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 September 30, 2022March 31, 2023
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 September 30, 2022,March 31, 2023, there were 141,022,462141,561,784 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 nine months ended September 30,March 31, 2023 and March 31, 2022 and October 3, 2021 | |
| Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30,March 31, 2023 and March 31, 2022 and October 3, 2021 | |
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| Condensed Consolidated Balance Sheets at September 30, 2022March 31, 2023 and December 31, 20212022 | |
| Condensed Consolidated Statements of Cash Flows for the ninethree months ended September 30,March 31, 2023 and March 31, 2022 and October 3, 2021 | |
| Condensed Consolidated Statements of Changes in Redeemable Noncontrolling Interests and Equity for the three and nine months ended September 30,March 31, 2023 and March 31, 2022 and October 3, 2021 | |
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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 | |
| | | Three months ended | | Nine months ended | | | March 31, | |
In millions, except per share amounts | In millions, except per share amounts | | September 30, 2022 | | October 3, 2021 | | September 30, 2022 | | October 3, 2021 | In millions, except per share amounts | | 2023 | | 2022 | |
NET SALES (a) (Note 2) | | $ | 7,333 | | | $ | 5,968 | | | $ | 20,304 | | | $ | 18,171 | | |
Cost of sales (Note 3) | | 5,691 | | | 4,554 | | | 15,404 | | | 13,793 | | |
NET SALES (Notes 1 and 2) | | NET SALES (Notes 1 and 2) | | $ | 8,453 | | | $ | 6,385 | | |
Cost of sales | | Cost of sales | | 6,424 | | | 4,853 | | |
GROSS MARGIN | GROSS MARGIN | | 1,642 | | | 1,414 | | | 4,900 | | | 4,378 | | GROSS MARGIN | | 2,029 | | | 1,532 | | |
| OPERATING EXPENSES AND INCOME | OPERATING EXPENSES AND INCOME | | | | | | | | | OPERATING EXPENSES AND INCOME | | | | | |
Selling, general and administrative expenses | Selling, general and administrative expenses | | 708 | | | 571 | | | 1,945 | | | 1,745 | | Selling, general and administrative expenses | | 753 | | | 615 | | |
Research, development and engineering expenses | Research, development and engineering expenses | | 348 | | | 266 | | | 945 | | | 802 | | Research, development and engineering expenses | | 350 | | | 298 | | |
Equity, royalty and interest income from investees (Notes 3 and 5) | | 70 | | | 94 | | | 261 | | | 397 | | |
Equity, royalty and interest income from investees (Note 4) | | Equity, royalty and interest income from investees (Note 4) | | 119 | | | 96 | | |
| Other operating expense, net (Note 3) | | 30 | | | 5 | | | 144 | | | 17 | | |
Other operating expense, net | | Other operating expense, net | | 19 | | | 111 | | |
OPERATING INCOME | OPERATING INCOME | | 626 | | | 666 | | | 2,127 | | | 2,211 | | OPERATING INCOME | | 1,026 | | | 604 | | |
| Interest expense | Interest expense | | 61 | | | 28 | | | 112 | | | 85 | | Interest expense | | 87 | | | 17 | | |
Other income, net | | 43 | | | 37 | | | 26 | | | 111 | | |
Other income (expense), net | | Other income (expense), net | | 90 | | | (9) | | |
INCOME BEFORE INCOME TAXES | INCOME BEFORE INCOME TAXES | | 608 | | | 675 | | | 2,041 | | | 2,237 | | INCOME BEFORE INCOME TAXES | | 1,029 | | | 578 | | |
| Income tax expense (Note 6) | | 199 | | | 134 | | | 502 | | | 473 | | |
Income tax expense (Note 5) | | Income tax expense (Note 5) | | 223 | | | 155 | | |
CONSOLIDATED NET INCOME | CONSOLIDATED NET INCOME | | 409 | | | 541 | | | 1,539 | | | 1,764 | | CONSOLIDATED NET INCOME | | 806 | | | 423 | | |
| Less: Net income attributable to noncontrolling interests | Less: Net income attributable to noncontrolling interests | | 9 | | | 7 | | | 19 | | | 27 | | Less: Net income attributable to noncontrolling interests | | 16 | | | 5 | | |
NET INCOME ATTRIBUTABLE TO CUMMINS INC. | NET INCOME ATTRIBUTABLE TO CUMMINS INC. | | $ | 400 | | | $ | 534 | | | $ | 1,520 | | | $ | 1,737 | | NET INCOME ATTRIBUTABLE TO CUMMINS INC. | | $ | 790 | | | $ | 418 | | |
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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 | | $ | 2.83 | | | $ | 3.72 | | | $ | 10.74 | | | $ | 11.96 | | Basic | | $ | 5.58 | | | $ | 2.94 | | |
Diluted | Diluted | | $ | 2.82 | | | $ | 3.69 | | | $ | 10.68 | | | $ | 11.86 | | Diluted | | $ | 5.55 | | | $ | 2.92 | | |
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WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING | WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING | | | | | | | | | WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING | | | | | |
Basic | Basic | | 141.1 | | | 143.5 | | | 141.5 | | | 145.2 | | Basic | | 141.5 | | | 142.2 | | |
Dilutive effect of stock compensation awards | Dilutive effect of stock compensation awards | | 0.9 | | | 1.2 | | | 0.8 | | | 1.3 | | Dilutive effect of stock compensation awards | | 0.9 | | | 0.9 | | |
Diluted | Diluted | | 142.0 | | | 144.7 | | | 142.3 | | | 146.5 | | Diluted | | 142.4 | | | 143.1 | | |
| | (a) Includes sales to nonconsolidated equity investees of $295 million and $920 million for the three and nine months ended September 30, 2022, compared with $385 million and $1,286 million for the comparable periods in 2021. | |
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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 | | September 30, 2022 | | October 3, 2021 | | September 30, 2022 | | October 3, 2021 | |
| CONSOLIDATED NET INCOME | | $ | 409 | | | $ | 541 | | | $ | 1,539 | | | $ | 1,764 | | |
| Other comprehensive income (loss), net of tax (Note 15) | | | | | | | | | |
| Change in pension and other postretirement defined benefit plans | | 6 | | | 17 | | | 28 | | | 63 | | |
| Foreign currency translation adjustments | | (379) | | | — | | | (620) | | | (34) | | |
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| Unrealized gain on derivatives | | 41 | | | 3 | | | 112 | | | 37 | | |
| Total other comprehensive (loss) income, net of tax | | (332) | | | 20 | | | (480) | | | 66 | | |
| COMPREHENSIVE INCOME | | 77 | | | 561 | | | 1,059 | | | 1,830 | | |
| Less: Comprehensive (loss) income attributable to noncontrolling interests | | (6) | | | 9 | | | (19) | | | 22 | | |
| COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC. | | $ | 83 | | | $ | 552 | | | $ | 1,078 | | | $ | 1,808 | | |
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| | | Three months ended | | | | | |
| | | March 31, | | | |
| In millions | | 2023 | | 2022 | | | | | |
| CONSOLIDATED NET INCOME | | $ | 806 | | | $ | 423 | | | | | | |
| Other comprehensive income (loss), net of tax (Note 13) | | | | | | | | | |
| Change in pension and other postretirement defined benefit plans | | (9) | | | 16 | | | | | | |
| Foreign currency translation adjustments | | 82 | | | 4 | | | | | | |
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| Unrealized (loss) gain on derivatives | | (3) | | | 28 | | | | | | |
| Total other comprehensive income, net of tax | | 70 | | | 48 | | | | | | |
| COMPREHENSIVE INCOME | | 876 | | | 471 | | | | | | |
| Less: Comprehensive income (loss) attributable to noncontrolling interests | | 19 | | | (3) | | | | | | |
| COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC. | | $ | 857 | | | $ | 474 | | | | | | |
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 | | September 30, 2022 | | December 31, 2021 | In millions, except par value | | March 31, 2023 | | December 31, 2022 |
ASSETS | ASSETS | | | | | ASSETS | | | | |
Current assets | Current assets | | | | | Current assets | | | | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 2,499 | | | $ | 2,592 | | Cash and cash equivalents | | $ | 1,980 | | | $ | 2,101 | |
| Marketable securities (Note 7) | | 466 | | | 595 | | |
Marketable securities (Note 6) | | Marketable securities (Note 6) | | 459 | | | 472 | |
Total cash, cash equivalents and marketable securities | Total cash, cash equivalents and marketable securities | | 2,965 | | | 3,187 | | Total cash, cash equivalents and marketable securities | | 2,439 | | | 2,573 | |
Accounts and notes receivable, net | Accounts and notes receivable, net | | Accounts and notes receivable, net | | 5,834 | | | 5,202 | |
