | | |
| | Other operating expense, net | | (5) | | | (20) | | | 15 | | | 75 | % | | (17) | | | (35) | | | 18 | | | 51 | % |
| | OPERATING INCOME | | 666 | | | 670 | | | (4) | | | (1) | % | | 2,211 | | | 1,640 | | | 571 | | | 35 | % |
| | | | | | | | | | | | | | | | | | |
| | Interest expense | | 28 | | | 25 | | | (3) | | | (12) | % | | 85 | | | 71 | | | (14) | | | (20) | % |
| | Other income, net | | 37 | | | 41 | | | (4) | | | (10) | % | | 111 | | | 134 | | | (23) | | | (17) | % |
| | INCOME BEFORE INCOME TAXES | | 675 | | | 686 | | | (11) | | | (2) | % | | 2,237 | | | 1,703 | | | 534 | | | 31 | % |
| | Income tax expense | | 134 | | | 182 | | | 48 | | | 26 | % | | 473 | | | 402 | | | (71) | | | (18) | % |
| | CONSOLIDATED NET INCOME | | 541 | | | 504 | | | 37 | | | 7 | % | | 1,764 | | | 1,301 | | | 463 | | | 36 | % |
| | Less: Net income attributable to noncontrolling interests | | 7 | | | 3 | | | (4) | | | NM | | 27 | | | 13 | | | (14) | | | NM |
| | NET INCOME ATTRIBUTABLE TO CUMMINS INC. | | $ | 534 | | | $ | 501 | | | $ | 33 | | | 7 | % | | $ | 1,737 | | | $ | 1,288 | | | $ | 449 | | | 35 | % |
| | Diluted Earnings Per Common Share Attributable to Cummins Inc. | | $ | 3.69 | | | $ | 3.36 | | | $ | 0.33 | | | 10 | % | | $ | 11.86 | | | $ | 8.65 | | | $ | 3.21 | | | 37 | % |
| | | | | | | | | | | | | | | | | | | |
| | "NM" - not meaningful information | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | Three months ended | | Favorable/ | | Six months ended | | Favorable/ |
| | | | | June 30, 2022 | | July 4, 2021 | | (Unfavorable) | | June 30, 2022 | | July 4, 2021 | | (Unfavorable) |
| | In millions, except per share amounts | | | | Amount | | Percent | | | | Amount | | Percent |
| | NET SALES | | $ | 6,586 | | | $ | 6,111 | | | $ | 475 | | | 8 | % | | $ | 12,971 | | | $ | 12,203 | | | $ | 768 | | | 6 | % |
| | Cost of sales | | 4,860 | | | 4,633 | | | (227) | | | (5) | % | | 9,713 | | | 9,239 | | | (474) | | | (5) | % |
| | GROSS MARGIN | | 1,726 | | | 1,478 | | | 248 | | | 17 | % | | 3,258 | | | 2,964 | | | 294 | | | 10 | % |
| | OPERATING EXPENSES AND INCOME | | | | | | | | | | | | | | | | |
| | Selling, general and administrative expenses | | 622 | | | 600 | | | (22) | | | (4) | % | | 1,237 | | | 1,174 | | | (63) | | | (5) | % |
| | Research, development and engineering expenses | | 299 | | | 276 | | | (23) | | | (8) | % | | 597 | | | 536 | | | (61) | | | (11) | % |
| | Equity, royalty and interest income from investees | | 95 | | | 137 | | | (42) | | | (31) | % | | 191 | | | 303 | | | (112) | | | (37) | % |
| | | | | | | | | | | | | | | | | | |
| | Other operating expense, net | | 3 | | | 4 | | | 1 | | | 25 | % | | 114 | | | 12 | | | (102) | | | NM |
| | OPERATING INCOME | | 897 | | | 735 | | | 162 | | | 22 | % | | 1,501 | | | 1,545 | | | (44) | | | (3) | % |
| | | | | | | | | | | | | | | | | | |
| | Interest expense | | 34 | | | 29 | | | (5) | | | (17) | % | | 51 | | | 57 | | | 6 | | | 11 | % |
| | Other (expense) income, net | | (8) | | | 73 | | | (81) | | | NM | | (17) | | | 74 | | | (91) | | | NM |
| | INCOME BEFORE INCOME TAXES | | 855 | | | 779 | | | 76 | | | 10 | % | | 1,433 | | | 1,562 | | | (129) | | | (8) | % |
| | Income tax expense | | 148 | | | 167 | | | 19 | | | 11 | % | | 303 | | | 339 | | | 36 | | | 11 | % |
| | CONSOLIDATED NET INCOME | | 707 | | | 612 | | | 95 | | | 16 | % | | 1,130 | | | 1,223 | | | (93) | | | (8) | % |
| | Less: Net income attributable to noncontrolling interests | | 5 | | | 12 | | | 7 | | | 58 | % | | 10 | | | 20 | | | 10 | | | 50 | % |
| | NET INCOME ATTRIBUTABLE TO CUMMINS INC. | | $ | 702 | | | $ | 600 | | | $ | 102 | | | 17 | % | | $ | 1,120 | | | $ | 1,203 | | | $ | (83) | | | (7) | % |
| | Diluted Earnings Per Common Share Attributable to Cummins Inc. | | $ | 4.94 | | | $ | 4.10 | | | $ | 0.84 | | | 20 | % | | $ | 7.86 | | | $ | 8.16 | | | $ | (0.30) | | | (4) | % |
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| | "NM" - not meaningful information | | | | | | | | | | | | | | | |
| | | | Three months ended | | Favorable/ (Unfavorable) | | Nine months ended | | Favorable/ (Unfavorable) | | | Three months ended | | Favorable/ (Unfavorable) | | Six months ended | | Favorable/ (Unfavorable) |
| | | October 3, 2021 | | September 27, 2020 | | October 3, 2021 | | September 27, 2020 | | | | June 30, 2022 | | July 4, 2021 | | June 30, 2022 | | July 4, 2021 | |
Percent of sales | Percent of sales | | Percentage Points | | Percentage Points | Percent of sales | | Percentage Points | | Percentage Points |
Gross margin | Gross margin | | 23.7 | % | | 26.4 | % | | (2.7) | | | 24.1 | % | | 25.3 | % | | (1.2) | | Gross margin | | 26.2 | % | | 24.2 | % | | 2.0 | | | 25.1 | % | | 24.3 | % | | 0.8 | |
Selling, general and administrative expenses | Selling, general and administrative expenses | | 9.6 | % | | 10.4 | % | | 0.8 | | | 9.6 | % | | 11.1 | % | | 1.5 | | Selling, general and administrative expenses | | 9.4 | % | | 9.8 | % | | 0.4 | | | 9.5 | % | | 9.6 | % | | 0.1 | |
Research, development and engineering expenses | Research, development and engineering expenses | | 4.5 | % | | 4.4 | % | | (0.1) | | | 4.4 | % | | 4.7 | % | | 0.3 | | Research, development and engineering expenses | | 4.5 | % | | 4.5 | % | | — | | | 4.6 | % | | 4.4 | % | | (0.2) | |
| |
Net Sales
Net sales for the three months ended October 3, 2021,June 30, 2022, increased by $850$475 million versus the comparable period in 2020.2021. The primary drivers were as follows:
•Engine segment sales increased 22 percent due to higher volumes in the global medium-duty truck markets and North American heavy-duty truck markets.
•Components segment sales increased 16 percent largely due to higher emission solutions demand in North America, India, Western Europe and Asia Pacific.
•Distribution segment sales increased 1417 percent principally due to higher demand across most product lines in North America.
•Engine segment sales increased 11 percent due to favorable pricing and improvedincreased on-highway demand (including higher aftermarket sales) in Russia and Asia Pacific.North America.
•Power Systems segment sales increased 195 percent primarily due to higher demand in global miningoil and gas markets (including higher aftermarket sales) in North America and power generationIndia and generator technologies markets in IndiaEurope and China.India.
These increases were partially offset by the following drivers:
•Components segment sales decreased 2 percent largely due to lower demand in all businesses in China, partially offset by higher demand in North America.
•FavorableUnfavorable foreign currency fluctuations of 1 percent of total sales, primarily in the Chinese renminbi,Euro, British pound Canadian dollar and Australian dollar.Indian rupee.
Net sales for the ninesix months ended October 3, 2021,June 30, 2022, increased $4,190$768 million versus the comparable period in 2020.2021. The primary drivers were as follows:
•Distribution segment sales increased 16 percent principally due to higher demand across most product lines in North America.
•Engine segment sales increased 3212 percent due to increased volumes in the North American heavy-duty truckfavorable pricing and pick-up truck markets and global medium-duty truck markets.
•Components segment sales increased 42 percent largely due tostronger on-highway demand (including higher emission solutions demandaftermarket sales) in North America, India and China.America.
•Power Systems segment sales increased 269 percent primarily due to increasedhigher demand in power generation markets in North America,China and India and China and global mining markets.markets and oil and gas markets (including higher aftermarket sales) in North America, China and India.
These increases were partially offset by the following drivers:
•Components segment sales decreased 5 percent largely due to lower demand in all businesses in China, partially offset by higher demand in North America.
•Distribution segment sales increased 11 percent principally due to higher demand across all product lines in North America and improved demand in Asia Pacific, Russia and Africa and Middle East.
•FavorableUnfavorable foreign currency fluctuations of 21 percent of total sales, primarily in the Chinese renminbi, Euro, Australian dollarBritish pound and British pound.Indian rupee.
Sales to international markets (excluding the U.S. and Canada), based on location of customers, for the three and ninesix months ended October 3, 2021,June 30, 2022, were 4339 percent and 4440 percent of total net sales compared with 4143 percent and 4244 percent of total net sales for the comparable periods in 2020.2021. A more detailed discussion of sales by segment is presented in the “OPERATING SEGMENT RESULTS” section.
Cost of Sales
The types of expenses included in cost of sales are the following: parts and material consumption, including direct and indirect materials; salaries, wages and benefits; depreciation on production equipment and facilities and amortization of technology intangibles; estimated costs of warranty programs and campaigns; production utilities; production-related purchasing; warehousing, including receiving and inspection; freight costs; engineering support costs; repairs and maintenance; production and warehousing facility property insurance; rent for production facilitiesfacilities; charges for the write-downs of inventories in Russia and other production overhead.
Gross Margin
Gross margin increased $65$248 million for the three months ended October 3, 2021June 30, 2022 and decreased 2.7increased 2.0 points as a percentage of net sales versus the comparable period in 2020.2021. The increase in gross margin and gross margin as a percentage of sales was primarily due to favorable pricing and higher volumes, partially offset by higher compensation expenses,material costs.
Gross margin increased $294 million for the six months ended June 30, 2022 and increased 0.8 points as a percentage of sales versus the comparable period in 2021. The increase in gross margin and gross margin as a percentage of sales was primarily due to favorable pricing and increased volumes, partially offset by higher material costs, increased freight costs due to supply chain constraints and higher material costs. The 2.7 percent decrease in gross margin as a percentage of net sales was principally due to higher compensation expenses, increased freight costs due to supply chain constraints and higher material costs which increased at a faster rate thanunfavorable foreign currency impacts (principally the increase in net sales.
Gross margin increased $845 million for the nine months ended October 3, 2021 and decreased 1.2 points as a percentage of net sales versus the comparable period in 2020. The increase in gross margin was primarily due to higher volumes, partially offset by higher compensation expenses, increased freight costs due to supply chain constraints and higher material costs. The 1.2 percent decrease in gross margin as a percentage of net sales was primarily due to higher compensation expenses, increased freight costs due to supply chain constraints and higher material costs which increased at a faster rate than the increase in net sales.Euro).
The provision for base warranties issued as a percent of sales for the three and ninesix months ended October 3, 2021,June 30, 2022, was 2.2 percent and 2.42.1 percent, respectively, compared to 2.32.4 percent and 2.02.5 percent for the comparable periods in 2020. A detailed discussion of gross margin by segment is presented in the “OPERATING SEGMENT RESULTS” section.2021.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $38$22 million for the three months ended October 3, 2021,June 30, 2022, versus the comparable period in 2020,2021, primarily due to higher compensationconsulting expenses driven by acquisitions and the work towards separation of the filtration business, partially offset by lower variable compensation expenses. Overall, selling, general and administrative expenses as a percentage of net sales decreased to 9.69.4 percent in the three months ended October 3, 2021,June 30, 2022, from 10.49.8 percent in the comparable period in 2020.2021. The decrease in selling, general and administrative expenses as a percentage of net sales was mainly due to net sales increasing at a faster rate than the increase in selling, general and administrative expenses.expenses increasing at a slower rate than the growth in net sales.
Selling, general and administrative expenses increased $196$63 million for the ninesix months ended October 3, 2021,June 30, 2022, versus the comparable period in 2020,2021, primarily due to higher consulting expenses driven by acquisitions and the work towards the separation of the filtration business, partially offset by lower variable compensation expenses. Overall, selling, general and administrative expenses, as a percentage of net sales, decreased to 9.69.5 percent in the ninesix months ended October 3, 2021,June 30, 2022, from 11.19.6 percent in the comparable period in 2020.2021. The decrease in selling, general and administrative expenses as a percentage of net sales was primarilymainly due to net salesselling, general and administrative expenses increasing at a fasterslower rate than the increase in selling, general and administrative expenses.net sales.
Research, Development and Engineering Expenses
Research, development and engineering expenses increased $42$23 million for the three months ended October 3, 2021,June 30, 2022, versus the comparable period in 20202021, primarily due to higher compensationincreased consulting expenses and increased consulting expenses.higher spending on supplies. Overall, research, development and engineering expenses as a percentage of net sales increased toremained flat at 4.5 percent in the three months ended October 3, 2021, from 4.4 percent inJune 30, 2022, and the comparable period in 2020.2021.
Research, development and engineering expenses increased $151$61 million for the ninesix months ended October 3, 2021,June 30, 2022, versus the comparable period in 2020,2021, primarily due to higher compensationincreased consulting expenses and increasedhigher spending on prototypes.prototypes and supplies. Overall, research, development and engineering expenses as a percentage of net sales decreasedincreased to 4.44.6 percent in the ninesix months ended October 3, 2021,June 30, 2022, from 4.74.4 percent in the comparable period in 2020.2021. The decreaseincrease in research, development and engineering expenses as a percentage of net sales was primarilymainly due to net salesresearch, development and engineering expenses increasing at a faster rate than the increase in research, development and engineering expenses. net sales.