Trade and other | | 4,450 | | | 3,565 | | |
Nonconsolidated equity investees | | 349 | | | 425 | | |
Inventories (Note 8) | | 5,543 | | | 4,355 | | |
| Inventories (Note 7) | | Inventories (Note 7) | | 5,878 | | | 5,603 | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | | 1,091 | | | 777 | | Prepaid expenses and other current assets | | 1,217 | | | 1,073 | |
Total current assets | Total current assets | | 14,398 | | | 12,309 | | Total current assets | | 15,368 | | | 14,451 | |
Long-term assets | Long-term assets | | | | | Long-term assets | | | | |
Property, plant and equipment | Property, plant and equipment | | 10,231 | | | 9,358 | | Property, plant and equipment | | 10,629 | | | 10,507 | |
Accumulated depreciation | Accumulated depreciation | | (5,030) | | | (4,936) | | Accumulated depreciation | | (5,039) | | | (4,986) | |
Property, plant and equipment, net | Property, plant and equipment, net | | 5,201 | | | 4,422 | | Property, plant and equipment, net | | 5,590 | | | 5,521 | |
Investments and advances related to equity method investees | Investments and advances related to equity method investees | | 1,826 | | | 1,538 | | Investments and advances related to equity method investees | | 1,860 | | | 1,759 | |
Goodwill (Note 9) | | 2,229 | | | 1,287 | | |
Other intangible assets, net (Note 9) | | 2,602 | | | 900 | | |
Pension assets (Note 4) | | 1,536 | | | 1,488 | | |
Other assets (Note 10) | | 1,977 | | | 1,766 | | |
Goodwill | | Goodwill | | 2,365 | | | 2,343 | |
Other intangible assets, net | | Other intangible assets, net | | 2,640 | | | 2,687 | |
Pension assets (Note 3) | | Pension assets (Note 3) | | 1,496 | | | 1,398 | |
Other assets (Note 8) | | Other assets (Note 8) | | 2,114 | | | 2,140 | |
Total assets | Total assets | | $ | 29,769 | | | $ | 23,710 | | Total assets | | $ | 31,433 | | | $ | 30,299 | |
| LIABILITIES | LIABILITIES | | | | | LIABILITIES | | | | |
Current liabilities | Current liabilities | | | | | Current liabilities | | | | |
Accounts payable (principally trade) | Accounts payable (principally trade) | | $ | 4,000 | | | $ | 3,021 | | Accounts payable (principally trade) | | $ | 4,636 | | | $ | 4,252 | |
Loans payable (Note 11) | | 217 | | | 208 | | |
Commercial paper (Note 11) | | 2,393 | | | 313 | | |
Loans payable (Note 9) | | Loans payable (Note 9) | | 229 | | | 210 | |
Commercial paper (Note 9) | | Commercial paper (Note 9) | | 2,545 | | | 2,574 | |
Current maturities of long-term debt (Note 9) | | Current maturities of long-term debt (Note 9) | | 569 | | | 573 | |
Accrued compensation, benefits and retirement costs | Accrued compensation, benefits and retirement costs | | 575 | | | 683 | | Accrued compensation, benefits and retirement costs | | 510 | | | 617 | |
Current portion of accrued product warranty (Note 12) | | 801 | | | 755 | | |
Current portion of accrued product warranty (Note 10) | | Current portion of accrued product warranty (Note 10) | | 746 | | | 726 | |
Current portion of deferred revenue (Note 2) | Current portion of deferred revenue (Note 2) | | 921 | | | 855 | | Current portion of deferred revenue (Note 2) | | 1,040 | | | 1,004 | |
| Other accrued expenses (Note 10) | | 1,568 | | | 1,190 | | |
Current maturities of long-term debt (Note 11) | | 55 | | | 59 | | |
Other accrued expenses (Note 8) | | Other accrued expenses (Note 8) | | 1,648 | | | 1,465 | |
Total current liabilities | Total current liabilities | | 10,530 | | | 7,084 | | Total current liabilities | | 11,923 | | | 11,421 | |
Long-term liabilities | Long-term liabilities | | | | | Long-term liabilities | | | | |
Long-term debt (Note 11) | | 5,450 | | | 3,579 | | |
Pensions and other postretirement benefits (Note 4) | | 678 | | | 604 | | |
Accrued product warranty (Note 12) | | 742 | | | 684 | | |
Long-term debt (Note 9) | | Long-term debt (Note 9) | | 4,409 | | | 4,498 | |
| Deferred revenue (Note 2) | Deferred revenue (Note 2) | | 867 | | | 850 | | Deferred revenue (Note 2) | | 937 | | | 844 | |
Other liabilities (Note 10) | | 1,892 | | | 1,508 | | |
Other liabilities (Note 8) | | Other liabilities (Note 8) | | 3,283 | | | 3,311 | |
Total liabilities | Total liabilities | | $ | 20,159 | | | $ | 14,309 | | Total liabilities | | $ | 20,552 | | | $ | 20,074 | |
| Commitments and contingencies (Note 13) | | |
Redeemable noncontrolling interests (Notes 1 and 14) | | $ | 252 | | | $ | 366 | | |
Commitments and contingencies (Note 11) | | Commitments and contingencies (Note 11) | |
| Redeemable noncontrolling interests (Note 12) | | Redeemable noncontrolling interests (Note 12) | | $ | 261 | | | $ | 258 | |
| | | | |
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 222.5 shares issued | Common stock, $2.50 par value, 500 shares authorized, 222.5 and 222.5 shares issued | | $ | 2,214 | | | $ | 2,099 | | Common stock, $2.50 par value, 500 shares authorized, 222.5 and 222.5 shares issued | | $ | 2,230 | | | $ | 2,243 | |
Retained earnings | Retained earnings | | 17,628 | | | 16,741 | | Retained earnings | | 18,605 | | | 18,037 | |
Treasury stock, at cost, 81.5 and 80.0 shares | | (9,449) | | | (9,123) | | |
Treasury stock, at cost, 80.9 and 81.2 shares | | Treasury stock, at cost, 80.9 and 81.2 shares | | (9,389) | | | (9,415) | |
| Accumulated other comprehensive loss (Note 15) | | (2,013) | | | (1,571) | | |
Accumulated other comprehensive loss (Note 13) | | Accumulated other comprehensive loss (Note 13) | | (1,823) | | | (1,890) | |
| Total Cummins Inc. shareholders’ equity | Total Cummins Inc. shareholders’ equity | | 8,380 | | | 8,146 | | Total Cummins Inc. shareholders’ equity | | 9,623 | | | 8,975 | |
Noncontrolling interests | Noncontrolling interests | | 978 | | | 889 | | Noncontrolling interests | | 997 | | | 992 | |
Total equity | Total equity | | $ | 9,358 | | | $ | 9,035 | | Total equity | | $ | 10,620 | | | $ | 9,967 | |
Total liabilities, redeemable noncontrolling interests and equity | Total liabilities, redeemable noncontrolling interests and equity | | $ | 29,769 | | | $ | 23,710 | | Total liabilities, redeemable noncontrolling interests and equity | | $ | 31,433 | | | $ | 30,299 | |
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | | | | | | | | | | Three months ended |
| | | Nine months ended | | | March 31, |
In millions | In millions | | September 30, 2022 | | October 3, 2021 | In millions | | 2023 | | 2022 |
CASH FLOWS FROM OPERATING ACTIVITIES | CASH FLOWS FROM OPERATING ACTIVITIES | | | | | CASH FLOWS FROM OPERATING ACTIVITIES | | | | |
Consolidated net income | Consolidated net income | | $ | 1,539 | | | $ | 1,764 | | Consolidated net income | | $ | 806 | | | $ | 423 | |
Adjustments to reconcile consolidated net income to net cash provided by operating activities | Adjustments to reconcile consolidated net income to net cash provided by operating activities | | | | | Adjustments to reconcile consolidated net income to net cash provided by operating activities | | | | |
Depreciation and amortization | Depreciation and amortization | | 544 | | | 497 | | Depreciation and amortization | | 246 | | | 161 | |
| Deferred income taxes | Deferred income taxes | | (194) | | | 44 | | Deferred income taxes | | (38) | | | (66) | |
Equity in income of investees, net of dividends | Equity in income of investees, net of dividends | | (30) | | | (150) | | Equity in income of investees, net of dividends | | (67) | | | (76) | |
Pension and OPEB expense (Note 4) | | 23 | | | 62 | | |
Pension contributions and OPEB payments (Note 4) | | (71) | | | (86) | | |
Share-based compensation expense | | 24 | | | 25 | | |
Pension and OPEB expense (Note 3) | | Pension and OPEB expense (Note 3) | | 1 | | | 9 | |
Pension contributions and OPEB payments (Note 3) | | Pension contributions and OPEB payments (Note 3) | | (92) | | | (43) | |
| Russian suspension costs, net of recoveries (Note 3) | | 112 | | | — | | |
Asset impairments and other charges | | 36 | | | — | | |
Loss on corporate owned life insurance | | 114 | | | 11 | | |
| Russian suspension costs (Note 15) | | Russian suspension costs (Note 15) | | — | | | 158 | |
| (Gain) loss on corporate owned life insurance | | (Gain) loss on corporate owned life insurance | | (19) | | | 37 | |