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 fullybattery electric, hybridfuel cell electric and hydrogen powertrainengine solutions.
Equity, Royalty and Interest Income from Investees
Equity, royalty and interest income from investees decreased $4$42 million for the three months ended October 3, 2021,June 30, 2022, versus the comparable period in 2020,2021, primarily due to decreased earnings at Beijing Foton Cummins Engine Co., Ltd. and Dongfeng Cummins Engine Co., Ltd. and Beijing Fotonthe February 7, 2022, purchase of Westport Fuel System Inc.'s stake in Cummins Engine Co., Ltd., partially offset by the absence of $10 million in impairment chargesWestport Joint Venture. See NOTE 14, "ACQUISITIONS," to our Condensed Consolidated Financial Statements for a joint venture in our Power Systems segment incurred in the third quarter of 2020 and increased earnings at Tata Cummins Ltd.additional information.
Equity, royalty and interest income from investees increased $55decreased $112 million for the ninesix months ended October 3, 2021,June 30, 2022, versus the comparable period in 2020, primarily2021, mainly due to higherdecreased earnings at Beijing Foton Cummins Engine Co., Ltd., Tata Cummins Ltd. (excluding the 2020 benefits noted below), and Dongfeng Cummins Engine Co., Ltd., Guangxi Cummins Industrial Power Co., Ltd.the $28 million impairment of our Russian joint venture with KAMAZ and the absenceFebruary 7, 2022, purchase of $13 million of impairment charges. These increases were partially offset by the absence of a $37 million favorable adjustment ($18 million of which relatedWestport Fuel System Inc.'s stake in Cummins Westport Joint Venture. See NOTE 3, "RUSSIAN OPERATIONS," and NOTE 14, "ACQUISITIONS," to Tata Cummins Ltd.) as the result of tax changes within India's 2020-2021 Union Budget (India Tax Law Changes) passed in March 2020 and $18 million of technology fee revenue related to Tata Cummins Ltd., both recorded in the first quarter of 2020. Seeour Note 4, "INCOME TAXES," of the Notes to theCondensed Consolidated Financial Statements of our 2020 Form 10-K for additional information on India Tax Law Changes.information. Other Operating Expense, Net
Other operating (expense) income, net was as follows:
| | | | Three months ended | | | Nine months ended | | | | Three months ended | | | Six months ended | |
In millions | In millions | | October 3, 2021 | | September 27, 2020 | | | October 3, 2021 | | September 27, 2020 | | In millions | | June 30, 2022 | | July 4, 2021 | | | June 30, 2022 | | July 4, 2021 | |
Amortization of intangible assets | Amortization of intangible assets | | $ | (6) | | | $ | (5) | |
| | $ | (17) | | | $ | (16) | | | Amortization of intangible assets | | $ | (9) | | | $ | (5) | |
| | $ | (14) | | | $ | (11) | | |
Loss on write-off of assets | Loss on write-off of assets | | (3) | | | (13) | | | | (7) | | | (18) | | | Loss on write-off of assets | | (3) | | | — | | | | (8) | | | (4) | | |
Asset impairments and other charges | | Asset impairments and other charges | | — | | | — | | | | (36) | | | — | | |
Gain (loss) on sale of assets, net | Gain (loss) on sale of assets, net | | 2 | | | (2) | | | | 1 | | | (8) | | | Gain (loss) on sale of assets, net | | — | | | (2) | | | | 1 | | | (1) | | |
Royalty income, net | Royalty income, net | | 2 | | | 1 | | | | 7 | | | 3 | | | Royalty income, net | | 3 | | | 3 | | | | 5 | | | 5 | | |
Russian suspension recoveries (costs) | | Russian suspension recoveries (costs) | | 7 | | (1) | — | | | | (61) | | (1) | — | | |
Other, net | Other, net | | — | | | (1) | | | | (1) | | | 4 | | | Other, net | | (1) | | | — | | | | (1) | | | (1) | | |
Total other operating expense, net | Total other operating expense, net | | $ | (5) | | | $ | (20) | | | | $ | (17) | | | $ | (35) | | | Total other operating expense, net | | $ | (3) | | | $ | (4) | | | | $ | (114) | | | $ | (12) | | |
| (1) See NOTE 3, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information. | | (1) See NOTE 3, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information. | |
| |
Interest Expense
Interest expense increased $3$5 million and $14decreased $6 million for the three and ninesix months ended October 3, 2021,June 30, 2022, versus the comparable periods in 2020,2021. The three month increase is primarily due to increasedthe overall increase in floating interest expense associated withrates in the second quarter of 2022. The six month decrease is principally due to the performance on the fixed to floating swaps placed in 2021 for our $2 billion senior unsecured notes issued in August of 2020.2030 and 2050 debt maturities.
Other (Expense) Income, Net
Other (expense) income, (expense), net was as follows:
| | | | Three months ended | | | Nine months ended | | | | Three months ended | | | Six months ended | |
In millions | In millions | | October 3, 2021 | | | September 27, 2020 | | | October 3, 2021 | | | September 27, 2020 | | In millions | | June 30, 2022 | | | July 4, 2021 | | | June 30, 2022 | | | July 4, 2021 | |
(Loss) gain on corporate owned life insurance | | (Loss) gain on corporate owned life insurance | | $ | (48) | | | | $ | 20 | | | | $ | (85) | | | | $ | (12) | | |
(Loss) gain on marketable securities, net | | (Loss) gain on marketable securities, net | | (5) | | | | 3 | | | | (9) | | | | 3 | | |
Foreign currency (loss) gain, net | | Foreign currency (loss) gain, net | | (1) | | | | 3 | | | | (13) | | | | (2) | | |
Gain on sale of land | | Gain on sale of land | | — | | | | 18 | | | | — | | | | 18 | | |
Interest income | | Interest income | | 7 | | | | 5 | | | | 15 | | | | 11 | | |
Non-service pension and OPEB credit | Non-service pension and OPEB credit | | $ | 23 | | | | $ | 16 | | | | $ | 72 | | | | $ | 48 | | | Non-service pension and OPEB credit | | 32 | | | | 25 | | | | 65 | | | | 49 | | |
Interest income | | 7 | | | | 4 | | | | 18 | | | | 15 | | | |
Foreign currency gain (loss), net | | 7 | | | | 2 | | | | 5 | | | | (1) | | | |
Gain on marketable securities, net | | 2 | | | | 2 | | | | 5 | | | | 6 | | | |
Gain (loss) on corporate owned life insurance | | 1 | | | | 12 | | | | (11) | | | | 50 | | | |
Gain on sale of land | | — | | | | — | | | | 18 | | | | — | | | |
| Other, net | Other, net | | (3) | | | | 5 | | | | 4 | | | | 16 | | | Other, net | | 7 | | | | (1) | | | | 10 | | | | 7 | | |
Total other income, net | | $ | 37 | | | | $ | 41 | | | | $ | 111 | | | | $ | 134 | | | |
Total other (expense) income, net | | Total other (expense) income, net | | $ | (8) | | | | $ | 73 | | | | $ | (17) | | | | $ | 74 | | |
| | |
Income Tax Expense
Our effective tax rate for 20212022 is expected to approximate 21.5 percent, excluding any discrete items that may arise.
Our effective tax rates for the three and ninesix months ended October 3, 2021,June 30, 2022, were 19.917.3 percent and 21.1 percent, respectively. Our effective tax rates for the three and ninesix months ended September 27, 2020,July 4, 2021, were 26.521.4 percent and 23.621.7 percent, respectively.
The three months ended October 3, 2021,June 30, 2022, contained favorable discrete tax items of $11$36 million, primarily due to $36 million of favorable changes in tax reserves, $10 million of favorable changes associated with uncertainty in our Russian operations and $8 million of net favorable other discrete tax items, partially offset by $18 million of unfavorable tax costs associated with internal restructuring ahead of the planned separation of our filtration business.
The six months ended June 30, 2022, contained favorable net discrete tax items of $5 million, primarily due to $27 million of favorable changes in tax reserves and $4 million of net favorable other discrete tax items, partially offset by $18 million of unfavorable tax costs associated with internal restructuring ahead of the planned separation of our filtration business and $8 million of unfavorable changes associated with uncertainty in our Russian operations.
The three months ended July 4, 2021, contained unfavorable discrete items of $7 million, primarily due to a $16$10 million favorable release ofunfavorable statutory change in tax reserves associated withrates (mostly in the settlement of tax positions,UK), partially offset by $5$3 million of unfavorable return to provision adjustments.other favorable discrete items.
The ninesix months ended October 3,July 4, 2021, contained favorable discrete items of $8 million, primarily due to an $18 million favorable release of tax reserves associated with the settlement of tax positions, partially offset by $10 million of unfavorable statutory changes in tax rates, mostly in the U.K.
The three months ended September 27, 2020, contained unfavorable discrete items of $31$3 million, primarily due to $17a $10 million of changesunfavorable statutory change in tax reserves, $8 million of provision to return adjustments relating to tax returns filed for 2019 and $6 million of net other discrete items.
The nine months ended September 27, 2020, contained $27 million of unfavorable net discrete tax items, primarily due to $34 million of unfavorable changesrates (mostly in tax reserves and $8 million of provision to return adjustments,the UK), partially offset by $15$7 million of other favorable tax changes due to the India Tax Law Change passed in March of 2020. See Note 4, "INCOME TAXES," of the Notes to the Consolidated Financial Statements of our 2020 Form 10-K for additional information on India Tax Law Changes.discrete items.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 for the three and ninesix months ended October 3, 2021, increased $4June 30, 2022, decreased $7 million and $14$10 million, respectively, versus the comparable periods in 2020.2021. The increasedecrease for the three and six months ended October 3, 2021,June 30, 2022, was primarily due to higher earnings at Cummins India Limited. The increase for the nine months ended October 3, 2021, is principally due to higherlower earnings at Cummins India Limited and Eaton Cummins Joint Venture, partially offset by the absence of a $19 million unfavorable adjustment as the results of India Tax Law Changes passed in March 2020. See Note 4, "INCOME TAXES," of the Notes to the Consolidated Financial Statements of our 2020 Form 10-K for additional information on India Tax Law Changes.Hydrogenics Corporation. Net Income Attributable to Cummins Inc. and Diluted Earnings Per Common Share Attributable to Cummins Inc.
Net income and diluted earnings per common share attributable to Cummins Inc. for the three months ended October 3, 2021,June 30, 2022, increased $33$102 million and $0.33$0.84 per diluted share versus the comparable period in 2020,2021, primarily due to higher net sales, increased gross margin, a lower effective tax raterecoveries associated with the suspension of our Russian operations and favorable foreign currency fluctuations (primarily the Chinese renminbi and Australian dollar),discrete tax items, partially offset by higher compensationunfavorable changes in corporate owned life insurance, increased consulting expenses driven by acquisitions and incremental costs associated with supply chain constraints.the work towards separation of the filtration business and lower equity, royalty and interest income from investees (primarily in China). See NOTE 3, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information.
Net income and diluted earnings per common share attributable to Cummins Inc. for the ninesix months ended October 3, 2021, increased $449June 30, 2022, decreased $83 million and $3.21$0.30 per diluted share versus the comparable period in 2020,2021, primarily due to higher net sales,costs associated with the suspension of our Russian operations, increased gross margin, higherconsulting expenses driven by acquisitions and the work towards separation of the filtration business, lower equity, royalty and interest income from investees (primarily in China due to stronger demand for trucksChina) and construction equipmentunfavorable changes in the first half of the year), a lower effective tax rate and favorable foreign currency fluctuations (primarily the Chinese renminbi and Australian dollar, partially offset by the Brazilian real),corporate owned life insurance, partially offset by higher compensation expenses, incremental costs associated with supply chain constraintsnet sales and mark-to-market losses on corporate owned life insurance.increased gross margin. See NOTE 3, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information. Diluted earnings per common share for the ninesix months ended October 3, 2021,June 30, 2022, benefited $0.23$0.06 from fewer weighted-average shares outstanding due to the stock repurchase program.