| Foreign currency remeasurement and transaction exposure | Foreign currency remeasurement and transaction exposure | | (136) | | | 27 | | Foreign currency remeasurement and transaction exposure | | (11) | | | (7) | |
Changes in current assets and liabilities, net of acquisitions | Changes in current assets and liabilities, net of acquisitions | | | Changes in current assets and liabilities, net of acquisitions | | |
Accounts and notes receivable | Accounts and notes receivable | | (333) | | | (353) | | Accounts and notes receivable | | (621) | | | (417) | |
Inventories | Inventories | | (597) | | | (919) | | Inventories | | (263) | | | (289) | |
Other current assets | Other current assets | | (18) | | | (45) | | Other current assets | | (142) | | | (57) | |
Accounts payable | Accounts payable | | 353 | | | 416 | | Accounts payable | | 381 | | | 484 | |
Accrued expenses | Accrued expenses | | (124) | | | 435 | | Accrued expenses | | 151 | | | (251) | |
Changes in other liabilities | Changes in other liabilities | | (41) | | | (59) | | Changes in other liabilities | | 64 | | | 70 | |
| Other, net | Other, net | | (56) | | | (145) | | Other, net | | 99 | | | 28 | |
Net cash provided by operating activities | Net cash provided by operating activities | | 1,145 | | | 1,524 | | Net cash provided by operating activities | | 495 | | | 164 | |
| CASH FLOWS FROM INVESTING ACTIVITIES | CASH FLOWS FROM INVESTING ACTIVITIES | | | | | CASH FLOWS FROM INVESTING ACTIVITIES | | | | |
Capital expenditures | Capital expenditures | | (453) | | | (362) | | Capital expenditures | | (193) | | | (104) | |
Investments in internal use software | | (44) | | | (36) | | |
| Proceeds from sale of land | | — | | | 20 | | |
Investments in and net advances from (to) equity investees | | (50) | | | 3 | | |
Acquisitions of businesses, net of cash acquired (Note 16) | | (3,008) | | | — | | |
| Acquisition of a business, net of cash acquired (Note 16) | | Acquisition of a business, net of cash acquired (Note 16) | | — | | | 83 | |
| Investments in marketable securities—acquisitions | Investments in marketable securities—acquisitions | | (738) | | | (569) | | Investments in marketable securities—acquisitions | | (326) | | | (197) | |
Investments in marketable securities—liquidations (Note 7) | | 819 | | | 602 | | |
Investments in marketable securities—liquidations (Note 6) | | Investments in marketable securities—liquidations (Note 6) | | 345 | | | 254 | |
| Cash flows from derivatives not designated as hedges | | (29) | | | 19 | | |
| Other, net | Other, net | | 7 | | | 45 | | Other, net | | (54) | | | (46) | |
Net cash used in investing activities | Net cash used in investing activities | | (3,496) | | | (278) | | Net cash used in investing activities | | (228) | | | (10) | |
| CASH FLOWS FROM FINANCING ACTIVITIES | CASH FLOWS FROM FINANCING ACTIVITIES | | | | | CASH FLOWS FROM FINANCING ACTIVITIES | | | | |
Proceeds from borrowings (Notes 11 and 16) | | 2,076 | | | 35 | | |
Net borrowings (payments) of commercial paper | | 2,080 | | | (123) | | |
Proceeds from borrowings | | Proceeds from borrowings | | 43 | | | 14 | |
Net payments of commercial paper | | Net payments of commercial paper | | (29) | | | (2) | |
Payments on borrowings and finance lease obligations | Payments on borrowings and finance lease obligations | | (1,070) | | | (57) | | Payments on borrowings and finance lease obligations | | (142) | | | (24) | |
Net borrowings (payments) under short-term credit agreements | | 21 | | | (93) | | |
Distributions to noncontrolling interests | | (38) | | | (28) | | |
| Dividend payments on common stock | Dividend payments on common stock | | (633) | | | (601) | | Dividend payments on common stock | | (222) | | | (207) | |
Repurchases of common stock | Repurchases of common stock | | (370) | | | (1,228) | | Repurchases of common stock | | — | | | (311) | |
Proceeds from issuing common stock | | 36 | | | 27 | | |
| | Other, net | Other, net | | 9 | | | (11) | | Other, net | | (13) | | | 33 | |
Net cash provided by (used in) financing activities | | 2,111 | | | (2,079) | | |
Net cash used in financing activities | | Net cash used in financing activities | | (363) | | | (497) | |
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | | 147 | | | 20 | | EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | | (25) | | | 27 | |
Net decrease in cash and cash equivalents | Net decrease in cash and cash equivalents | | (93) | | | (813) | | Net decrease in cash and cash equivalents | | (121) | | | (316) | |
Cash and cash equivalents at beginning of year | Cash and cash equivalents at beginning of year | | 2,592 | | | 3,401 | | Cash and cash equivalents at beginning of year | | 2,101 | | | 2,592 | |
CASH AND CASH EQUIVALENTS AT END OF PERIOD | CASH AND CASH EQUIVALENTS AT END OF PERIOD | | $ | 2,499 | | | $ | 2,588 | | CASH AND CASH EQUIVALENTS AT END OF PERIOD | | $ | 1,980 | | | $ | 2,276 | |
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
(Unaudited)
| | | Three months ended | | Three months ended |
In millions, except per share amounts | In millions, except per share amounts | | Redeemable Noncontrolling Interests | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | | Accumulated Other Comprehensive Loss | | Total Cummins Inc. Shareholders’ Equity | | Noncontrolling Interests | | Total Equity | In millions, except per share amounts | | Redeemable Noncontrolling Interests | | 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 JUNE 30, 2022 | | $ | 226 | | | $ | 556 | | | $ | 1,668 | | | $ | 17,450 | | | $ | (9,439) | | | | $ | (1,696) | | | $ | 8,539 | | | $ | 890 | | | $ | 9,429 | | |
BALANCE AT DECEMBER 31, 2022 | | BALANCE AT DECEMBER 31, 2022 | | $ | 258 | | | $ | 556 | | | $ | 1,687 | | | $ | 18,037 | | | $ | (9,415) | | | | $ | (1,890) | | | $ | 8,975 | | | $ | 992 | | | $ | 9,967 | |
| Net income | Net income | | (7) | | | | 400 | | | | | 400 | | | 16 | | | 416 | | Net income | | (8) | | | | 790 | | | | | 790 | | | 24 | | | 814 | |
Other comprehensive loss, net of tax (Note 15) | | | | | (317) | | | (317) | | | (15) | | | (332) | | |
Issuance of common stock | | | | 7 | | | | | 7 | | | — | | | 7 | | |
Other comprehensive income, net of tax (Note 13) | | Other comprehensive income, net of tax (Note 13) | | | | | 67 | | | 67 | | | 3 | | | 70 | |
| Repurchases of common stock | | | | (23) | | | | | (23) | | | — | | | (23) | | |
| Cash dividends on common stock, $1.57 per share | Cash dividends on common stock, $1.57 per share | | | | (222) | | | | | (222) | | | — | | | (222) | | Cash dividends on common stock, $1.57 per share | | | | (222) | | | | | (222) | | | — | | | (222) | |
Distributions to noncontrolling interests | Distributions to noncontrolling interests | | | | | | — | | | (24) | | | (24) | | Distributions to noncontrolling interests | | | | | | — | | | (22) | | | (22) | |
Share-based awards | Share-based awards | | | | 4 | | | 13 | | | | | 17 | | | — | | | 17 | | Share-based awards | | | | (5) | | | 25 | | | | | 20 | | | — | | | 20 | |
Acquisition of business | | | | | | — | | | 111 | | | 111 | | |
| Fair value adjustment of redeemable noncontrolling interests | Fair value adjustment of redeemable noncontrolling interests | | 33 | | | | (33) | | | | | (33) | | | — | | | (33) | | Fair value adjustment of redeemable noncontrolling interests | | 11 | | | | (11) | | | | | (11) | | | — | | | (11) | |
| Other shareholder transactions | Other shareholder transactions | | | | 12 | | | | | 12 | | | — | | | 12 | | Other shareholder transactions | | | | 3 | | | 1 | | | | | 4 | | | — | | | 4 | |
BALANCE AT SEPTEMBER 30, 2022 | | $ | 252 | | | $ | 556 | | | $ | 1,658 | | | $ | 17,628 | | | $ | (9,449) | | | | $ | (2,013) | | | $ | 8,380 | | | $ | 978 | | | $ | 9,358 | | |
BALANCE AT MARCH 31, 2023 | | BALANCE AT MARCH 31, 2023 | | $ | 261 | | | $ | 556 | | | $ | 1,674 | | | $ | 18,605 | | | $ | (9,389) | | | | $ | (1,823) | | | $ | 9,623 | | | $ | 997 | | | $ | 10,620 | |
| BALANCE AT JULY 4, 2021 | | $ | 346 | | | $ | 556 | | | $ | 1,548 | | | $ | 16,228 | | | $ | (8,838) | | | | $ | (1,929) | | | $ | 7,565 | | | $ | 882 | | | $ | 8,447 | | |
BALANCE AT DECEMBER 31, 2021 | | BALANCE AT DECEMBER 31, 2021 | | $ | 366 | | | $ | 556 | | | $ | 1,543 | | | $ | 16,741 | | | $ | (9,123) | | | | $ | (1,571) | | | $ | 8,146 | | | $ | 889 | | | $ | 9,035 | |