Comprehensive Income - Foreign Currency Translation Adjustment
The foreign currency translation adjustment was flata net loss of $245 million and $241 million, respectively, for the three and six months ended June 30, 2022, compared to a net gain of $22 million and net loss of $34 million, respectively, for the three and ninesix months ended October 3,July 4, 2021, compared to a net gain of $111 million and a net loss of $62 million, respectively, for the three and nine months ended September 27, 2020, driven by the following:
| | | Three months ended | | Three months ended |
| | October 3, 2021 | | September 27, 2020 | | June 30, 2022 | | July 4, 2021 |
In millions | In millions | | Translation adjustment | | Primary currency driver vs. U.S. dollar | | Translation adjustment | | Primary currency driver vs. U.S. dollar | In millions | | Translation adjustment | | Primary currency driver vs. U.S. dollar | | Translation adjustment | | Primary currency driver vs. U.S. dollar |
Wholly-owned subsidiaries | Wholly-owned subsidiaries | | $ | (8) | | | Brazilian real, offset by Indian rupee, Chinese renminbi | | $ | 69 | | | Chinese renminbi, Indian rupee | Wholly-owned subsidiaries | | $ | (175) | | | Chinese renminbi, Indian rupee | | $ | 20 | | | Brazilian real, Chinese renminbi, partially offset by Indian rupee, British pound |
Equity method investments | Equity method investments | | 6 | | | Chinese renminbi, Indian rupee | | 32 | | | Chinese renminbi | Equity method investments | | (55) | | | Chinese renminbi | | 9 | | | Chinese renminbi, partially offset by Indian rupee |
Consolidated subsidiaries with a noncontrolling interest | Consolidated subsidiaries with a noncontrolling interest | | 2 | | | Indian rupee | | 10 | | | Indian rupee | Consolidated subsidiaries with a noncontrolling interest | | (15) | | | Indian rupee | | (7) | | | Indian rupee |
Total | Total | | $ | — | | | $ | 111 | | | Total | | $ | (245) | | | $ | 22 | | |
| | | | Nine months ended | | Six months ended |
| | October 3, 2021 | | September 27, 2020 | | June 30, 2022 | | July 4, 2021 |
In millions | In millions | | Translation adjustment | | Primary currency driver vs. U.S. dollar | | Translation adjustment | | Primary currency driver vs. U.S. dollar | In millions | | Translation adjustment | | Primary currency driver vs. U.S. dollar | | Translation adjustment | | Primary currency driver vs. U.S. dollar |
Wholly-owned subsidiaries | Wholly-owned subsidiaries | | $ | (36) | | | British pound, Brazilian real, Indian rupee, Euro, offset by Chinese renminbi | | $ | (62) | | | Brazilian real, Indian rupee, offset by Chinese renminbi | Wholly-owned subsidiaries | | $ | (159) | | | Chinese renminbi, Indian rupee | | $ | (28) | | | British pound, Indian rupee, partially offset by Chinese renminbi |
Equity method investments | Equity method investments | | 7 | | | Chinese renminbi, offset by Indian rupee | | 12 | | | Chinese renminbi | Equity method investments | | (59) | | | Chinese renminbi | | 1 | | | Chinese renminbi, partially offset by Indian rupee |
Consolidated subsidiaries with a noncontrolling interest | Consolidated subsidiaries with a noncontrolling interest | | (5) | | | Indian rupee | | (12) | | | Indian rupee | Consolidated subsidiaries with a noncontrolling interest | | (23) | | | Indian rupee | | (7) | | | Indian rupee |
Total | Total | | $ | (34) | | | $ | (62) | | | Total | | $ | (241) | | | $ | (34) | | |
| |
OPERATING SEGMENT RESULTS
Our reportable operating segments consist of the Engine, Distribution, Components, Power Systems and New Power segments. This reporting structure is organized according to the products and markets each segment serves. We use segment EBITDA as a primary 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. Segment amounts exclude certain expenses not specifically identifiable to segments. See Note 13,NOTE 15, "OPERATING SEGMENTS," to the Condensed Consolidated Financial Statements for additional information and a reconciliation of our segment information to the corresponding amounts in our Condensed Consolidated Statements of Net Income.
Following is a discussionWe continue to experience supply chain disruptions and related financial impacts reflected as increased cost of results for each of our operating segments.
Engine Segment Results
Financial data for the Engine segment was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Favorable/ | | Nine months ended | | Favorable/ |
| | October 3, | | September 27, | | (Unfavorable) | | October 3, | | September 27, | | (Unfavorable) |
In millions | | 2021 | | 2020 | | Amount | | Percent | | 2021 | | 2020 | | Amount | | Percent |
External sales | | $ | 1,961 | | | $ | 1,617 | | | $ | 344 | | | 21 | % | | $ | 5,776 | | | $ | 4,133 | | | $ | 1,643 | | | 40 | % |
Intersegment sales | | 617 | | | 495 | | | 122 | | | 25 | % | | 1,752 | | | 1,560 | | | 192 | | | 12 | % |
Total sales | | 2,578 | | | 2,112 | | | 466 | | | 22 | % | | 7,528 | | | 5,693 | | | 1,835 | | | 32 | % |
| | | | | | | | | | | | | | | | |
Research, development and engineering expenses | | 97 | | | 72 | | | (25) | | | (35) | % | | 288 | | | 217 | | | (71) | | | (33) | % |
Equity, royalty and interest income from investees | | 61 | | | 74 | | | (13) | | | (18) | % | | 278 | | | 236 | | | 42 | | | 18 | % |
| | | | | | | | | | | | | | | | |
Interest income | | 3 | | | 1 | | | 2 | | | NM | | 7 | | | 6 | | | 1 | | | 17 | % |
Segment EBITDA | | 391 | | | 382 | | | 9 | | | 2 | % | | 1,147 | | | 897 | | | 250 | | | 28 | % |
| | | | | | | | | | | | | | | | |
| | | | | | Percentage Points | | | | | | Percentage Points |
Segment EBITDA as a percentage of total sales | | 15.2 | % | | 18.1 | % | | | | (2.9) | | | 15.2 | % | | 15.8 | % | | | | (0.6) | |
| | | | | | | | | | | | | | | | |
| | | | | | | | |
"NM" - not meaningful information | | | | | | | | | | | | | | | | |
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Sales for our Engine segment by market were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Favorable/ | | Nine months ended | | Favorable/ |
| | October 3, | | September 27, | | (Unfavorable) | | October 3, | | September 27, | | (Unfavorable) |
In millions | | 2021 | | 2020 | | Amount | | Percent | | 2021 | | 2020 | | Amount | | Percent |
Heavy-duty truck | | $ | 861 | | | $ | 694 | | | $ | 167 | | | 24 | % | | $ | 2,527 | | | $ | 1,859 | | | $ | 668 | | | 36 | % |
Medium-duty truck and bus | | 713 | | | 492 | | | 221 | | | 45 | % | | 2,075 | | | 1,501 | | | 574 | | | 38 | % |
Light-duty automotive | | 515 | | | 522 | | | (7) | | | (1) | % | | 1,480 | | | 1,055 | | | 425 | | | 40 | % |
Total on-highway | | 2,089 | | | 1,708 | | | 381 | | | 22 | % | | 6,082 | | | 4,415 | | | 1,667 | | | 38 | % |
Off-highway | | 489 | | | 404 | | | 85 | | | 21 | % | | 1,446 | | | 1,278 | | | 168 | | | 13 | % |
Total sales | | $ | 2,578 | | | $ | 2,112 | | | $ | 466 | | | 22 | % | | $ | 7,528 | | | $ | 5,693 | | | $ | 1,835 | | | 32 | % |
| | | | | | | | | | | | | | | | |
| | | | | | Percentage Points | | | | | | Percentage Points |
On-highway sales as percentage of total sales | | 81 | % | | 81 | % | | | | — | | | 81 | % | | 78 | % | | | | 3 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Unit shipments by engine classification (including unit shipments to Power Systems and off-highway engine units included in their respective classification) were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Favorable/ | | Nine months ended | | Favorable/ |
| | October 3, | | September 27, | | (Unfavorable) | | October 3, | | September 27, | | (Unfavorable) |
| | 2021 | | 2020 | | Amount | | Percent | | 2021 | | 2020 | | Amount | | Percent |
Heavy-duty | | 29,200 | | | 23,300 | | | 5,900 | | | 25 | % | | 89,300 | | | 65,000 | | | 24,300 | | | 37 | % |
Medium-duty | | 65,200 | | | 50,100 | | | 15,100 | | | 30 | % | | 205,800 | | | 156,200 | | | 49,600 | | | 32 | % |
Light-duty | | 73,900 | | | 67,200 | | | 6,700 | | | 10 | % | | 210,500 | | | 146,400 | | | 64,100 | | | 44 | % |
Total unit shipments | | 168,300 | | | 140,600 | | | 27,700 | | | 20 | % | | 505,600 | | | 367,600 | | | 138,000 | | | 38 | % |
Sales
Engine segment sales for the three months ended October 3, 2021, increased $466 million versus the comparable period in 2020. The following were the primary drivers by market:
•Medium-duty truck and bus sales increased $221 million mainly due to higher global medium-duty demand, especially in North America and Brazil.
•Heavy-duty truck sales increased $167 million principally due to higher volumes in North America with shipments up 32 percent.
•Off-highway sales increased $85 million primarily due to increased global construction demand, especially in North America, Asia Pacific and Europe.
sales. Our industry continues to be unfavorably impacted by supply chain constraints leading to shortages across multiple components categories and limiting our collective ability to meet end-user demand. Our customers are also experiencing other supply chain issues slowing production.issues.
Following is a discussion of results for each of our operating segments.
Engine Segment Results
Financial data for the Engine segment was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Favorable/ | | Six months ended | | Favorable/ |
| | June 30, | | July 4, | | (Unfavorable) | | June 30, | | July 4, | | (Unfavorable) |
In millions | | 2022 | | 2021 | | Amount | | Percent | | 2022 | | 2021 | | Amount | | Percent |
External sales | | $ | 2,092 | | | $ | 1,920 | | $ | 172 | | | 9 | % | | $ | 4,141 | | $ | 3,815 | | | $ | 326 | | | 9 | % |
Intersegment sales | | 683 | | | 571 | | 112 | | | 20 | % | | 1,387 | | 1,135 | | | 252 | | | 22 | % |
Total sales | | 2,775 | | | 2,491 | | 284 | | | 11 | % | | 5,528 | | 4,950 | | | 578 | | | 12 | % |
| | | | | | | | | | | | | | | | |
Research, development and engineering expenses | | 116 | | | 99 | | (17) | | | (17) | % | | 225 | | 191 | | | (34) | | | (18) | % |
Equity, royalty and interest income from investees | | 59 | | | 104 | | (45) | | | (43) | % | | 103 | (1) | 217 | | | (114) | | | (53) | % |
| | | | | | | | | | | | | | | | |
Interest income | | 1 | | | 1 | | — | | | — | % | | 5 | | 4 | | | 1 | | | 25 | % |
| | | | | | | | | | | | | | | | |
Russian suspension costs(2) | | 1 | | | — | | (1) | | | NM | | 33 | (3) | — | | | (33) | | | NM |
| | | | | | | | | | | | | | | | |
Segment EBITDA | | 422 | | | 402 | | 20 | | | 5 | % | | 814 | | 756 | | | 58 | | | 8 | % |
| | | | | | | | | | | | | | | | |
| | | | | | Percentage Points | | | | | | Percentage Points |
Segment EBITDA as a percentage of total sales | | 15.2 | % | | 16.1 | % | | | | (0.9) | | | 14.7 | % | | 15.3 | % | | | | (0.6) | |
| | | | | | | | | | | | | | | | |
| | | | | | | | |
"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 Cummins Westport Joint Venture. See NOTE 3, "RUSSIAN OPERATIONS," and NOTE 14, "ACQUISITIONS," to our Condensed Consolidated Financial Statements for additional information. |
(2) See NOTE 3, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information. |
(3) Includes $31 million of Russian suspension costs reflected in the Equity, royalty and interest income from investees line above. |
Sales for our Engine segment by market were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Favorable/ | | Six months ended | | Favorable/ |
| | June 30, | | July 4, | | (Unfavorable) | | June 30, | | July 4, | | (Unfavorable) |
In millions | | 2022 | | 2021 | | Amount | | Percent | | 2022 | | 2021 | | Amount | | Percent |
Heavy-duty truck | | $ | 1,001 | | | $ | 839 | | $ | 162 | | | 19 | % | | $ | 1,909 | | $ | 1,666 | | $ | 243 | | | 15 | % |
Medium-duty truck and bus | | 875 | | | 688 | | 187 | | | 27 | % | | 1,723 | | 1,362 | | 361 | | | 27 | % |
Light-duty automotive | | 456 | | | 484 | | (28) | | | (6) | % | | 954 | | 965 | | (11) | | | (1) | % |
Total on-highway | | 2,332 | | | 2,011 | | 321 | | | 16 | % | | 4,586 | | 3,993 | | 593 | | | 15 | % |
Off-highway | | 443 | | | 480 | | (37) | | | (8) | % | | 942 | | 957 | | (15) | | | (2) | % |
Total sales | | $ | 2,775 | | | $ | 2,491 | | $ | 284 | | | 11 | % | | $ | 5,528 | | $ | 4,950 | | $ | 578 | | | 12 | % |
| | | | | | | | | | | | | | | | |
| | | | | | Percentage Points | | | | | | Percentage Points |
On-highway sales as percentage of total sales | | 84 | % | | 81 | % | | | | 3 | | | 83 | % | | 81 | % | | | | 2 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Unit shipments by engine classification (including unit shipments to Power Systems and off-highway engine units included in their respective classification) were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Favorable/ | | Six months ended | | Favorable/ |
| | June 30, | | July 4, | | (Unfavorable) | | June 30, | | July 4, | | (Unfavorable) |
| | 2022 | | 2021 | | Amount | | Percent | | 2022 | | 2021 | | Amount | | Percent |
Heavy-duty | | 30,900 | | | 29,400 | | | 1,500 | | | 5 | % | | 59,500 | | | 60,100 | | | (600) | | | (1) | % |
Medium-duty | | 68,800 | | | 67,500 | | | 1,300 | | | 2 | % | | 141,400 | | | 140,600 | | | 800 | | | 1 | % |
Light-duty | | 60,400 | | | 68,100 | | | (7,700) | | | (11) | % | | 126,900 | | | 136,600 | | | (9,700) | | | (7) | % |
Total unit shipments | | 160,100 | | | 165,000 | | | (4,900) | | | (3) | % | | 327,800 | | | 337,300 | | | (9,500) | | | (3) | % |
Sales
Engine segment sales for the ninethree months ended October 3, 2021,June 30, 2022, increased $1,835$284 million versus the comparable period in 2020.2021. The following were the primary drivers by market:
•Medium-duty truck and bus sales increased $187 million mainly due to favorable pricing and higher demand (including higher aftermarket sales), especially in North America.
•Heavy-duty truck sales increased $668$162 million principally due to favorable pricing and stronger demand (including higher volumesaftermarket sales) in North America with shipments up 64 percent.and Latin America.
These increases were partially offset by decreased off-highway sales of $37 million primarily due to lower demand in construction markets in China, partially offset by increased demand in Western Europe.
Engine segment sales for the six months ended June 30, 2022, increased $578 million versus the comparable period in 2021. The following were the primary drivers by market:
•Medium-duty truck and bus sales increased $574$361 million mainly due to favorable pricing and higher global medium-duty demand (including higher aftermarket sales), especially in North America.
•Heavy-duty truck sales increased $243 million principally due to favorable pricing and stronger demand (including higher aftermarket sales), especially in North America Brazil and Western Europe, partially offset by lower bus sales, mainly in North America and Western Europe.
•Light-duty truck automotive sales increased $425 million primarily due towith higher pick-up sales in North America with shipments up 53of 5 percent.
Our industry continues to be unfavorably impacted by supply chain constraints leading to shortages across multiple components categories and limiting our collective ability to meet end-user demand. Our customers are also experiencing other supply chain issues slowing production.