| Net income | Net income | | (3) | | | | 534 | | | | | 534 | | | 10 | | | 544 | | Net income | | (4) | | | | 418 | | | | | 418 | | | 9 | | | 427 | |
Other comprehensive income, net of tax (Note 15) | | | | | 18 | | | 18 | | | 2 | | | 20 | | |
Other comprehensive income (loss), net of tax (Note 13) | | Other comprehensive income (loss), net of tax (Note 13) | | | | | 56 | | | 56 | | | (8) | | | 48 | |
| Repurchases of common stock | Repurchases of common stock | | | | (138) | | | | | (138) | | | — | | | (138) | | Repurchases of common stock | | | | (311) | | | | | (311) | | | — | | | (311) | |
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 | | | | (207) | | | | | (207) | | | — | | | (207) | |
Distributions to noncontrolling interests | Distributions to noncontrolling interests | | | | | | — | | | (15) | | | (15) | | Distributions to noncontrolling interests | | | | | | — | | | (14) | | | (14) | |
Share-based awards | Share-based awards | | | | 1 | | | | | 1 | | | — | | | 1 | | Share-based awards | | | | (9) | | | 18 | | | | | 9 | | | — | | | 9 | |
| Fair value adjustment of redeemable noncontrolling interests | Fair value adjustment of redeemable noncontrolling interests | | (42) | | | | 42 | | | | | 42 | | | — | | | 42 | | Fair value adjustment of redeemable noncontrolling interests | | 30 | | | | (30) | | | | | (30) | | | — | | | (30) | |
Other shareholder transactions | Other shareholder transactions | | | | 7 | | | 1 | | | | | 8 | | | — | | | 8 | | Other shareholder transactions | | | | (7) | | | 4 | | | | | (3) | | | 17 | | | 14 | |
BALANCE AT OCTOBER 3, 2021 | | $ | 301 | | | $ | 556 | | | $ | 1,597 | | | $ | 16,555 | | | $ | (8,974) | | | | $ | (1,911) | | | $ | 7,823 | | | $ | 879 | | | $ | 8,702 | | |
BALANCE AT MARCH 31, 2022 | | BALANCE AT MARCH 31, 2022 | | $ | 392 | | | $ | 556 | | | $ | 1,497 | | | $ | 16,952 | | | $ | (9,412) | | | | $ | (1,515) | | | $ | 8,078 | | | $ | 893 | | | $ | 8,971 | |
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | Nine months ended |
| In millions, except per share amounts | | Redeemable Noncontrolling Interests | | 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 | | $ | 366 | | | $ | 556 | | | $ | 1,543 | | | $ | 16,741 | | | $ | (9,123) | | | | | $ | (1,571) | | | $ | 8,146 | | | $ | 889 | | | $ | 9,035 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income | | (18) | | | | | | | 1,520 | | | | | | | | | 1,520 | | | 37 | | | 1,557 | |
| Other comprehensive loss, net of tax (Note 15) | | | | | | | | | | | | | | (442) | | | (442) | | | (38) | | | (480) | |
| Issuance of common stock | | | | | | 8 | | | | | | | | | | | 8 | | | — | | | 8 | |
| | | | | | | | | | | | | | | | | | | | | |
| Repurchases of common stock | | | | | | | | | | (370) | | | | | | | (370) | | | — | | | (370) | |
| Cash dividends on common stock, $4.47 per share | | | | | | | | (633) | | | | | | | | | (633) | | | — | | | (633) | |
| Distributions to noncontrolling interests | | | | | | | | | | | | | | | | — | | | (38) | | | (38) | |
| Share-based awards | | | | | | (3) | | | | | 39 | | | | | | | 36 | | | — | | | 36 | |
| Acquisition of business | | | | | | | | | | | | | | | | — | | | 111 | | | 111 | |
| Fair value adjustment of redeemable noncontrolling interests | | (96) | | | | | 96 | | | | | | | | | | | 96 | | | — | | | 96 | |
| Other shareholder transactions | | | | | | 14 | | | | | 5 | | | | | | | 19 | | | 17 | | | 36 | |
| BALANCE AT SEPTEMBER 30, 2022 | | $ | 252 | | | $ | 556 | | | $ | 1,658 | | | $ | 17,628 | | | $ | (9,449) | | | | | $ | (2,013) | | | $ | 8,380 | | | $ | 978 | | | $ | 9,358 | |
| | | | | | | | | | | | | | | | | | | | | |
| BALANCE AT DECEMBER 31, 2020 | | $ | 282 | | | $ | 556 | | | $ | 1,617 | | | $ | 15,419 | | | $ | (7,779) | | | | | $ | (1,982) | | | $ | 7,831 | | | $ | 876 | | | $ | 8,707 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income | | (9) | | | | | | | 1,737 | | | | | | | | | 1,737 | | | 36 | | | 1,773 | |
| Other comprehensive income (loss), net of tax (Note 15) | | | | | | | | | | | | | | 71 | | | 71 | | | (5) | | | 66 | |
| Issuance of common stock | | | | | | 1 | | | | | | | | | | | 1 | | | — | | | 1 | |
| | | | | | | | | | | | | | | | | | | | | |
| Repurchases of common stock | | | | | | | | | | (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 | |
| | | | | | | | | | | | | | | | | | | | | |
| Fair value adjustment of redeemable noncontrolling interests | | 28 | | | | | (28) | | | | | | | | | | | (28) | | | — | | | (28) | |
| Other shareholder transactions | | | | | | 11 | | | | | 2 | | | | | | | 13 | | | — | | | 13 | |
| BALANCE AT OCTOBER 3, 2021 | | $ | 301 | | | $ | 556 | | | $ | 1,597 | | | $ | 16,555 | | | $ | (8,974) | | | | | $ | (1,911) | | | $ | 7,823 | | | $ | 879 | | | $ | 8,702 | |
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, axles, drivelines, brakes, suspension systems, electric power generation systems, batteries, electrified power systems, electric powertrains, hydrogen production and fuel cell products. We sell our products to original equipment manufacturers (OEMs), distributors, dealers and other customers worldwide. We serve our customers through a service network of approximately 500460 wholly-owned, joint venture and independent distributor locations and more than 10,000 Cummins certified dealer locations in approximately 190 countries and territories.
Meritor Acquisition
On August 3, 2022, we completed the acquisition of Meritor, Inc. (Meritor) with a purchase price of $2.9 billion (including debt repaid concurrent with the acquisition). Our consolidated results and segment results include Meritor's activity since the date of acquisition. The results are included in our Components segment in the axles and brakes business while the electric powertrain portion is included in our New Power segment. See NOTE 16, "ACQUISITIONS," for additional information.
Reporting Period
Beginning in 2022, we transitioned to a Gregorian calendar with our reporting period ending on the last day of the quarterly calendar period. In 2021 and prior, our reporting period ended on the Sunday closest to the last day of the quarterly calendar period. The third quarters of 2022 and 2021 ended on September 30 and October 3, 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, 20212022. Our interim period financial results for the three and nine 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.
Revisions
During the third quarter of 2022, we determined that a put right held by a minority shareholder in one of our subsidiaries, which became exercisable in September 2022, was incorrectly classified as noncontrolling interests (NCI) as opposed to mezzanine equity in our Condensed Consolidated Balance Sheets. Because the put right was exercisable at fair value (as defined in the governing documents of the subsidiary), the NCI should have also been reflected at fair value at each balance sheet date with an offset to additional paid-in-capital (APIC). As a result, we have revised our historical financial statements to reflect the NCI at its estimated fair value as redeemable noncontrolling interests in our Condensed Consolidated Balance Sheets with a corresponding offset in NCI and APIC. This error did not impact our Condensed Consolidated Statements of Net Income, Condensed Consolidated Statements of Comprehensive Income or Condensed Consolidated Statements of Cash Flows for any period. The amount reclassified from NCI and APIC was as follows:
| | | | | | | | | | | | | | | | | | | | |
In millions | | Noncontrolling Interests | | Additional Paid-in Capital | | Total Correction to Mezzanine Equity |
December 31, 2019 | | $ | 58 | | | $ | — | | | $ | 58 | |
December 31, 2020 | | 51 | | | 231 | | | 282 | |
April 4, 2021 | | 48 | | | 297 | | | 345 | |
July 4, 2021 | | 45 | | | 301 | | | 346 | |
October 3, 2021 | | 42 | | | 259 | | | 301 | |
December 31, 2021 | | 38 | | | 328 | | | 366 | |
March 31, 2022 | | 34 | | | 358 | | | 392 | |
June 30, 2022 | | 27 | | | 199 | | | 226 | |
| | | | | | |
See NOTE 14, "REDEEMABLE NONCONTROLLING INTERESTS," for further information regarding the put right. We have concluded the correction of this error does not have a material impact to our previously issued annual and interim consolidated financial statements.
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.
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 |
| September 30, 2022 | | October 3, 2021 | | September 30, 2022 | | October 3, 2021 |
Options excluded | 22,307 | | | 7,813 | | | 25,290 | | | 4,577 | |
| | | | | | | | | | | | | | | |
| Three months ended | | | | |
| March 31, | | |
| 2023 | | 2022 | | | | |
Options excluded | 4,833 | | | 20,463 | | | | | |
Related Party Transactions
In accordance with the provisions of various joint venture agreements, we may purchase products and components from our joint ventures, sell products and components to our joint ventures and our joint ventures may sell products and components to unrelated parties.
The following is a summary of sales to and purchases from nonconsolidated equity investees:
| | | | | | | | | | | | | | | | | | |
| | Three months ended | | | | |
| | March 31, | | |
In millions | | 2023 | | 2022 | | | | |
Sales to nonconsolidated equity investees | | $ | 376 | | | $ | 344 | | | | | |
Purchases from nonconsolidated equity investees | | 704 | | | 427 | | | | | |
| | | | | | | | |
The following is a summary of accounts receivable from and accounts payable to nonconsolidated equity investees:
| | | | | | | | | | | | | | | | | | | | |
In millions | | March 31, 2023 | | December 31, 2022 | | Balance Sheet Location |
Accounts receivable from nonconsolidated equity investees | | $ | 469 | | | $ | 376 | | | Accounts and notes receivable, net |
Accounts payable to nonconsolidated equity investees | | 370 | | | 292 | | | Accounts payable (principally trade) |
| | | | | | |
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 original due date. The maximum amount that we may have outstanding under the program is $532 million at March 31, 2023. We do not reimburse vendors for any costs they incur for participation in the program, their participation is completely voluntary and there are no assets pledged as security or other forms of guarantees provided for the committed payment to the finance provider or intermediary. As a result, all amounts owed to the financial intermediaries are presented as accounts payable in our Condensed Consolidated Balance Sheets. Amounts due to the financial intermediaries reflected in accounts payable at March 31, 2023 and December 31, 2022, were $253 million and $331 million, respectively.
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 September 30, 2022,March 31, 2023, was $695$649 million. We expect to recognize the related revenue of $125$126 million over the next 12 months and $570$523 million over periods up to 10 years. See NOTE 12,10, "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 | | September 30, 2022 | | December 31, 2021 | In millions | | March 31, 2023 | | December 31, 2022 |
Unbilled revenue | Unbilled revenue | | $ | 244 | | | $ | 100 | | Unbilled revenue | | $ | 332 | | | $ | 257 | |
Deferred revenue, primarily extended warranty | | 1,788 | | | 1,705 | | |
Deferred revenue | | Deferred revenue | | 1,977 | | | 1,848 | |
| |
We recognized revenue of $123 million and $539$206 million for the three and nine months ended September 30, 2022,March 31, 2023, compared with $130 million and $432$240 million for the comparable periodsperiod in 2021,2022, 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 nine months ended September 30, 2022March 31, 2023 or October 3, 2021.March 31, 2022.
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 | |
| | | Three months ended | | Nine months ended | | | March 31, | |
In millions | In millions | | September 30, 2022 | | October 3, 2021 | | September 30, 2022 | | October 3, 2021 | In millions | | 2023 | | 2022 | |
United States | United States | | $ | 4,116 | | | $ | 3,177 | | | $ | 11,361 | | | $ | 9,500 | | United States | | $ | 4,802 | | | $ | 3,457 | | |
| China | China | | 601 | | | 679 | | | 1,774 | | | 2,468 | | China | | 790 | | | 653 | | |
| India | India | | 358 | | | 294 | | | 978 | | | 841 | | India | | 411 | | | 309 | | |
| Other international | Other international | | 2,258 | | | 1,818 | | | 6,191 | | | 5,362 | | Other international | | 2,450 | | | 1,966 | | |
Total net sales | Total net sales | | $ | 7,333 | | | $ | 5,968 | | | $ | 20,304 | | | $ | 18,171 | | Total net sales | | $ | 8,453 | | | $ | 6,385 | | |
|
Segment Revenue
As previously announced, our Components segment reorganized its reporting structure to carve out the electronics business into the newly formed software and electronics business and combined the turbo technologies and fuels systems businesses into the newly formed engine components business. We started reporting results for the reorganized business in the first quarter of 2023 and reflected these changes for prior periods.
Components segment external sales by business were as follows:
| | | | | | | | | | | | | | | | | | |
| | Three months ended | | | | |
| | March 31, | | |
In millions | | 2023 | | 2022 | | | | |
Axles and brakes | | $ | 1,272 | | | $ | — | | | | | |
Emission solutions | | 939 | | | 808 | | | | | |
Filtration | | 342 | | | 308 | | | | | |
Engine components | | 292 | | | 240 | | | | | |
Automated transmissions | | 178 | | | 134 | | | | | |
Software and electronics | | 20 | | | 27 | | | | | |
Total sales | | $ | 3,043 | | | $ | 1,517 | | | | | |
| | | | | | | | |
Engine segment external sales by market were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | Three months ended | |
| | Three months ended | | Nine months ended | | March 31, | |
In millions | In millions | | September 30, 2022 | | October 3, 2021 | | September 30, 2022 | | October 3, 2021 | In millions | | 2023 | | 2022 | |
Heavy-duty truck | Heavy-duty truck | | $ | 751 | | | $ | 662 | | | $ | 2,232 | | | $ | 1,941 | | Heavy-duty truck | | $ | 860 | | | $ | 684 | | |
Medium-duty truck and bus | Medium-duty truck and bus | | 583 | | | 501 | | | 1,794 | | | 1,461 | | Medium-duty truck and bus | | 617 | | | 591 | | |
Light-duty automotive | Light-duty automotive | | 465 | | | 492 | | | 1,377 | | | 1,432 | | Light-duty automotive | | 441 | | | 487 | | |
Total on-highway | Total on-highway | | 1,799 | | | 1,655 | | | 5,403 | | | 4,834 | | Total on-highway | | 1,918 | | | 1,762 | | |
Off-highway | Off-highway | | 264 | | | 306 | | | 801 | | | 942 | | Off-highway | | 334 | | | 287 | | |
Total sales | Total sales | | $ | 2,063 | | | $ | 1,961 | | | $ | 6,204 | | | $ | 5,776 | | Total sales | | $ | 2,252 | | | $ | 2,049 | | |
|
As previously announced, due to the indefinite suspension of operations in Russia, we reorganized the regional management structure of our Distribution segment and moved all Commonwealth of Independent States (CIS) sales into the Europe and Africa and Middle East regions. The Russian portion of prior period CIS sales moved to the Europe region. We started to report results for our new regional management structure in the first quarter of 2023 and reflected these changes for historical periods.