Segment EBITDA
Engine segment EBITDA for the three months ended October 3, 2021,June 30, 2022, increased $9$20 million versus the comparable period in 2020,2021, primarily due to higher volumes,favorable pricing, partially offset by higher freightmaterial costs, due to supply chain constraints and increased compensation expenses.
Engine segment EBITDA for the nine months ended October 3, 2021, increased $250 million versus the comparable period in 2020, mainly due to higher volumes and an increase inlower equity, royalty and interest income from investees (largely due to increased earnings at(principally Beijing Foton Cummins Engine Co., Ltd., Tata Cummins Ltd. (excluding the 2020 benefits noted below), and Dongfeng Cummins Engine Co., Ltd.) and Guangxi Cummins Industrial Power Co., Ltd., partially offset by the absence of an $18 million favorable adjustment related to India Tax Law Changes passed in March 2020 and $18 million of technology fee revenue both recorded in the first quarter of 2020 in Tata Cummins Ltd.), partially offset by increased compensation expenses, higher freight costs due to supply chain constraints, increased material costs and higher consulting expenses. See Note 4, "INCOME TAXES," of the Notes to the Consolidated Financial Statements of our 2020 Form 10-K for additional information on India Tax Law Changes.constraints.
Engine segment EBITDA for the six months ended June 30, 2022, increased $58 million versus the comparable period in 2021, mainly due to favorable pricing, partially offset by higher material costs, lower equity, royalty and interest income from investees (principally Beijing Foton Cummins Engine Co., Ltd. and Dongfeng Cummins Engine Co., Ltd.) and costs associated with the suspension of our Russian operations including a $28 million impairment of our joint venture with KAMAZ. See Note 3, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information.
Distribution Segment Results
Financial data for the Distribution segment was as follows:
| | | | Three months ended | | Favorable/ | | Nine months ended | | Favorable/ | | | Three months ended | | Favorable/ | | Six months ended | | Favorable/ |
| | | October 3, | | September 27, | | (Unfavorable) | | October 3, | | September 27, | | (Unfavorable) | | | June 30, | | July 4, | | (Unfavorable) | | June 30, | | July 4, | | (Unfavorable) |
In millions | In millions | | 2021 | | 2020 | | Amount | | Percent | | 2021 | | 2020 | | Amount | | Percent | In millions | | 2022 | | 2021 | | Amount | | Percent | | 2022 | | 2021 | | Amount | | Percent |
External sales | External sales | | $ | 1,952 | | | $ | 1,715 | | | $ | 237 | | | 14 | % | | $ | 5,692 | | | $ | 5,123 | | | $ | 569 | | | 11 | % | External sales | | $ | 2,247 | | $ | 1,913 | | $ | 334 | | | 17 | % | | $ | 4,358 | | $ | 3,740 | | $ | 618 | | | 17 | % |
Intersegment sales | Intersegment sales | | 7 | | | 6 | | | 1 | | | 17 | % | | 22 | | | 17 | | | 5 | | | 29 | % | Intersegment sales | | 6 | | 7 | | (1) | | | (14) | % | | 12 | | 15 | | (3) | | | (20) | % |
Total sales | Total sales | | 1,959 | | | 1,721 | | | 238 | | | 14 | % | | 5,714 | | | 5,140 | | | 574 | | | 11 | % | Total sales | | 2,253 | | 1,920 | | 333 | | | 17 | % | | 4,370 | | 3,755 | | 615 | | | 16 | % |
| Research, development and engineering expenses | Research, development and engineering expenses | | 10 | | | 9 | | | (1) | | | (11) | % | | 35 | | | 20 | | | (15) | | | (75) | % | Research, development and engineering expenses | | 13 | | 12 | | (1) | | | (8) | % | | 26 | | 25 | | (1) | | | (4) | % |
Equity, royalty and interest income from investees | Equity, royalty and interest income from investees | | 15 | | | 13 | | | 2 | | | 15 | % | | 47 | | | 45 | | | 2 | | | 4 | % | Equity, royalty and interest income from investees | | 21 | | 15 | | 6 | | | 40 | % | | 37 | | 32 | | 5 | | | 16 | % |
Interest income | Interest income | | 2 | | | 1 | | | 1 | | | 100 | % | | 5 | | | 3 | | | 2 | | | 67 | % | Interest income | | 3 | | 2 | | 1 | | | 50 | % | | 5 | | 3 | | 2 | | | 67 | % |
| Russian suspension (recoveries) costs(1) | | Russian suspension (recoveries) costs(1) | | (45) | | — | | 45 | | | NM | | 55 | | — | | (55) | | | NM |
Segment EBITDA | Segment EBITDA | | 192 | | | 182 | | | 10 | | | 5 | % | | 553 | | | 500 | | | 53 | | | 11 | % | Segment EBITDA | | 297 | | 201 | | 96 | | | 48 | % | | 407 | | 361 | | 46 | | | 13 | % |
| | | | | | | | Percentage Points | | | | | | Percentage Points | | | | | | | Percentage Points | | | | | | Percentage Points |
Segment EBITDA as a percentage of total sales | Segment EBITDA as a percentage of total sales | | 9.8 | % | | 10.6 | % | | | | (0.8) | | | 9.7 | % | | 9.7 | % | | | | — | | Segment EBITDA as a percentage of total sales | | 13.2 | % | | 10.5 | % | | | | 2.7 | | | 9.3 | % | | 9.6 | % | | | | (0.3) | |
| "NM" - not meaningful information | | "NM" - not meaningful information | |
| (1) See NOTE 3, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information. | | (1) See NOTE 3, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information. |
| |
Sales for our Distribution segment by region were as follows:
| | | | Three months ended | | Favorable/ | | Nine months ended | | Favorable/ | | | Three months ended | | Favorable/ | | Six months ended | | Favorable/ |
| | | October 3, | | September 27, | | (Unfavorable) | | October 3, | | September 27, | | (Unfavorable) | | | June 30, | | July 4, | | (Unfavorable) | | June 30, | | July 4, | | (Unfavorable) |
In millions | In millions | | 2021 | | 2020 | | Amount | | Percent | | 2021 | | 2020 | | Amount | | Percent | In millions | | 2022 | | 2021 | | Amount | | Percent | | 2022 | | 2021 | | Amount | | Percent |
North America | North America | | $ | 1,236 | | | $ | 1,125 | | | $ | 111 | | | 10 | % | | $ | 3,637 | | | $ | 3,412 | | | $ | 225 | | | 7 | % | North America | | $ | 1,494 | | | $ | 1,230 | | | $ | 264 | | | 21 | % | | $ | 2,861 | | | $ | 2,401 | | | $ | 460 | | | 19 | % |
Asia Pacific | Asia Pacific | | 238 | | | 196 | | | 42 | | | 21 | % | | 679 | | | 582 | | | 97 | | | 17 | % | Asia Pacific | | 242 | | | 227 | | | 15 | | | 7 | % | | 488 | | | 441 | | | 47 | | | 11 | % |
Europe | Europe | | 144 | | | 153 | | | (9) | | | (6) | % | | 468 | | | 425 | | | 43 | | | 10 | % | Europe | | 179 | | | 161 | | | 18 | | | 11 | % | | 328 | | | 324 | | | 4 | | | 1 | % |
China | | China | | 99 | | | 77 | | | 22 | | | 29 | % | | 182 | | | 164 | | | 18 | | | 11 | % |
Russia | Russia | | 87 | | | 42 | | | 45 | | | NM | | 210 | | | 128 | | | 82 | | | 64 | % | Russia | | 75 | | | 66 | | | 9 | | | 14 | % | | 211 | | | 123 | | | 88 | | | 72 | % |
China | | 81 | | | 77 | | | 4 | | | 5 | % | | 245 | | | 246 | | | (1) | | | — | % | |
Latin America | | Latin America | | 56 | | | 48 | | | 8 | | | 17 | % | | 97 | | | 88 | | | 9 | | | 10 | % |
Africa and Middle East | Africa and Middle East | | 74 | | | 49 | | | 25 | | | 51 | % | | 197 | | | 138 | | | 59 | | | 43 | % | Africa and Middle East | | 55 | | | 69 | | | (14) | | | (20) | % | | 101 | | | 123 | | | (22) | | | (18) | % |
India | India | | 51 | | | 42 | | | 9 | | | 21 | % | | 142 | | | 101 | | | 41 | | | 41 | % | India | | 53 | | | 42 | | | 11 | | | 26 | % | | 102 | | | 91 | | | 11 | | | 12 | % |
Latin America | | 48 | | | 37 | | | 11 | | | 30 | % | | 136 | | | 108 | | | 28 | | | 26 | % | |
Total sales | Total sales | | $ | 1,959 | | | $ | 1,721 | | | $ | 238 | | | 14 | % | | $ | 5,714 | | | $ | 5,140 | | | $ | 574 | | | 11 | % | Total sales | | $ | 2,253 | | | $ | 1,920 | | | $ | 333 | | | 17 | % | | $ | 4,370 | | | $ | 3,755 | | | $ | 615 | | | 16 | % |
| "NM" - not meaningful information | | |
| |
Sales for our Distribution segment by product line were as follows:
| | | | Three months ended | | Favorable/ | | Nine months ended | | Favorable/ | | | Three months ended | | Favorable/ | | Six months ended | | Favorable/ |
| | | October 3, | | September 27, | | (Unfavorable) | | October 3, | | September 27, | | (Unfavorable) | | | June 30, | | July 4, | | (Unfavorable) | | June 30, | | July 4, | | (Unfavorable) |
In millions | In millions | | 2021 | | 2020 | | Amount | | Percent | | 2021 | | 2020 | | Amount | | Percent | In millions | | 2022 | | 2021 | | Amount | | Percent | | 2022 | | 2021 | | Amount | | Percent |
Parts | Parts | | $ | 800 | | | $ | 722 | | | $ | 78 | | | 11 | % | | $ | 2,322 | | | $ | 2,163 | | | $ | 159 | | | 7 | % | Parts | | $ | 990 | | | $ | 765 | | | $ | 225 | | | 29 | % | | $ | 1,914 | | | $ | 1,522 | | | $ | 392 | | | 26 | % |
Power generation | Power generation | | 438 | | | 416 | | | 22 | | | 5 | % | | 1,310 | | | 1,169 | | | 141 | | | 12 | % | Power generation | | 441 | | | 454 | | | (13) | | | (3) | % | | 842 | | | 872 | | | (30) | | | (3) | % |
Engines | Engines | | 377 | | | 279 | | | 98 | | | 35 | % | | 1,062 | | | 879 | | | 183 | | | 21 | % | Engines | | 429 | | | 351 | | | 78 | | | 22 | % | | 870 | | | 685 | | | 185 | | | 27 | % |
Service | Service | | 344 | | | 304 | | | 40 | | | 13 | % | | 1,020 | | | 929 | | | 91 | | | 10 | % | Service | | 393 | | | 350 | | | 43 | | | 12 | % | | 744 | | | 676 | | | 68 | | | 10 | % |
Total sales | Total sales | | $ | 1,959 | | | $ | 1,721 | | | $ | 238 | | | 14 | % | | $ | 5,714 | | | $ | 5,140 | | | $ | 574 | | | 11 | % | Total sales | | $ | 2,253 | | | $ | 1,920 | | | $ | 333 | | | 17 | % | | $ | 4,370 | | | $ | 3,755 | | | $ | 615 | | | 16 | % |
|
Sales
Distribution segment sales for the three months ended October 3, 2021,June 30, 2022, increased $238$333 million versus the comparable period in 2020.2021. The following were the primary drivers by region:
•North American sales increased $111$264 million, representing 4779 percent of the total change in Distribution segment sales, mainly due to higher demand in most product lines.for parts and vocational engines.
•Improved demand in Russia and Asia Pacific.
•FavorableThese increases were partially offset by unfavorable foreign currency fluctuations, primarily in the Euro, Australian dollar, Canadian dollar and Chinese renminbi.Indian rupee.
Distribution segment sales for the ninesix months ended October 3, 2021,June 30, 2022, increased $574$615 million versus the comparable period in 2020.2021. The following were the primary drivers by region:
•North American sales increased $225$460 million, representing 3975 percent of the total change in Distribution segment sales, largely due to higher demand in all product lines.for parts and vocational engines.
•ImprovedRussian sales increased $88 million as a result of increased demand for engines and parts following our announcement to indefinitely suspend our operations in Asia Pacific, Russia and Africa and Middle East.Russia.
•FavorableThese increases were partially offset by unfavorable foreign currency fluctuations, mainly in the Euro, Australian dollar Canadian dollar and Euro.Japanese yen.
Segment EBITDA
Distribution segment EBITDA for the three months ended October 3, 2021,June 30, 2022, increased $10$96 million versus the comparable period in 2020,2021, primarily due to higher volumes and recoveries associated with the suspension of our Russian operations, partially offset by unfavorable foreign currency fluctuations (principally in emerging market currencies and South African rand). See NOTE 3, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information.
Distribution segment EBITDA for the six months ended June 30, 2022, increased compensation expenses$46 million versus the comparable period in 2021, mainly due to higher volumes and higherfavorable pricing, partially offset by costs associated with the suspension of our Russian operations, unfavorable foreign currency fluctuations (principally in the emerging market currencies and Australian dollar), increased freight costs due to supply chain constraints.
Distribution segment EBITDAconstraints and the absence of an $18 million gain on sale of land recorded in the second quarter of 2021. See NOTE 3, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for the nine months ended October 3, 2021, increased $53 million versus the comparable period in 2020, primarily due to higher volumes, partially offset by higher compensation expenses.additional information.
Components Segment Results
Financial data for the Components segment was as follows:
| | | | Three months ended | | Favorable/ | | Nine months ended | | Favorable/ | | | Three months ended | | Favorable/ | | Six months ended | | Favorable/ |
| | | October 3, | | September 27, | | (Unfavorable) | | October 3, | | September 27, | | (Unfavorable) | | | June 30, | | July 4, | | (Unfavorable) | | June 30, | | July 4, | | (Unfavorable) |
In millions | In millions | | 2021 | | 2020 | | Amount | | Percent | | 2021 | | 2020 | | Amount | | Percent | In millions | | 2022 | | 2021 | | Amount | | Percent | | 2022 | | 2021 | | Amount | | Percent |
External sales | External sales | | $ | 1,347 | | | $ | 1,201 | | | $ | 146 | | | 12 | % | | $ | 4,627 | | | $ | 3,192 | | | $ | 1,435 | | | 45 | % | External sales | | $ | 1,477 | | $ | 1,556 | | $ | (79) | | | (5) | % | | $ | 2,994 | | $ | 3,280 | | $ | (286) | | | (9) | % |
Intersegment sales | Intersegment sales | | 446 | | | 340 | | | 106 | | | 31 | % | | 1,312 | | | 1,001 | | | 311 | | | 31 | % | Intersegment sales | | 473 | | 438 | | 35 | | | 8 | % | | 944 | | 866 | | 78 | | | 9 | % |
Total sales | Total sales | | 1,793 | | | 1,541 | | | 252 | | | 16 | % | | 5,939 | | | 4,193 | | | 1,746 | | | 42 | % | Total sales | | 1,950 | | 1,994 | | (44) | | | (2) | % | | 3,938 | | 4,146 | | (208) | | | (5) | % |
| Research, development and engineering expenses | Research, development and engineering expenses | | 78 | | | 64 | | | (14) | | | (22) | % | | 232 | | | 187 | | | (45) | | | (24) | % | Research, development and engineering expenses | | 73 | | 79 | | 6 | | | 8 | % | | 149 | | 154 | | 5 | | | 3 | % |
Equity, royalty and interest income from investees | Equity, royalty and interest income from investees | | 10 | | | 13 | | | (3) | | | (23) | % | | 41 | | | 46 | | | (5) | | | (11) | % | Equity, royalty and interest income from investees | | 9 | | 12 | | (3) | | | (25) | % | | 37 | | 31 | | 6 | | | 19 | % |
Interest income | Interest income | | 1 | | | 1 | | | — | | | — | % | | 3 | | | 3 | | | — | | | — | % | Interest income | | 2 | | 1 | | 1 | | | 100 | % | | 3 | | 2 | | 1 | | | 50 | % |
| Russian suspension (recoveries) costs(1) | | Russian suspension (recoveries) costs(1) | | (2) | | — | | 2 | | | NM | | 4 | | — | | (4) | | | NM |
Segment EBITDA | Segment EBITDA | | 253 | | | 261 | | | (8) | | | (3) | % | | 975 | | | 681 | | | 294 | | | 43 | % | Segment EBITDA | | 352 | | 301 | | 51 | | | 17 | % | | 672 | | 722 | | (50) | | | (7) | % |
| | | | | | | | Percentage Points | | | | | | Percentage Points | | | | | | | Percentage Points | | | | | | Percentage Points |
Segment EBITDA as a percentage of total sales | Segment EBITDA as a percentage of total sales | | 14.1 | % | | 16.9 | % | | | | (2.8) | | | 16.4 | % | | 16.2 | % | | | | 0.2 | | Segment EBITDA as a percentage of total sales | | 18.1 | % | | 15.1 | % | | | | 3.0 | | | 17.1 | % | | 17.4 | % | | | | (0.3) | |
| "NM" - not meaningful information | | "NM" - not meaningful information | |
| (1) See NOTE 3, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information. | | (1) See NOTE 3, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information. |
| |
Sales for our Components segment by business were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Favorable/ | | Nine months ended | | Favorable/ |
| | October 3, | | September 27, | | (Unfavorable) | | October 3, | | September 27, | | (Unfavorable) |
In millions | | 2021 | | 2020 | | Amount | | Percent | | 2021 | | 2020 | | Amount | | Percent |
Emission solutions | | $ | 793 | | | $ | 665 | | | $ | 128 | | | 19 | % | | $ | 2,710 | | | $ | 1,801 | | | $ | 909 | | | 50 | % |
Filtration | | 354 | | | 314 | | | 40 | | | 13 | % | | 1,100 | | | 881 | | | 219 | | | 25 | % |
Turbo technologies | | 325 | | | 281 | | | 44 | | | 16 | % | | 1,043 | | | 767 | | | 276 | | | 36 | % |
Electronics and fuel systems | | 210 | | | 187 | | | 23 | | | 12 | % | | 714 | | | 525 | | | 189 | | | 36 | % |
Automated transmissions | | 111 | | | 94 | | | 17 | | | 18 | % | | 372 | | | 219 | | | 153 | | | 70 | % |
Total sales | | $ | 1,793 | | | $ | 1,541 | | | $ | 252 | | | 16 | % | | $ | 5,939 | | | $ | 4,193 | | | $ | 1,746 | | | 42 | % |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Favorable/ | | Six months ended | | Favorable/ |
| | June 30, | | July 4, | | (Unfavorable) | | June 30, | | July 4, | | (Unfavorable) |
In millions | | 2022 | | 2021 | | Amount | | Percent | | 2022 | | 2021 | | Amount | | Percent |
Emission solutions | | $ | 863 | | | $ | 882 | | | $ | (19) | | | (2) | % | | $ | 1,773 | | | $ | 1,917 | | | $ | (144) | | | (8) | % |
Filtration | | 391 | | | 374 | | | 17 | | | 5 | % | | 773 | | | 746 | | | 27 | | | 4 | % |
Turbo technologies | | 355 | | (1) | 351 | | | 4 | | | 1 | % | | 701 | | (1) | 718 | | | (17) | | | (2) | % |
Electronics and fuel systems | | 198 | | | 241 | | | (43) | | | (18) | % | | 414 | | | 504 | | | (90) | | | (18) | % |
Automated transmissions | | 143 | | | 146 | | | (3) | | | (2) | % | | 277 | | | 261 | | | 16 | | | 6 | % |
Total sales | | $ | 1,950 | | | $ | 1,994 | | | $ | (44) | | | (2) | % | | $ | 3,938 | | | $ | 4,146 | | | $ | (208) | | | (5) | % |
| | | | | | | | | | | | | | | | |
(1) The three and six months ended June 30, 2022, included revenues of $37 million related to the newly acquired Jacobs Vehicle Systems business. See NOTE 14, "ACQUISITIONS," to our Condensed Consolidated Financial Statements for additional information. |
| | | | | | | | | | | | | | | | |
Sales
Components segment sales for the three months ended October 3, 2021, increased $252June 30, 2022, decreased $44 million versus the comparable period in 2020.2021. The following were the primary drivers by business:
•Electronics and fuel systems sales decreased by $43 million principally due to weaker demand in China.
•Unfavorable foreign currency fluctuations primarily in the Euro, British pound and Indian rupee.
•Emission solutions sales decreased $19 million primarily due to lower demand in China, partially offset by stronger demand in North America and India.
These decreases were partially offset by increased sales of $17 million in the filtration business mainly due to stronger demand in North America and Latin America, partially offset by lower demand in China.
Components segment sales for the six months ended June 30, 2022, decreased $208 million versus the comparable period in 2021. The following were the primary drivers by business:
•Emission solutions sales increased $128decreased $144 million primarily due to lower demand in China, partially offset by stronger demand in North America, India, Western EuropeAmerica.
•Electronics and Asia Pacific,fuel systems sales decreased $90 million mainly due to weaker demand in China, partially offset by lower demand in China.
•Turbo technologies sales increased $44 million principally due to higher demand in North America, Western EuropeAmerica.
•Unfavorable foreign currency fluctuations, primarily in the Euro and India,Indian rupee.
These decreases were partially offset by lower demandincreased sales of $27 million in China.
•Filtration sales increased $40 millionthe filtration business mainly due to stronger demand in North America and Latin America, Europe and Asia Pacific, partially offset by weakerlower demand in China.
•Favorable foreign currency fluctuations, primarily in the Chinese renminbi and British pound.
Our industry continues to be unfavorably impacted by supply chain constraints leading to shortages across multiple components categories and limiting our collective ability to meet end-user demand. Our customers are also experiencing other supply chain issues slowing production.
Components segment sales for the nine months ended October 3, 2021, increased $1,746 million versus the comparable period in 2020. The following were the primary drivers by business:
•Emission solutions sales increased $909 million principally due to stronger demand in North America, India and China.
•Turbo technologies sales increased $276 million mainly due to higher demand in North America and Western Europe.
•Filtration sales increased $219 million primarily due to stronger market demand in North America, Europe, Latin America, China and Asia Pacific.
•Favorable foreign currency fluctuations principally in the Chinese renminbi and Euro.
Our industry continues to be unfavorably impacted by supply chain constraints leading to shortages across multiple components categories and limiting our collective ability to meet end-user demand. Our customers are also experiencing other supply chain issues slowing production.
Segment EBITDA
Components segment EBITDA for the three months ended October 3, 2021, decreased $8June 30, 2022, increased $51 million versus the comparable period in 2020,2021, mainly due to higher compensation expenses, increased materialfavorable pricing and lower product coverage costs, higher freight costs due to supply chain constraints and increased spending on prototypes, partially offset by higher volumes.increased material costs.
Components segment EBITDA for the ninesix months ended October 3, 2021, increased $294June 30, 2022, decreased $50 million versus the comparable period in 2020,2021, primarily due to higherlower volumes and favorable mix,increased material costs, partially offset by higher compensation expenses, increased material costs, higher freight costs due to supply chain constraints and lower equity, royalty and interest income in investees (mainly due to the absencefavorable pricing.
Power Systems Segment Results
Financial data for the Power Systems segment was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Favorable/ | | Nine months ended | | Favorable/ |
| | October 3, | | September 27, | | (Unfavorable) | | October 3, | | September 27, | | (Unfavorable) |
In millions | | 2021 | | 2020 | | Amount | | Percent | | 2021 | | 2020 | | Amount | | Percent |
External sales | | $ | 688 | | | $ | 567 | | | $ | 121 | | | 21 | % | | $ | 1,999 | | | $ | 1,495 | | | $ | 504 | | | 34 | % |
Intersegment sales | | 476 | | | 414 | | | 62 | | | 15 | % | | 1,330 | | | 1,147 | | | 183 | | | 16 | % |
Total sales | | 1,164 | | | 981 | | | 183 | | | 19 | % | | 3,329 | | | 2,642 | | | 687 | | | 26 | % |
| | | | | | | | | | | | | | | | |
Research, development and engineering expenses | | 55 | | | 53 | | | (2) | | | (4) | % | | 172 | | | 148 | | | (24) | | | (16) | % |
Equity, royalty and interest income from investees | | 11 | | | — | | | 11 | | | NM | | 32 | | | 18 | | | 14 | | | 78 | % |
Interest income | | 1 | | | 1 | | | — | | | — | % | | 3 | | | 3 | | | — | | | — | % |
Segment EBITDA | | 134 | | | 101 | | | 33 | | | 33 | % | | 399 | | | 269 | | | 130 | | | 48 | % |
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| | | | | | Percentage Points | | | | | | Percentage Points |
Segment EBITDA as a percentage of total sales | | 11.5 | % | | 10.3 | % | | | | 1.2 | | | 12.0 | % | | 10.2 | % | | | | 1.8 | |
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"NM" - not meaningful information | | | | | | | | | | | | | | | | |
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| | Three months ended | | Favorable/ | | Six months ended | | Favorable/ |
| | June 30, | | July 4, | | (Unfavorable) | | June 30, | | July 4, | | (Unfavorable) |
In millions | | 2022 | | 2021 | | Amount | | Percent | | 2022 | | 2021 | | Amount | | Percent |
External sales | | $ | 734 | | $ | 699 | | $ | 35 | | | 5 | % | | $ | 1,417 | | $ | 1,311 | | $ | 106 | | | 8 | % |
Intersegment sales | | 469 | | 444 | | 25 | | | 6 | % | | 946 | | 854 | | 92 | | | 11 | % |
Total sales | | 1,203 | | 1,143 | | 60 | | | 5 | % | | 2,363 | | 2,165 | | 198 | | | 9 | % |
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Research, development and engineering expenses | | 58 | | 60 | | 2 | | | 3 | % | | 122 | | 117 | | (5) | | | (4) | % |
Equity, royalty and interest income from investees | | 10 | | 9 | | 1 | | | 11 | % | | 21 | | 21 | | — | | | — | % |
Interest income | | 1 | | 1 | | — | | | — | % | | 2 | | 2 | | — | | | — | % |
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Russian suspension (recoveries) costs(1) | | (1) | | — | | 1 | | | NM | | 19 | | — | | (19) | | | NM |
Segment EBITDA | | 128 | | 139 | | (11) | | | (8) | % | | 218 | | 265 | | (47) | | | (18) | % |
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| | | | | | Percentage Points | | | | | | Percentage Points |
Segment EBITDA as a percentage of total sales | | 10.6 | % | | 12.2 | % | | | | (1.6) | | | 9.2 | % | | 12.2 | % | | | | (3.0) | |
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"NM" - not meaningful information | | | | | | | | | | | | | | | | |
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(1) See NOTE 3, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information. |
Sales for our Power Systems segment by product line were as follows:
| | | | Three months ended | | Favorable/ | | Nine months ended | | Favorable/ | | | Three months ended | | Favorable/ | | Six months ended | | Favorable/ |
| | | October 3, | | September 27, | | (Unfavorable) | | October 3, | | September 27, | | (Unfavorable) | | | June 30, | | July 4, | | (Unfavorable) | | June 30, | | July 4, | | (Unfavorable) |
In millions | In millions | | 2021 | | 2020 | | Amount | | Percent | | 2021 | | 2020 | | Amount | | Percent | In millions | | 2022 | | 2021 | | Amount | | Percent | | 2022 | | 2021 | | Amount | | Percent |
Power generation | Power generation | | $ | 664 | | | $ | 601 | | | $ | 63 | | | 10 | % | | $ | 1,930 | | | $ | 1,544 | | | $ | 386 | | | 25 | % | Power generation | | $ | 657 | | | $ | 655 | | | $ | 2 | | | — | % | | $ | 1,321 | | | $ | 1,266 | | | $ | 55 | | | 4 | % |
Industrial | Industrial | | 412 | | | 309 | | | 103 | | | 33 | % | | 1,135 | | | 896 | | | 239 | | | 27 | % | Industrial | | 428 | | | 399 | | | 29 | | | 7 | % | | 821 | | | 723 | | | 98 | | | 14 | % |
Generator technologies | Generator technologies | | 88 | | | 71 | | | 17 | | | 24 | % | | 264 | | | 202 | | | 62 | | | 31 | % | Generator technologies | | 118 | | | 89 | | | 29 | | | 33 | % | | 221 | | | 176 | | | 45 | | | 26 | % |
Total sales | Total sales | | $ | 1,164 | | | $ | 981 | | | $ | 183 | | | 19 | % | | $ | 3,329 | | | $ | 2,642 | | | $ | 687 | | | 26 | % | Total sales | | $ | 1,203 | | | $ | 1,143 | | | $ | 60 | | | 5 | % | | $ | 2,363 | | | $ | 2,165 | | | $ | 198 | | | 9 | % |
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Sales
Power Systems segment sales for the three months ended October 3, 2021,June 30, 2022, increased $183$60 million versus the comparable period in 2020.2021. The following were the primary drivers by product line:
•Industrial sales increased $103$29 million due to stronger demand (including higher aftermarket sales) in global mining markets and oil and gas markets in China.North America and India.