Distribution segment external sales by region were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | Three months ended | |
| | Three months ended | | Nine months ended | | March 31, | |
In millions | In millions | | September 30, 2022 | | October 3, 2021 | | September 30, 2022 | | October 3, 2021 | In millions | | 2023 | | 2022 | |
North America | North America | | $ | 1,512 | | | $ | 1,237 | | | $ | 4,374 | | | $ | 3,631 | | North America | | $ | 1,693 | | | $ | 1,371 | | |
Asia Pacific | Asia Pacific | | 258 | | | 236 | | | 744 | | | 675 | | Asia Pacific | | 239 | | | 244 | | |
Europe | Europe | | 174 | | | 143 | | | 494 | | | 467 | | Europe | | 194 | | | 275 | | |
China | China | | 89 | | | 80 | | | 270 | | | 239 | | China | | 101 | | | 82 | | |
Africa and Middle East | Africa and Middle East | | 73 | | | 74 | | | 174 | | | 197 | | Africa and Middle East | | 62 | | | 50 | | |
India | | India | | 57 | | | 48 | | |
Latin America | Latin America | | 58 | | | 48 | | | 155 | | | 136 | | Latin America | | 53 | | | 41 | | |
India | | 55 | | | 48 | | | 155 | | | 138 | | |
Russia(1) | | 13 | | | 86 | | | 224 | | | 209 | | |
| Total sales | Total sales | | $ | 2,232 | | | $ | 1,952 | | | $ | 6,590 | | | $ | 5,692 | | Total sales | | $ | 2,399 | | | $ | 2,111 | | |
| | (1) The Distribution segment is organized and managed by geographic regions. The Russia region contains sales to several countries in the geographic area. | |
| |
Distribution segment external sales by product line were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
In millions | | September 30, 2022 | | October 3, 2021 | | September 30, 2022 | | October 3, 2021 |
Parts | | $ | 942 | | | $ | 796 | | | $ | 2,855 | | | $ | 2,313 | |
Engines | | 449 | | | 376 | | | 1,315 | | | 1,058 | |
Power generation | | 428 | | | 437 | | | 1,266 | | | 1,305 | |
Service | | 413 | | | 343 | | | 1,154 | | | 1,016 | |
Total sales | | $ | 2,232 | | | $ | 1,952 | | | $ | 6,590 | | | $ | 5,692 | |
| | | | | | | | |
Components segment external sales by business were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
In millions | | September 30, 2022 | | October 3, 2021 | | September 30, 2022 | | October 3, 2021 |
Emission solutions | | $ | 748 | | | $ | 699 | | | $ | 2,323 | | | $ | 2,466 | |
Axles and brakes | | 732 | | | — | | | 732 | | | — | |
Filtration | | 322 | | | 288 | | | 949 | | | 892 | |
Turbo technologies | | 205 | | | 177 | | | 597 | | | 609 | |
Automated transmissions | | 159 | | | 112 | | | 436 | | | 374 | |
Electronics and fuel systems | | 54 | | | 71 | | | 177 | | | 286 | |
Total sales | | $ | 2,220 | | | $ | 1,347 | | | $ | 5,214 | | | $ | 4,627 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Three months ended | | | | |
| | March 31, | | |
In millions | | 2023 | | 2022 | | | | |
Parts | | $ | 1,052 | | | $ | 926 | | | | | |
Power generation | | 491 | | | 398 | | | | | |
Engines | | 456 | | | 438 | | | | | |
Service | | 400 | | | 349 | | | | | |
Total sales | | $ | 2,399 | | | $ | 2,111 | | | | | |
| | | | | | | | |
Power Systems segment external sales by product line were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
In millions | | September 30, 2022 | | October 3, 2021 | | September 30, 2022 | | October 3, 2021 |
Power generation | | $ | 425 | | | $ | 395 | | | $ | 1,232 | | | $ | 1,127 | |
Industrial | | 226 | | | 209 | | | 627 | | | 621 | |
Generator technologies | | 122 | | | 84 | | | 331 | | | 251 | |
Total sales | | $ | 773 | | | $ | 688 | | | $ | 2,190 | | | $ | 1,999 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Three months ended | | | | |
| | March 31, | | |
In millions | | 2023 | | 2022 | | | | |
Power generation | | $ | 380 | | | $ | 399 | | | | | |
Industrial | | 189 | | | 188 | | | | | |
Generator technologies | | 110 | | | 96 | | | | | |
Total sales | | $ | 679 | | | $ | 683 | | | | | |
| | | | | | | | |
NOTE 3. RUSSIAN OPERATIONSPENSIONS AND OTHER POSTRETIREMENT BENEFITS
On March 17, 2022,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 | | | | |
| | March 31, | | |
In millions | | 2023 | | 2022 | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Defined benefit pension contributions | | $ | 88 | | | $ | 33 | | | | | |
| | | | | | | | |
| | | | | | | | |
OPEB payments, net | | 4 | | | 10 | | | | | |
| | | | | | | | |
| | | | | | | | |
Defined contribution pension plans | | 43 | | | 36 | | | | | |
| | | | | | | | |
We anticipate making additional defined benefit pension contributions during the Boardremainder of Directors (the Board) decided to indefinitely suspend2023 of $20 million for 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,U.S. 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 RussiaU.K. qualified and assessed other potential liabilities. We experienced and expect to continue to experience an inability to collect customer receivables andnon-qualified pension plans. These contributions may be the subjectmade from trusts or company funds either to increase pension assets or to make direct benefit payments to plan participants. We expect our 2023 annual net periodic pension cost to be near zero.
The components of litigationnet periodic pension and OPEB expense (income) under our plans were 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. In the third quarter, we incurred $4 million of additional contract termination charges, and we recovered certain bad debt expenses and inventory amounts reserved in the first quarter for a net charge of $1 million. As of September 30, 2022, we had approximately $13 million of inventory and $15 million of receivables in Russia, all of which are fully reserved. In addition, we have cash balances of $71 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:follows:
| | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended | | |
In millions | | September 30, 2022 | | September 30, 2022 | | Statement of Net Income Location |
Inventory write-downs | | $ | (2) | | | $ | 17 | | | Cost of sales |
Accounts receivable reserves | | (1) | | | 42 | | | Other operating expense, net |
Impairment and other joint venture costs | | — | | | 31 | | | Equity, royalty and interest income from investees |
| | | | | | |
Other | | 4 | | | 22 | | | Other operating expense, net |
Total | | $ | 1 | | | $ | 112 | | | |
| | | | | | |
We will continue to evaluate the situation as conditions evolve and may take additional actions as deemed necessary in future periods. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension | | | | |
| | U.S. Plans | | U.K. Plans | | OPEB |
| | Three months ended March 31, |
In millions | | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 |
Service cost | | $ | 29 | | | $ | 34 | | | $ | 4 | | | $ | 8 | | | $ | — | | | $ | — | |
Interest cost | | 42 | | | 22 | | | 17 | | | 9 | | | 2 | | | 1 | |
Expected return on plan assets | | (69) | | | (52) | | | (25) | | | (20) | | | — | | | — | |
| | | | | | | | | | | | |
Recognized net actuarial loss (gain) | | 2 | | | 6 | | | — | | | 1 | | | (1) | | | — | |
Net periodic benefit expense (income) | | $ | 4 | | | $ | 10 | | | $ | (4) | | | $ | (2) | | | $ | 1 | | | $ | 1 | |
| | | | | | | | | | | | |
NOTE 4. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
We sponsor funded and unfunded domestic and foreign defined benefit pension and other postretirement benefit (OPEB) plans. Prior to the acquisition, Meritor provided a range of benefits to its employees and retirees, including pension benefits and postretirement healthcare benefits. As part of the acquisition, we assumed the assets and liabilities associated with these plans. Accordingly, on August 3, 2022, we recorded assets of $147 million and liabilities of $105 million on our Condensed Consolidated Balance Sheets related to Meritor's postretirement benefit plans.
Contributions to these plans were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
In millions | | September 30, 2022 | | October 3, 2021 | | September 30, 2022 | | October 3, 2021 |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Defined benefit pension contributions | | $ | 7 | | | $ | 13 | | | $ | 46 | | | $ | 67 | |
| | | | | | | | |
| | | | | | | | |
OPEB payments, net | | 9 | | | 5 | | | 25 | | | 19 | |
| | | | | | | | |
| | | | | | | | |
Defined contribution pension plans | | 26 | | | 20 | | | 82 | | | 72 | |
| | | | | | | | |
We anticipate making additional defined benefit pension contributions during the remainder of 2022 of $7 million for our U.S. and U.K. qualified and non-qualified pension 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 2022 annual net periodic pension cost to approximate $20 million.
The components of net periodic pension and OPEB costs under our plans were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension | | | | |
| | U.S. Plans | | U.K. Plans | | OPEB |
| | Three months ended |
In millions | | September 30, 2022 | | October 3, 2021 | | September 30, 2022 | | October 3, 2021 | | September 30, 2022 | | October 3, 2021 |
Service cost | | $ | 35 | | | $ | 35 | | | $ | 7 | | | $ | 8 | | | $ | — | | | $ | — | |
Interest cost | | 27 | | | 20 | | | 10 | | | 8 | | | 2 | | | 1 | |
Expected return on plan assets | | (60) | | | (49) | | | (22) | | | (22) | | | — | | | — | |
Amortization of prior service cost | | 1 | | | — | | | — | | | 1 | | | — | | | — | |
Recognized net actuarial loss | | 5 | | | 11 | | | 1 | | | 8 | | | — | | | — | |
Net periodic benefit cost (credit) | | $ | 8 | | | $ | 17 | | | $ | (4) | | | $ | 3 | | | $ | 2 | | | $ | 1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Pension | | | | |
| | U.S. Plans | | U.K. Plans | | OPEB |
| | Nine months ended |
In millions | | September 30, 2022 | | October 3, 2021 | | September 30, 2022 | | October 3, 2021 | | September 30, 2022 | | October 3, 2021 |
Service cost | | $ | 103 | | | $ | 105 | | | $ | 23 | | | $ | 25 | | | $ | — | | | $ | — | |
Interest cost | | 71 | | | 59 | | | 28 | | | 23 | | | 4 | | | 3 | |
Expected return on plan assets | | (164) | | | (149) | | | (62) | | | (65) | | | — | | | — | |
Amortization of prior service cost | | 1 | | | — | | | — | | | 2 | | | — | | | — | |
Recognized net actuarial loss | | 17 | | | 35 | | | 2 | | | 24 | | | — | | | — | |
Net periodic benefit cost (credit) | | $ | 28 | | | $ | 50 | | | $ | (9) | | | $ | 9 | | | $ | 4 | | | $ | 3 | |
NOTE 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 periodsperiod was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | Three months ended | | |
| | | Three months ended | | Nine months ended | | | | March 31, | | |
In millions | In millions | | September 30, 2022 | | October 3, 2021 | | September 30, 2022 | | October 3, 2021 | | In millions | | 2023 | | 2022 | | |
Manufacturing entities | Manufacturing entities | | | | | | | | | | Manufacturing entities | | | | | | |
Dongfeng Cummins Engine Company, Ltd. | Dongfeng Cummins Engine Company, Ltd. | | $ | 8 | | | $ | 11 | | | $ | 35 | | | $ | 63 | | | Dongfeng Cummins Engine Company, Ltd. | | $ | 19 | | | $ | 16 | | | |
Beijing Foton Cummins Engine Co., Ltd. | | Beijing Foton Cummins Engine Co., Ltd. | | 16 | | | 14 | | | |
Chongqing Cummins Engine Company, Ltd. | Chongqing Cummins Engine Company, Ltd. | | 7 | | | 8 | | | 23 | | | 28 | | | Chongqing Cummins Engine Company, Ltd. | | 9 | | | 9 | | | |
Beijing Foton Cummins Engine Co., Ltd. | | 6 | | | 23 | | | 34 | | | 108 | | | |
Tata Cummins, Ltd. | Tata Cummins, Ltd. | | 5 | | | 6 | | | 19 | | | 13 | | | Tata Cummins, Ltd. | | 8 | | | 9 | | | |
All other manufacturers | All other manufacturers | | 11 | | | 21 | | | 14 | | (1) | 104 | | | All other manufacturers | | 19 | | | (10) | | (1) | |
| Distribution entities | Distribution entities | | | Distribution entities | | |
Komatsu Cummins Chile, Ltda. | Komatsu Cummins Chile, Ltda. | | 13 | | | 8 | | | 32 | | | 23 | | | Komatsu Cummins Chile, Ltda. | | 14 | | | 7 | | | |
All other distributors | All other distributors | | 3 | | | 2 | | | 8 | | | 6 | | | All other distributors | | 3 | | | 2 | | | |
| Cummins share of net income | Cummins share of net income | | 53 | | | 79 | | | 165 | | | 345 | | | Cummins share of net income | | 88 | | | 47 | | | |
Royalty and interest income | Royalty and interest income | | 17 | | | 15 | | | 96 | | | 52 | | | Royalty and interest income | | 31 | | | 49 | | | |
Equity, royalty and interest income from investees | Equity, royalty and interest income from investees | | $ | 70 | | | $ | 94 | | | $ | 261 | | | $ | 397 | | | Equity, royalty and interest income from investees | | $ | 119 | | | $ | 96 | | | |
| | (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 16, "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. See NOTE 15, "RUSSIAN OPERATIONS," 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. See NOTE 15, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information. | |
| |
NOTE 6.5. INCOME TAXES
Our effective tax rates for the three and nine months ended September 30,March 31, 2023 and 2022, were 32.721.7 percent and 24.6 percent, respectively. Our effective tax rates for the three and nine months ended October 3, 2021, were 19.9 percent and 21.126.8 percent, respectively.