•Power generationGenerator technologies sales increased $63$29 million due to higher demand in IndiaEurope and China,India.
These increases were partially offset by weaker demandunfavorable foreign currency fluctuations, primarily in Europethe Euro, British pound and Russia.Indian rupee.
Power Systems segment sales for the ninesix months ended October 3, 2021,June 30, 2022, increased $687$198 million versus the comparable period in 2020.2021. The following were the primary drivers by product line:
•Industrial sales increased $98 million due to stronger demand (including higher aftermarket sales) in oil and gas markets in North America and China and global mining markets.
•Power generation sales increased $386$55 million due to higher demand in China and India, partially offset by weaker demand in North America, India and China.America.
•IndustrialGenerator technologies sales increased $239$45 million due to higher demand in global mining markets.Europe and India.
•FavorableThese increases were partially offset by unfavorable foreign currency fluctuations, primarily in the Chinese renminbiEuro, British pound and British pound.Indian rupee.
Segment EBITDA
Power Systems segment EBITDA for the three months ended October 3, 2021, increased $33June 30, 2022, decreased $11 million versus the comparable period in 2020,2021, mainly due to higher volumesmaterial costs, increased freight costs due to supply chain constraints and the absence of $10 million in impairment charges for a joint venture incurred in the third quarter of 2020,higher product coverage costs, partially offset by increased material costs, higher compensation expenses, increased consulting expenses and unfavorable mix.favorable pricing.
Power Systems segment EBITDA for the ninesix months ended October 3, 2021, increased $130June 30, 2022, decreased $47 million versus the comparable period in 2020,2021, primarily due to higher volumesmaterial costs, increased freight costs due to supply chain constraints and costs associated with the absencesuspension of $13 million in impairment charges for a joint venture,our Russian operations, partially offset by higher compensation expenses, unfavorable mix and increased material costs.favorable pricing. See NOTE 3, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information.
New Power Segment Results
The New Power segment designs, manufactures, sells and supports hydrogen production solutions as well as electrified power systems ranging from fully electric to hybrid along with innovative components and subsystems, including battery and fuel cell technologies. The New Power segment is currently in the development phase with a primary focus on research and development activities for our power systems, components and subsystems. Financial data for the New Power segment was as follows:
| | | | | Three months ended | | Favorable/ | | Nine months ended | | Favorable/ | | | Three months ended | | Favorable/ | | Six months ended | | Favorable/ |
| | | October 3, | | September 27, | | (Unfavorable) | | October 3, | | September 27, | | (Unfavorable) | | | June 30, | | July 4, | | (Unfavorable) | | June 30, | | July 4, | | (Unfavorable) |
In millions | In millions | | 2021 | | 2020 | | Amount | | Percent | | 2021 | | 2020 | | Amount | | Percent | In millions | | 2022 | | 2021 | | Amount | | Percent | | 2022 | | 2021 | | Amount | | Percent |
External sales | External sales | | $ | 20 | | | $ | 18 | | | $ | 2 | | | 11 | % | | $ | 77 | | | $ | 38 | | | $ | 39 | | | NM | External sales | | $ | 36 | | $ | 23 | | $ | 13 | | | 57 | % | | $ | 61 | | $ | 57 | | $ | 4 | | | 7 | % |
Intersegment sales | Intersegment sales | | 3 | | | — | | | 3 | | | NM | | 5 | | | — | | | 5 | | | NM | Intersegment sales | | 6 | | 1 | | 5 | | | NM | | 12 | | 2 | | 10 | | | NM |
Total sales | Total sales | | 23 | | | 18 | | | 5 | | | 28 | % | | 82 | | | 38 | | | 44 | | | NM | Total sales | | 42 | | 24 | | 18 | | | 75 | % | | 73 | | 59 | | 14 | | | 24 | % |
| Research, development and engineering expenses | Research, development and engineering expenses | | 26 | | | 26 | | | — | | | — | % | | 75 | | | 79 | | | 4 | | | 5 | % | Research, development and engineering expenses | | 39 | | 26 | | (13) | | | (50) | % | | 75 | | 49 | | (26) | | | (53) | % |
Equity, royalty and interest (loss) from investees | | (3) | | | (2) | | | (1) | | | 50 | % | | (1) | | | (3) | | | 2 | | | 67 | % | |
Equity, royalty and interest (loss) income from investees | | Equity, royalty and interest (loss) income from investees | | (4) | | (3) | | (1) | | | (33) | % | | (7) | | 2 | | (9) | | | NM |
| Segment EBITDA | Segment EBITDA | | (58) | | | (40) | | | (18) | | | (45) | % | | (169) | | | (121) | | | (48) | | | (40) | % | Segment EBITDA | | (80) | | (60) | | (20) | | | (33) | % | | (147) | | (111) | | (36) | | | (32) | % |
| | | | "NM" - not meaningful information | "NM" - not meaningful information | | "NM" - not meaningful information | |
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OUTLOOK
COVID-19 ImpactSupply Chain Disruptions
The acceleration of the COVID-19 vaccine distribution around the world is helping curb the spread of the virus and will hopefully allow the majority of our manufacturing facilities to remain open to meet increasing customer demand. While the vaccination effort continues to progress globally, many markets are still dealing with rising cases, new COVID variants and slower vaccination rollout. We continue to take necessary precautions at all our facilities both in the U.S.experience supply chain disruptions and abroadrelated financial impacts reflected as increased cost of sales. Our industry continues to mitigate the spread of the disease and prioritize the health and safety of our employees. While we are optimistic that continued vaccination distribution globally will minimize the impacts of the virus, there is still a risk of increased cases or new virus variants resulting in lower customer demand, additional facility shutdowns orbe unfavorably impacted by supply chain constraints inleading to shortages across multiple components categories and limiting our collective ability to meet end-user demand. Our customers are also experiencing supply chain issues. Should the future.
In March 2021,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 continues to monitor and evaluate all of these factors and the related impacts on our business and operations, and we gained approval as a COVID-19 vaccine administrator at several U.S. sites and began offeringare diligently working to minimize the vaccinesupply chain impacts to our employeesbusiness and their families at certain facilities in the U.S. During the second quarter of 2021, we received approval and began providing vaccines to our employees in other international locations as allowed. We continue to collaborate with health officials around the world to provide employees with access to COVID-19 vaccines. That work differs geographically due to the variability in vaccine accessibility and distribution. Our global network of medical professionals is always focused on efforts to ensure the safety of all Cummins employees, their families and our communities.
On September 9, 2021, President Biden issued an executive order for U.S. government contractors. We are taking steps to comply with the executive order for all U.S.-based employees, contractors and subcontractors that work on or in support of contracts with the U.S. government. In addition, on September 9, 2021, President Biden announced that he directed the Occupational Safety and Health Administration (OSHA) to develop an Emergency Temporary Standard (ETS) mandating either the full vaccination or weekly testing of employees for employers with 100 or more employees. Employees who are not subject to the executive order and who are not fully vaccinated may be subject to the ETS that will require them to get a COVID-19 test at least once a week. OSHA has not yet issued the ETS nor provided any additional information on its contents or requirements. See Item 1A.Risk Factors in this Form 10-Q, for a discussion of the risks associated with the potential adverse effects on our workforce of the U.S. Government vaccine mandate. Additionally, see the section titled Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020 for a discussion of risks associated with the COVID-19 pandemic.customers.Business Outlook
Our outlook reflects the following positive trends and challenges to our business that could impact our revenue and earnings potential for the remainder of 2021.2022.
Positive Trends
•We expect demand for pick-up trucks in North America to remain strong.
•We estimateexpect North American medium-duty and heavy-duty truck demand will continue to improve from 2020 levels.remain strong.
•We believe market demand for trucks in India will improve from 2020 levels.continue to improve.
•We anticipate demand in our aftermarket business will continue to improve,be robust, driven primarily by increased truck utilization in North America.America and improved demand in our Power Systems business.
•Our liquidity of $6.3$5.8 billion in cash, marketable securities and available credit facilities strengthens ourputs us in a strong position to deal with any uncertainties that may arise in the remainder of 2021.2022.
Challenges
•Supply constraints driven by strong demand in multiple end markets and regions may lead to increased costs, including higher premium freight.freight and conversion costs.
•Continued increases in material and commodity costs, as well as other inflationary pressures, could negatively impact earnings.
•Our industry continuesindustry's sales continue to be unfavorably impacted by supply chain constraints leading to shortages across multiple components categories and limiting our collective ability to meet end-user demand. Our customers are also experiencing other supply chain issues slowing production.limiting full production capabilities.
•Resurgence of COVID-19 in China led to lockdowns in several cities that negatively impacted the economy and our end markets. Any continued lockdowns will also contribute to further disruptions in the global supply chain, negatively impacting both our revenues and profitability.
•We expect market demand in truck and construction markets in China to decline from record levels in 2020.2021 full year levels.
•The indefinite suspension of our operations in Russia is expected to impact our revenue and profitability. The 2021 sales through our wholly-owned distributor in Russia and direct sales into Russia were 2.7 percent of net sales.
44•We expect to incur incremental expenses as a result of the completion of the Meritor, Inc. acquisition and its integration into our business.
Table•The completion of Contentsthe Meritor, Inc. acquisition will impact our liquidity and result in incremental interest expense for debt utilized in funding the transaction.Separation of Filtration Business
On August 3, 2021, we announced our exploration of strategic alternatives for our filtration business. Potential strategic alternatives to be explored include the•Planned separation of our filtration business into a stand-alone company. The executioncompany is expected to result in incremental expenses.
LIQUIDITY AND CAPITAL RESOURCES
Key Working Capital and Balance Sheet Data
We fund our working capital with cash from operations and short-term borrowings, including commercial paper, when necessary. Various assets and liabilities, including short-term debt, can fluctuate significantly from month to month depending on short-term liquidity needs. As a result, working capital is a prime focus of management's attention. Working capital and balance sheet measures are provided in the following table:
| Dollars in millions | Dollars in millions | | October 3, 2021 | | December 31, 2020 | Dollars in millions | | June 30, 2022 | | December 31, 2021 |
Working capital (1) | Working capital (1) | | $ | 5,459 | | | $ | 5,562 | | Working capital (1) | | $ | 5,091 | | | $ | 5,225 | |
Current ratio | Current ratio | | 1.80 | | | 1.88 | | Current ratio | | 1.66 | | | 1.74 | |
Accounts and notes receivable, net | Accounts and notes receivable, net | | $ | 4,152 | | | $ | 3,820 | | Accounts and notes receivable, net | | $ | 4,156 | | | $ | 3,990 | |
Days' sales in receivables | Days' sales in receivables | | 60 | | | 69 | | Days' sales in receivables | | 57 | | | 59 | |
Inventories | Inventories | | $ | 4,322 | | | $ | 3,425 | | Inventories | | $ | 4,765 | | | $ | 4,355 | |
Inventory turnover | Inventory turnover | | 4.6 | | | 4.2 | | Inventory turnover | | 4.2 | | | 4.6 | |
Accounts payable (principally trade) | Accounts payable (principally trade) | | $ | 3,210 | | | $ | 2,820 | | Accounts payable (principally trade) | | $ | 3,405 | | | $ | 3,021 | |
Days' payable outstanding | Days' payable outstanding | | 58 | | | 68 | | Days' payable outstanding | | 59 | | | 57 | |
Total debt | Total debt | | $ | 3,942 | | | $ | 4,164 | | Total debt | | $ | 4,425 | | | $ | 4,159 | |
Total debt as a percent of total capital | Total debt as a percent of total capital | | 30.5 | % | | 31.7 | % | Total debt as a percent of total capital | | 31.4 | % | | 30.7 | % |
| (1) Working capital includes cash and cash equivalents. | (1) Working capital includes cash and cash equivalents. | | (1) Working capital includes cash and cash equivalents. | |
Cash Flows
Cash and cash equivalents were impacted as follows:
| | | | Nine months ended | | | | | Six months ended | | |
In millions | In millions | | October 3, 2021 | | September 27, 2020 | | Change | In millions | | June 30, 2022 | | July 4, 2021 | | Change |
Net cash provided by operating activities | Net cash provided by operating activities | | $ | 1,524 | | | $ | 1,580 | | | $ | (56) | | Net cash provided by operating activities | | $ | 763 | | | $ | 955 | | | $ | (192) | |
Net cash used in investing activities | Net cash used in investing activities | | (278) | | | (337) | | | 59 | | Net cash used in investing activities | | (576) | | | (146) | | | (430) | |
Net cash (used in) provided by financing activities | | (2,079) | | | 564 | | | (2,643) | | |
Net cash used in financing activities | | Net cash used in financing activities | | (391) | | | (1,722) | | | 1,331 | |
Effect of exchange rate changes on cash and cash equivalents | Effect of exchange rate changes on cash and cash equivalents | | 20 | | | 31 | | | (11) | | Effect of exchange rate changes on cash and cash equivalents | | 74 | | | (7) | | | 81 | |
Net (decrease) increase in cash and cash equivalents | | $ | (813) | | | $ | 1,838 | | | $ | (2,651) | | |
Net decrease in cash and cash equivalents | | Net decrease in cash and cash equivalents | | $ | (130) | | | $ | (920) | | | $ | 790 | |
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Net cash provided by operating activities decreased $56$192 million for the ninesix months ended October 3, 2021,June 30, 2022, versus the comparable period in 2020,2021, primarily due to higher working capital requirements of $409 million and changes in other liabilities of $267 million, partially offset by higher consolidated net income of $463 million, lower restructuring payments of $99 million and higher mark-to-market losses on corporate owned life insurances of $61$239 million. During the first ninesix months of 2021,2022, the higher working capital requirements resulted in a cash outflow of $466$670 million compared to a cash outflow of $57$431 million in the comparable period in 2020,2021, mainly due to higher variable compensation payouts in accrued expenses, partially offset by favorable changes in inventories and accounts and notes receivable, partially offset by higher accrued expenses and accounts payable.receivable.
Net cash used in investing activities decreased $59increased $430 million for the ninesix months ended October 3, 2021,June 30, 2022, versus the comparable period in 2020,2021, primarily due to the acquisition of Jacobs Vehicle Systems and Cummins Westport Joint Venture, net of cash acquired, of $245 million, higher investments in and net liquidationsadvances to equity investees of marketable securities of $47$63 million, unfavorable changes in cash flows from derivatives not designated as hedges of $34 million, lower investments in and advances to equity investees of $33$44 million and proceeds from sale of land of $20 million, partially offset by higher capital expendituresspending of $94$39 million.
Net cash used in financing activities increased $2,643decreased $1,331 million for the ninesix months ended October 3, 2021,June 30, 2022, versus the comparable period in 2020,2021, primarily due to lower proceeds from borrowings of $1,964 million, mainly resulting from our $2 billion bond issuance in 2020, and higher repurchases of common stock of $678$743 million partially offset by lowerand higher net paymentsborrowings of commercial paper of $221$515 million.
The effect of exchange rate changes on cash and cash equivalents for the ninesix months ended October 3, 2021,June 30, 2022, versus the comparable period in 2020, decreased $112021, increased $81 million primarily due to unfavorablefavorable fluctuations in the British pound of $11$124 million, partially offset by unfavorable fluctuations in the Chinese renminbi of $38 million.
Sources of Liquidity
We generate significant ongoing cash flow. Cash provided by operations is typically our principal source of liquidity with $1,524$763 million generated in the ninesix months ended October 3, 2021.June 30, 2022. Our sources of liquidity include:
| | | October 3, 2021 | | June 30, 2022 |
In millions | In millions | | Total | | U.S. | | International | | Primary location of international balances | In millions | | Total | | U.S. | | International | | Primary location of international balances |
Cash and cash equivalents | Cash and cash equivalents | | $ | 2,588 | | | $ | 1,278 | | | $ | 1,310 | | | China, Singapore, Belgium, Mexico, Australia, Canada | Cash and cash equivalents | | $ | 2,462 | | | $ | 732 | | | $ | 1,730 | | | China, Singapore, Belgium, Australia, Mexico, India |
| Marketable securities (1) | Marketable securities (1) | | 430 | | | 89 | | | 341 | | | India | Marketable securities (1) | | 536 | | | 100 | | | 436 | | | India |
Total | Total | | $ | 3,018 | | | $ | 1,367 | | | $ | 1,651 | | | Total | | $ | 2,998 | | | $ | 832 | | | $ | 2,166 | | |
Available credit capacity | Available credit capacity | | | | | | | | Available credit capacity | | | | | | | |
Revolving credit facilities (2) | Revolving credit facilities (2) | | $ | 3,300 | | | Revolving credit facilities (2) | | $ | 2,795 | | |
International and other uncommitted domestic credit facilities | International and other uncommitted domestic credit facilities | | $ | 268 | | | International and other uncommitted domestic credit facilities | | $ | 271 | | |
| | (1) The majority of marketable securities could be liquidated into cash within a few days. | (1) The majority of marketable securities could be liquidated into cash within a few days. | (1) The majority of marketable securities could be liquidated into cash within a few days. |
(2) The five-year credit facility for $2.0 billion and the 364-day credit facility for $1.5 billion, maturing August 2026 and August 2022, respectively, are maintained primarily to provide backup liquidity for our commercial paper borrowings and general corporate purposes. At October 3, 2021, we had $200 million of commercial paper outstanding, which effectively reduced the available capacity under our revolving credit facilities to $3.3 billion. | |
(2) The five-year credit facility for $2.0 billion and the 364-day credit facility for $1.5 billion, maturing August 2026 and August 2022, respectively, are maintained primarily to provide backup liquidity for our commercial paper borrowings and general corporate purposes. At June 30, 2022, we had $705 million of commercial paper outstanding, which effectively reduced our available capacity under our revolving credit facilities to $2.8 billion. | | (2) The five-year credit facility for $2.0 billion and the 364-day credit facility for $1.5 billion, maturing August 2026 and August 2022, respectively, are maintained primarily to provide backup liquidity for our commercial paper borrowings and general corporate purposes. At June 30, 2022, we had $705 million of commercial paper outstanding, which effectively reduced our available capacity under our revolving credit facilities to $2.8 billion. |
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Cash, Cash Equivalents and Marketable Securities
A significant portion of our cash flow is generated outside the U.S. We manage our worldwide cash requirements considering available funds among the many subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. As a result, we do not anticipate any local liquidity restrictions to preclude us from funding our operating needs with local resources.
If we distribute our foreign cash balances to the U.S. or to other foreign subsidiaries, we could be required to accrue and pay withholding taxes, for example, if we repatriated cash from certain foreign subsidiaries whose earnings we asserted are completely or partially permanently reinvested. Foreign earnings for which we assert permanent reinvestment outside the U.S. consist primarily of earnings of our China, India and Netherlands domiciled subsidiaries. At present, we do not foresee a need to repatriate any earnings for which we asserted permanent reinvestment. However, to help fund cash needs of the U.S. 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.
Debt Facilities and Other Sources of Liquidity
On August 18, 2021,As of June 30, 2022, we entered into an amended and restated five-year revolving credit agreement with a syndicate of lenders. The amended and restated credit agreement provides us with a $2 billion senior unsecured revolving credit facility until August 18, 2026. On August 18, 2021, we entered into an amended and restated 364-day credit agreement that allows us to borrow up to $1.5 billion of unsecured funds at any time prior to August 17, 2022. This credit agreement amended and restated the prior $1.5 billion 364-day credit facility that matured on August 18, 2021. See Note 9, "DEBT," to our Condensed Consolidated Financial Statements for additional information.
We havehad access to committed credit facilities that totaltotaling $3.5 billion, including the $1.5 billion 364-day facility that expires August 17, 2022 and our $2.0 billion five-year facility that expires on August 18, 2026. 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. These revolving credit facilities are maintained primarily to provide backup liquidity for our commercial paper borrowings and for general corporate purposes. There were no outstanding borrowings under these facilities at October 3, 2021.June 30, 2022. We anticipate renewing our 364-day credit facility before expiration and adding another credit facility available for general corporate purposes in the near-term.
We can issue up to $3.5 billion of unsecured, short-term promissory notes (commercial paper) pursuant to the Board of Directors (the Board) authorized commercial paper programs. TheThese programs facilitate the private placement of unsecured short-term debt through third-party brokers. We intend to use the net proceeds from the commercial paper borrowings for acquisitions and general corporate purposes. The total combined borrowing capacity under the revolving credit facilities and commercial programs should not exceed $3.5 billion. See Note 9,NOTE 10, "DEBT," to our Condensed Consolidated Financial Statements for additional information.
At June 30, 2022, we had $705 million of commercial paper outstanding, which effectively reduced our available capacity under our revolving credit facilities to $2.8 billion.
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. 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 London Interbank Offered Rate (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
At October 3, 2021,LIBOR has since been extended until mid-2023. Various central bank committees and working groups continue to discuss replacement of benchmark rates, the process for amending existing LIBOR-based contracts and the potential economic impacts of different alternatives. The Alternative Reference Rates Committee has identified the Secured Overnight Financing Rate (SOFR) as its preferred alternative rate for U.S. 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 had $200 milliondo 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 commercial paper outstanding, which effectively reduced the available capacity underLIBOR's phase out, our most recent revolving credit facilitiesagreements include a well-documented transition mechanism for selecting a benchmark replacement rate for LIBOR, subject to $3.3 billion.our agreement. Additionally, with respect to our $1.3 billion in LIBOR-based fixed to variable rate swaps maturing in 2025 and 2030, we reviewed and believe our adherence to the 2020 LIBOR fallback protocol will allow for a smooth transition to the designated replacement rate when that transition occurs.
Supply Chain Financing
We currently have supply chain financing programs with financial intermediaries, which provide certain vendors the option to be paid by financial intermediaries earlier than the due date on the applicable invoice. 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 $457 million. We do not reimburse vendors for any costs they incur for participation in the program and their participation is completely voluntary. As a result, all amounts owed to the financial intermediaries are presented as "Accounts payable"Accounts payable in our Condensed Consolidated Balance Sheets. Amounts due to the financial intermediaries reflected in accounts payable at June 30, 2022, were $336 million.
Uses of Cash
Stock Repurchases
In December 2021, the Board authorized the acquisition of up to $2.0 billion of additional common stock upon completion of the 2019 repurchase plan. In December 2019, the Board authorized the acquisition of up to $2.0 billion of additional common stock upon completion of the 2018 repurchase plan. In the first ninesix months of 2021,2022, we made the following purchases under the 2019 stock repurchase program:
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In millions, except per share amounts | | Shares Purchased | | Average Cost Per Share | | Total Cost of Repurchases | | | | Remaining Authorized Capacity (1) |
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April 4 | | 1.7 | | | $ | 247.35 | | | $ | 418 | | | | | $ | 1,576 | |
July 4 | | 2.7 | | | 252.66 | | | 672 | | | | | 904 | |
October 3 | | 0.6 | | | 231.57 | | | 138 | | | | | 766 | |
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Total | | 5.0 | | | 248.30 | | | $ | 1,228 | | | | | |
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(1) The remaining authorized capacity under these plans was calculated based on the cost to purchase the shares but excludes commission expenses in accordance with the authorized plan. |
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In millions, except per share amounts | | Shares Purchased | | Average Cost Per Share | | Total Cost of Repurchases | | | | Remaining Authorized Capacity (1) |
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March 31 | | 1.6 | | | $ | 199.27 | | | $ | 311 | | | | | $ | 2,281 | |
June 30 | | 0.1 | | | 194.00 | | | 36 | | | | | 2,245 | |
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Total | | 1.7 | | | 198.72 | | | $ | 347 | | | | | |
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(1) The remaining $245 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. |
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We intend to repurchase outstanding shares from time to time during 20212022 to enhance shareholder value.
Dividends
We paid dividends of $411 million during the six months ended June 30, 2022. In July 2021,2022, the Board authorized an increase to our quarterly dividend of 7.4approximately 8 percent from $1.35$1.45 per share to $1.45$1.57 per share.
We paid dividends of $601 million during the nine months ended October 3, 2021.
Capital Expenditures
Capital expenditures, including spending on internal use software, for the ninesix months ended October 3, 2021,June 30, 2022, were $398$275 million versus $301$234 million in the comparable period in 2020.2021. We plan to spend an estimated $725$850 million to $775$900 million in 20212022 on capital expenditures, excluding internal use software, with over 5060 percent of these expenditures expected to be invested in North America. In addition, we plan to spend an estimated $50$60 million to $60$70 million on internal use software in 2021.2022.
Current Maturities of Short and Long-Term Debt
We had $200$705 million of commercial paper outstanding at October 3, 2021,June 30, 2022, that matures in less than one year. The maturity schedule of our existing long-term debt does not require significant cash outflows until 2023 when our 3.65%3.65 percent senior notes and 2025 when our 0.75%0.75 percent senior notes are due. Required annual long-term debt principal payments range from $16$41 million to $536$545 million over the next five years (including the remainder of 2021)2022). See Note 9,NOTE 10, "DEBT," to the Condensed Consolidated Financial Statements for additional information.
Pensions
Our global pension plans, including our unfunded and non-qualified plans, were 112121 percent funded at December 31, 2020.2021. Our U.S. defined benefit plan, which represented approximately 52 percent of the worldwide pension obligation, was 128138 percent funded, and our U.K. defined benefit plan was 114127 percent funded at December 31, 2020.2021. The funded status of our pension plans is dependent upon a variety of variables and assumptions including return on invested assets, market interest rates and levels of voluntary contributions to the plans. In the first ninesix months of 2021,2022, the investment gainloss on our U.S. pension trust was 6.25.0 percent while our U.K. pension trust gainloss was 0.717.8 percent. Approximately 6964 percent of our pension plan assets are held in highly liquid investments such as fixed income and equity securities. The remaining 3136 percent of our plan assets are held in less liquid, but market valued investments, including real estate, private equity, venture capital, opportunistic credit and insurance contracts. During the remainder of
2021, weWe anticipate making $6 million in additional defined benefit pension contributions induring the U.K. and $4remainder of 2022 of $10 million in contributions tofor our U.S. and U.K. qualified and non-qualified benefitpension plans. These contributions may be made from trusts or company funds either to increase pension assets or to make direct benefit payments to plan participants. We expect our 20212022 annual net periodic pension cost to approximate $79$31 million.
Credit Ratings
Our rating and outlook from each of the credit rating agencies as of the date of filing are shown in the table below:
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| | Long-Term | | | | Short-Term | | | | |
Credit Rating Agency (1) | | Senior Debt Rating | | | | Debt Rating | | | | Outlook |
Standard and Poor’s Rating Services | | A+ | | | | A1 | | | | Stable |
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Moody’s Investors Service, Inc. | | A2 | | | | P1 | | | | Stable |
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(1) Credit ratings are not recommendations to buy, are subject to change, and each rating should be evaluated independently of any other rating. In addition, we undertake no obligation to update disclosures concerning our credit ratings, whether as a result of new information, future events or otherwise. |
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Subsequent Events
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 initial interest rate, based on the Secured Overnight Financing Rate for the one-month interest period plus the relevant spread, is 3.11 percent. The loan will mature on August 2, 2025. Borrowings under the agreement will not be secured by liens on any of our assets or assets of our subsidiaries. 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 3, 2022, we completed the acquisition of Meritor with a purchase price of $3.0 billion (including convertible debt). We borrowed an additional $1.3 billion under our commercial paper program to complete the acquisition. The acquisition reduced our borrowing capacity under the revolving credit facilities to $1.43 billion at the time of filing. See NOTE 14, "ACQUISITIONS," to our Condensed Consolidated Financial Statements for additional information.