The three months ended September 30, 2022,March 31, 2023, contained unfavorablefavorable discrete tax items of $57$3 million, primarily due to $51 million of unfavorableshare-based compensation tax costs associated with internal restructuring ahead of the planned separation of our filtration business and $10 million of unfavorable return to provision adjustments, partially offset by $4 million of net favorable other discrete tax items.
The nine months ended September 30, 2022, contained unfavorable net discrete tax items of $52 million, primarily due to $69 million of unfavorable tax costs associated with internal restructuring ahead of the planned separation of our filtration business and $10 million of unfavorable return to provision adjustments, partially offset by $27 million of favorable changes in tax reserves.benefits.
The three months ended October 3, 2021,March 31, 2022, contained favorableunfavorable discrete items of $11$31 million, primarily due to a $16$18 million favorable release of tax reservesunfavorable changes associated with the settlementindefinite suspension of tax positions, partially offset by $5Russian operations, $9 million of net unfavorable return to provision adjustments.
The nine months ended October 3, 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 (mostlyreserves and $4 million of net unfavorable other discrete tax items.
NOTE 6. MARKETABLE SECURITIES
A summary of marketable securities, all of which were classified as current, was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
In millions | | Cost | | Gross unrealized gains/(losses)(1) | | Estimated fair value | | Cost | | Gross unrealized gains/(losses)(1) | | Estimated fair value |
| | | | | | | | | | | | |
Equity securities | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Certificates of deposit | | $ | 226 | | | $ | — | | | $ | 226 | | | $ | 209 | | | $ | — | | | $ | 209 | |
Debt mutual funds | | 206 | | | (4) | | | 202 | | | 238 | | | (5) | | | 233 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Equity mutual funds | | 31 | | | (2) | | | 29 | | | 25 | | | 3 | | | 28 | |
| | | | | | | | | | | | |
Debt securities | | 1 | | | 1 | | | 2 | | | 2 | | | — | | | 2 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Marketable securities | | $ | 464 | | | $ | (5) | | | $ | 459 | | | $ | 474 | | | $ | (2) | | | $ | 472 | |
| | | | | | | | | | | | |
(1) Unrealized gains and losses for debt securities are recorded in other comprehensive income while unrealized gains and losses for equity securities are recorded in our 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 three months ended March 31, 2023, or the year ended December 31, 2022.
A description of the valuation techniques and inputs used for our Level 2 fair value measures is as follows:
•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 U.K.).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:
| | | | | | | | | | | | | | | | | | |
| | | | | | Three months ended |
| | | | March 31, |
In millions | | | | | | 2023 | | 2022 |
Proceeds from sales of marketable securities | | | | | | $ | 276 | | | $ | 195 | |
Proceeds from maturities of marketable securities | | | | | | 69 | | | 59 | |
Investments in marketable securities - liquidations | | | | | | $ | 345 | | | $ | 254 | |
| | | | | | | | |
| | | | | | | | |
NOTE 7. INVENTORIES
Inventories are stated at the lower of cost or net realizable value. Inventories included the following:
| | | | | | | | | | | | | | |
In millions | | March 31, 2023 | | December 31, 2022 |
Finished products | | $ | 3,089 | | | $ | 2,917 | |
Work-in-process and raw materials | | 3,019 | | | 2,926 | |
Inventories at FIFO cost | | 6,108 | | | 5,843 | |
Excess of FIFO over LIFO | | (230) | | | (240) | |
Inventories | | $ | 5,878 | | | $ | 5,603 | |
NOTE 7. MARKETABLE SECURITIES
A summary of marketable securities, all of which were classified as current, was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
In millions | | Cost | | Gross unrealized gains/(losses)(1) | | Estimated fair value | | Cost | | Gross unrealized gains/(losses)(1) | | Estimated fair value |
| | | | | | | | | | | | |
Equity securities | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Certificates of deposit | | $ | 229 | | | $ | — | | | $ | 229 | | | $ | 299 | | | $ | — | | | $ | 299 | |
| | | | | | | | | | | | |
Debt mutual funds | | 215 | | | (7) | | | 208 | | | 254 | | | 2 | | | 256 | |
Equity mutual funds | | 28 | | | 1 | | | 29 | | | 29 | | | 10 | | | 39 | |
| | | | | | | | | | | | |
Debt securities | | — | | | — | | | — | | | 1 | | | — | | | 1 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total marketable securities | | $ | 472 | | | $ | (6) | | | $ | 466 | | | $ | 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. |
| | | | | | | | | | | | |
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 nine months ended September 30, 2022, or the year ended December 31, 2021.