Management's Assessment of Liquidity
Our financial condition and liquidity remain strong. Our solid balance sheet and credit ratings enable us to have ready access to credit and the capital markets. We assess our liquidity in terms of our ability to generate adequate cash to fund our operating, investing and financing activities. We believe our existing cash and marketable securities, operating cash flow and revolving credit facilities provide us with the financial flexibility needed to fund acquisitions, common stock repurchases, dividend payments, targeted capital expenditures, projected pension obligations, acquisitions, working capital and debt service obligations through 20212022 and beyond. We continue to generate significant cash from operations and maintain access to our revolving credit facilities and commercial paper programs as noted above.
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
Our Condensed Consolidated Financial Statements are prepared in accordance with generally accepted accounting principles that often require management to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts presented and disclosed in the financial statements. Management reviews these estimates and assumptions based on historical experience, changes in business conditions including the impacts of COVID-19 and other relevant factors they believe to be reasonable under the circumstances. In any given reporting period, our actual results may differ from the estimates and assumptions used in preparing our Condensed Consolidated Financial Statements.
Critical accounting estimates are defined as follows: the estimate requires management to make assumptions about matters that were highly uncertain at the time the estimate was made; different estimates reasonably could have been used; or if changes in the estimate are reasonably likely to occur from period to period and the change would have a material impact on our financial condition or results of operations. Our senior management has discussed the development and selection of our accounting policies, related accounting estimates and the disclosures set forth below with the Audit Committee of the Board. Our critical accounting estimates disclosed in the Form 10-K address estimating liabilities for warranty programs, assessing goodwill impairment, accounting for income taxes and pension benefits. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, our CEO and our CFO concluded that our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to management, including our CEO and CFO, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter ended October 3, 2021,June 30, 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The matters described under "Legal Proceedings" in Note 11,NOTE 12, "COMMITMENTS AND CONTINGENCIES," to the Condensed Consolidated Financial Statements are incorporated herein by reference.
ITEM 1A. Risk Factors
In addition to other information set forth in this report and the risk factorfactors noted below, you should consider other risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 20202021, which could materially affect our business, financial condition or future results. Other than noted below, there have been no material changes to our risks described in our 20202021 Annual Report on Form 10-K or the "CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION" in this Quarterly report are not the only risks we face.report. Additional risks and uncertainties not currently known to us or that we currently judge to be immaterial also may materially adversely affect our business, financial condition or operating results. GOVERNMENT REGULATION
We are conducting a formal internal review of our emission certification process and compliance with emission standards with respect to our pick-up truck applications and are working with the U.S. Environmental Protection Agency (EPA)EPA and California Air Resources Board (CARB)CARB to address their questions about these applications. Due to the continuing nature of our formal internal review and on-going discussions with the EPA and CARB, we cannot predict the final results of this formal review and these regulatory processes, nor whether, or the extent to which, they could have a material adverse impact on our results of operations and cash flows.
We previously announced that we are conducting a formal internal review of our emissions certification process and compliance with emission standards with respect to all of our pick-up truck applications, following conversations with the EPA and CARB regarding certification of our engines for model year 2019 RAM 2500 and 3500 trucks. During conversations with the EPA and CARB about the effectiveness of our pick-up truck applications, the regulators raised concerns that certain aspects of our emissions systems may reduce the effectiveness of our emissions control systems and thereby act as defeat devices. As a result, our internal review focuses, in part, on the regulators’ concerns. We are working closely with the regulators to enhance our emissions systems to improve the effectiveness of all of our pick-up truck applications and to fully address the regulators’ requirements. Based on discussions with the regulators, we have developed a new calibration for the engines in model year 2019 RAM 2500 and 3500 trucks that has been included in all engines shipped since September 2019. During our discussions, the regulators turned their attention to other model years and other engines, most notably our pick-up truck applications for RAM 2500 and 3500 trucks for model years 2013 through 2018. In connection with these and other ongoing discussions with the EPA and CARB, we are developing a new software calibration and will recall model years 2013 through 2018 RAM 2500 and 3500 trucks. We accrued $30 million for the recall during the first quarter of 2022, an amount that reflects our current estimate of the cost of the recall.
We will continue to work together closely with the relevant regulators to develop and implement recommendations for improvement and seek to reach further resolutions as part of our ongoing commitment to compliance.
Due to the continuing nature of the formal review, our ongoing cooperation with the regulators and the presence of many unknown facts and circumstances, we are not yet able to estimate theany further financial impact of these matters. It is possible that the consequences of any remediation plans resulting from our formal review and these regulatory processes could have a material adverse impact on our results of operations and cash flows.
BUSINESS CONDITIONS / DISRUPTIONS The U.S. government’s pending rulesongoing conflict between Russia and regulations concerning mandatory COVID-19 vaccinationUkraine, and the global response (including government bans or restrictions on doing business in Russia), could have a material adverse impact on our results of U.S.-based employeesoperations, financial condition and cash flows.
Given the nature of companies that work on orour business and our global operations, political, economic, and other conditions in support of federal contracts, or have 100 or more employees, could materiallyforeign countries and regions, including geopolitical risks such as the current conflict between Russia and Ukraine, may adversely affect our results of operations, financial condition and cash flows.
On September 9, 2021, President Biden issued We have suspended our commercial operations in Russia indefinitely, which resulted in a $158 million charge in the first quarter of 2022. In the second quarter, we recovered certain inventory and other expense amounts reserved in the first quarter and incurred some small additional charges resulting in a net recovery of $47 million. We may incur additional charges as conditions continue to evolve including with respect to our planned extrication from our relationship with KAMAZ Publicly Traded Company and its subsidiaries, including the unconsolidated joint venture. In addition, we have experienced, and expect to continue to experience, an executive order requiring all employersinability to collect customer receivables and may be the subject of litigation in connection with U.S. government contracts to ensure that their U.S.-based employees, contractorsour suspension of commercial operations in Russia. The broader consequences of this conflict, which may include further sanctions, embargoes, regional instability, and subcontractors, that work on or in support of U.S. government contracts, are fully vaccinated against COVID-19 as requiredgeopolitical shifts; potential retaliatory action by the executive order. The executive order includes on-siteRussian government against companies, including possible nationalization of foreign businesses in Russia; increased tensions between the United States and remote U.S.-based employees, contractorscountries in which we operate; and subcontractors and provides for limited medical and religious exceptions.
In addition, on September 9, 2021, President Biden announced that he has directed Occupational Safety and Health Administration (OSHA) to develop an Emergency Temporary Standard (ETS) mandating either the full vaccination against COVID-19 or weekly testingextent of employees for employers with 100 or more employees. OSHA has not yet issued the ETS nor provided any additional information on its contents or requirements.
It is currently not possible to predict with certainty the impact the executive order or the OSHA ETS will haveconflict’s effect on our
workforce. As a U.S. government contractor, all U.S. based employees, contractorsbusiness and
subcontractors that service or supportresults of operations as well as the global economy, cannot be predicted. To the extent the current conflict between Russia and Ukraine adversely affects our
U.S. government contracts, which are subject tobusiness, it may also have the
provisionseffect of
heightening many other risks disclosed in our Annual Report on Form 10-K for the executive order, will be required to be fully vaccinated against COVID-19. Employees who are not subject to this requirement and who are not fully vaccinated may be subject to the ETS that will require them to get a COVID-19 test at least once a week. Additional vaccine mandates may be announced in jurisdictions in which our businesses operate. Our implementationyear ended December 31, 2021, any of these requirements may result in attrition, including attrition of critically skilled labor, and difficulty securing future labor needs, which could materially and adversely affect our business and results of operations. Such risks include, but are not limited to, adverse effects on macroeconomic conditions, including inflation, particularly with regard to raw material, transportation and labor price fluctuations; disruptions to our information technology environment, including through cyberattack, ransom attack, or cyber-intrusion; adverse
changes in international trade policies and relations; disruptions in global supply chains; and our exposure to foreign currency exchange rate changes.
Failure to successfully integrate the acquisition of Meritor, Inc. (Meritor) could have a material adverse impact on our results of operations, financial condition and cash flows.
The acquisition of Meritor will involve the integration of Meritor’s operations with our existing operations, and there are uncertainties inherent in such an integration. We will be required to devote significant management attention and resources to integrating Meritor’s operations. A delay in the integration of Meritor could cause us to fail to realize some or all of the anticipated benefits within a reasonable period of time or at all, which could result in additional transaction costs or in other negative effects.
We may fail to fully realize all of the anticipated benefits, including enhanced revenue, earnings, and cash flow from our acquisition of Meritor.
Our ability to fully realize all of the anticipated benefits, including enhanced revenue, earnings, and cash flow, from our acquisition of Meritor will depend, in substantial part, on our ability to successfully integrate the products into our segments, launch the Meritor products around the world and achieve our projected market penetration. While we believe we will ultimately achieve these objectives, it is possible that we will be unable to achieve all of these objectives within our anticipated time frame or in the anticipated amounts. If we are not able to successfully complete the integration of the Meritor business or implement our Meritor strategy, we may not fully realize the anticipated benefits, including enhanced revenue, earnings, and cash flows, from this acquisition or such anticipated benefits may take longer to realize than expected.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following information is provided pursuant to Item 703 of Regulation S-K:
| | | | Issuer Purchases of Equity Securities | | | Issuer Purchases of Equity Securities |
Period | Period | | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in millions) (2) | Period | | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in millions) (2) |
July 5 - August 8 | | — | | | $ | — | | | — | | | $ | 904 | | |
August 9 - September 5 | | 302,129 | | | 233.75 | | | 302,129 | | | 833 | | |
September 6 - October 3 | | 294,388 | | | 229.34 | | | 294,388 | | | 766 | | |
April 1 - April 30 | | April 1 - April 30 | | — | | | $ | — | | | — | | | $ | 2,281 | |
May 1 - May 31 | | May 1 - May 31 | | — | | | — | | | — | | | 2,281 | |
June 1 - June 30 | | June 1 - June 30 | | 184,243 | | | 194.00 | | | 184,243 | | | 2,245 | |
Total | Total | | 596,517 | | | 231.57 | | | 596,517 | | | | Total | | 184,243 | | | 194.00 | | | 184,243 | | | |
| (1) Shares purchased represent shares under the Board authorized share repurchase program. | (1) Shares purchased represent shares under the Board authorized share repurchase program. | (1) Shares purchased represent shares under the Board authorized share repurchase program. |
(2) Shares repurchased under our Key Employee Stock Investment Plan only occur in the event of a participant default, which cannot be predicted, and were excluded from this column. | (2) Shares repurchased under our Key Employee Stock Investment Plan only occur in the event of a participant default, which cannot be predicted, and were excluded from this column. | (2) Shares repurchased under our Key Employee Stock Investment Plan only occur in the event of a participant default, which cannot be predicted, and were excluded from this column. |
In December 2021, the Board authorized the acquisition of up to $2.0 billion of additional common stock upon completion of the 2019 repurchase plan. In December 2019, the Board authorized the acquisition of up to $2.0 billion of additional common stock upon completion of the 2018 repurchase plan. During the three months ended October 3, 2021,June 30, 2022, we repurchased $138$36 million of common stock under the 2019 authorization. The dollar value remaining available for future purchases under the 2019 program at October 3, 2021,June 30, 2022, was $766$245 million.
Our Key Employee Stock Investment Plan allows certain employees, other than officers, to purchase shares of common stock on an installment basis up to an established credit limit. We hold participants’ shares as security for the loans and would, in effect, repurchase shares only if the participant defaulted in repayment of the loan. Shares associated with participants' sales are sold as open-market transactions via a third-party broker.
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Mine Safety Disclosures
Not applicable.
ITEM 5. Other Information
Not applicable.
ITEM 6. Exhibits
The exhibits listed in the following Exhibit Index are filed as part of this Quarterly Report on Form 10-Q.
CUMMINS INC.
EXHIBIT INDEX
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Exhibit No. | | Description of Exhibit |
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| | Third Amended and Restated 364-Day CreditLoan Agreement, dated as of August 18, 2021,July 13, 2022, by and among Cummins Inc., the subsidiary borrowers referredlenders from time to therein, the Lenders and Agentstime party thereto, and JPMorgan ChaseWells Fargo Bank, N.A.,National Association, as Administrative Agent.(incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Cummins Inc. with the Securities and Exchange Commission onAugust 18, 2021 July 19, 2022 (File No. 001-04949)). |
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101.INS* | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH* | | Inline XBRL Taxonomy Extension Schema Document. |
101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
* Filed with this quarterly report on Form 10-Q are the following documents formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Net Income for the three and ninesix months ended October 3,June 30, 2022 and July 4, 2021, and September 27, 2020, (ii) the Condensed Consolidated Statements of Comprehensive Income for the three and ninesix months ended October 3,June 30, 2022 and July 4, 2021, and September 27, 2020, (iii) the Condensed Consolidated Balance Sheets at October 3, 2021June 30, 2022 and December 31, 2020,2021, (iv) the Condensed Consolidated Statements of Cash Flows for the ninesix months ended October 3,June 30, 2022 and July 4, 2021, and September 27, 2020, (v) the Condensed Consolidated Statements of Changes in Equity for the three and ninesix months ended October 3,June 30, 2022 and July 4, 2021 and September 27, 2020 and (vi) Notes to Condensed Consolidated Financial Statements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | | | | | | | | | | | | | | | | | |
Cummins Inc. | | | |
Date: | November 2, 2021August 3, 2022 | | | |
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| By: | /s/ MARK A. SMITH | | By: | /s/ CHRISTOPHER C. CLULOWLUTHER E. PETERS |
| | Mark A. Smith | | | Christopher C. ClulowLuther E. Peters |
| | Vice President and Chief Financial Officer | | | Vice President-Controller |
| | (Principal Financial Officer) | | | (Principal Accounting Officer) |