A description of the valuation techniques and inputs used for our Level 2 fair value measures is as follows:
•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 |
In millions | | | | | | September 30, 2022 | | October 3, 2021 |
Proceeds from sales of marketable securities | | | | | | $ | 576 | | | $ | 428 | |
Proceeds from maturities of marketable securities | | | | | | 243 | | | 174 | |
Investments in marketable securities - liquidations | | | | | | $ | 819 | | | $ | 602 | |
| | | | | | | | |
| | | | | | | | |
NOTE 8. INVENTORIES
Inventories are stated at the lower of cost or net realizable value. Inventories included the following:
| | | | | | | | | | | | | | |
In millions | | September 30, 2022 | | December 31, 2021 |
Finished products | | $ | 2,914 | | | $ | 2,538 | |
Work-in-process and raw materials | | 2,860 | | | 2,009 | |
Inventories at FIFO cost | | 5,774 | | | 4,547 | |
Excess of FIFO over LIFO | | (231) | | | (192) | |
Total inventories | | $ | 5,543 | | | $ | 4,355 | |
NOTE 9. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table summarizes the changes in the carrying amount of goodwill for the nine months ended September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
In millions | | Components | | New Power | | Distribution | | Power Systems | | Engine | | | | | | Total |
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Balance at December 31, 2021 | | $ | 934 | | | $ | 257 | | | $ | 79 | | | $ | 11 | | | $ | 6 | | | | | | | $ | 1,287 | |
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Acquisitions(1) | | 799 | | | 159 | | | — | | | — | | | — | | | | | | | 958 | |
Translation and other | | (15) | | | — | | | — | | | (1) | | | — | | | | | | | (16) | |
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Balance at September 30, 2022 | | $ | 1,718 | | | $ | 416 | | | $ | 79 | | | $ | 10 | | | $ | 6 | | | | | | | $ | 2,229 | |
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(1)See NOTE 16, "ACQUISITIONS," for additional information on acquisition goodwill. |
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Intangible assets that have finite useful lives are amortized over their estimated useful lives. The following table summarizes our other intangible assets with finite useful lives that are subject to amortization:
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In millions | | September 30, 2022 | | December 31, 2021 |
Software | | $ | 652 | | | $ | 586 | |
Less: Accumulated amortization | | (378) | | | (314) | |
Software, net | | 274 | | | 272 | |
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Trademarks, patents, customer relationships and other(1) | | 2,711 | | | 957 | |
Less: Accumulated amortization | | (383) | | | (329) | |
Trademarks, patents, customer relationships and other, net | | 2,328 | | | 628 | |
Total other intangible assets, net | | $ | 2,602 | | | $ | 900 | |
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(1)See NOTE 16, "ACQUISITIONS," for additional information on acquired intangible assets. |
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NOTE 10. SUPPLEMENTAL BALANCE SHEET DATA
Other assets included the following:
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| In millions | | September 30, 2022 | | December 31, 2021 |
| Deferred income taxes | | $ | 472 | | | $ | 428 | |
| Operating lease assets | | 471 | | | 444 | |
| Corporate owned life insurance | | 378 | | | 492 | |
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| Other | | 656 | | | 402 | |
| Other assets | | $ | 1,977 | | | $ | 1,766 | |
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| In millions | | March 31, 2023 | | December 31, 2022 |
| Deferred income taxes | | $ | 688 | | | $ | 625 | |
| Operating lease assets | | 489 | | | 492 | |
| Corporate owned life insurance | | 409 | | | 390 | |
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| Other | | 528 | | | 633 | |
| Other assets | | $ | 2,114 | | | $ | 2,140 | |
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Other accrued expenses included the following:
| | In millions | In millions | | September 30, 2022 | | December 31, 2021 | In millions | | March 31, 2023 | | December 31, 2022 |
Income taxes payable | | Income taxes payable | | $ | 341 | | | $ | 173 | |
Marketing accruals | Marketing accruals | | $ | 307 | | | $ | 303 | | Marketing accruals | | 339 | | | 316 | |
Income taxes payable | | 231 | | | 107 | | |
Other taxes payable | Other taxes payable | | 210 | | | 234 | | Other taxes payable | | 226 | | | 224 | |
Current portion of operating lease liabilities | Current portion of operating lease liabilities | | 126 | | | 128 | | Current portion of operating lease liabilities | | 133 | | | 132 | |
Other | Other | | 694 | | | 418 | | Other | | 609 | | | 620 | |
Other accrued expenses | Other accrued expenses | | $ | 1,568 | | | $ | 1,190 | | Other accrued expenses | | $ | 1,648 | | | $ | 1,465 | |
Other liabilities included the following:
| | In millions | In millions | | September 30, 2022 | | December 31, 2021 | In millions | | March 31, 2023 | | December 31, 2022 |
| Accrued product warranty | | Accrued product warranty | | $ | 753 | | | $ | 744 | |
Deferred income taxes | Deferred income taxes | | $ | 570 | | | $ | 403 | | Deferred income taxes | | 662 | | | 649 | |
Pensions | | Pensions | | 442 | | | 445 | |
Operating lease liabilities | Operating lease liabilities | | 347 | | | 326 | | Operating lease liabilities | | 364 | | | 368 | |
Long-term income taxes | | Long-term income taxes | | 192 | | | 192 | |
Accrued compensation | Accrued compensation | | 201 | | | 177 | | Accrued compensation | | 172 | | | 184 | |
Long-term income taxes | | 192 | | | 263 | | |
Other postretirement benefits | | Other postretirement benefits | | 138 | | | 141 | |
Mark-to-market valuation on interest rate derivatives | Mark-to-market valuation on interest rate derivatives | | 161 | | | 19 | | Mark-to-market valuation on interest rate derivatives | | 118 | | | 151 | |
Other long-term liabilities | Other long-term liabilities | | 421 | | | 320 | | Other long-term liabilities | | 442 | | | 437 | |
Other liabilities | Other liabilities | | $ | 1,892 | | | $ | 1,508 | | Other liabilities | | $ | 3,283 | | | $ | 3,311 | |
NOTE 11.9. DEBT
Loans Payable and Commercial Paper
Loans payable, commercial paper and the related weighted-average interest rates were as follows:
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In millions | | September 30, 2022 | | | | December 31, 2021 | | |
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Loans payable (1) | | $ | 217 | | | | | $ | 208 | | | |
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Commercial paper | | 2,393 | | | | (2)(3) | 313 | | (4) | |
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(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 2.82 percent at September 30, 2022. This included $97 million of borrowings under the Europe program at a weighted-average interest rate of 0.87 percent and $2,296 million of borrowings under the U.S. program at a weighted-average interest rate of 2.91 percent. | | |
(3) Additional commercial paper borrowings were primarily used for the Meritor acquisition. See NOTE 16, "ACQUISITIONS," for additional information. | | |
(4) 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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In millions | | March 31, 2023 | | | | December 31, 2022 | | |
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Loans payable (1) | | $ | 229 | | | | | $ | 210 | | | |
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Commercial paper (2) | | 2,545 | | | | | 2,574 | | | |
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(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 4.82 percent and 4.27 percent at March 31, 2023 and December 31, 2022, respectively. | | |
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We can issue up to $4.0 billion of unsecured, short-term promissory notes (commercial paper) pursuant to the Board of Directors (the Board) authorized commercial paper programs. These 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 17, 2022, we entered into an amended and restated 364-day credit agreement, which allows us to borrow up to $1.5 billion of unsecured funds at any time prior to August 16, 2023. This credit agreement amended and restated the prior $1.5 billion 364-day credit facility that matured on August 17, 2022.
On August 17, 2022, we also entered into an incremental 364-day credit agreement, which allows us to borrow up to $500 million of unsecured funds at any time prior to August 16, 2023.
We have access to committed credit facilities totaling $4.0 billion, including the $1.5 billion 364-day facility that expires August 16, 2023, $500 million incremental 364-day facility that expires August 16, 2023, and our $2.0 billion five-year facility that expires on August 18, 2026. We intend to maintain credit facilities at the current or higher aggregate amounts by renewing or replacing these facilities at or before expiration. These revolving credit facilities are maintained primarily to provide backup liquidity for our commercial paper borrowings and general corporate purposes. There were no outstanding borrowings under these facilities at September 30, 2022March 31, 2023 and December 31, 2021.2022. At September 30, 2022,March 31, 2023, the $2,393 million$2.5 billion of outstanding commercial paper effectively reduced the $4.0 billion of revolving credit capacity to $1.6$1.5 billion.
At September 30, 2022,March 31, 2023, we also had an additional $230$215 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 | | Interest Rate | | September 30, 2022 | | December 31, 2021 |
Long-term debt | | | | | | |
Senior notes, due 2023 | | 3.65% | | $ | 500 | | | $ | 500 | |
Term loan, due 2025 | | Variable | | 2,000 | | | — | |
Senior notes, due 2025(1) | | 0.75% | | 500 | | | 500 | |
Debentures, due 2027 | | 6.75% | | 58 | | | 58 | |
Debentures, due 2028 | | 7.125% | | 250 | | | 250 | |
Senior notes, due 2030(1) | | 1.50% | | 850 | | | 850 | |
Senior notes, due 2043 | | 4.875% | | 500 | | | 500 | |
Senior notes, due 2050 | | 2.60% | | 650 | | | 650 | |
Debentures, due 2098(2) | | 5.65% | | 165 | | | 165 | |
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Other debt | | | | 121 | | | 110 | |
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Unamortized discount and deferred issuance costs | | | | (65) | | | (68) | |
Fair value adjustments due to hedge on indebtedness | | | | (133) | | | 34 | |
Finance leases | | | | 109 | | | 89 | |
Total long-term debt | | | | 5,505 | | | 3,638 | |
Less: Current maturities of long-term debt | | | | 55 | | | 59 | |
Long-term debt | | | | $ | 5,450 | | | $ | 3,579 | |
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(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. |
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On July 13, 2022, we entered into a loan agreement under which we may obtain delayed-draw loans in an amount up to $2.0 billion in the aggregate prior to October 13, 2022. We drew down the entire $2.0 billion balance on August 2, 2022, to help fund the acquisition of Meritor. The interest rate is based on Secured Overnight Financing Rate (SOFR) for the one-month interest period plus the relevant spread. The loan will mature on August 1, 2025. The agreement contains customary events of default and financial and other covenants, including maintaining a net debt to capital ratio of no more than 0.65 to 1.0.
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In millions | | Interest Rate | | March 31, 2023 | | December 31, 2022 |
Long-term debt | | | | | | |
Senior notes, due 2023(1) | | 3.65% | | $ | 500 | | | $ | 500 | |
Term loan, due 2025(2) | | Variable | | 1,450 | | | 1,550 | |
Senior notes, due 2025(3) | | 0.75% | | 500 | | | 500 | |
Debentures, due 2027 | | 6.75% | | 58 | | | 58 | |
Debentures, due 2028 | | 7.125% | | 250 | | | 250 | |
Senior notes, due 2030(3) | | 1.50% | | 850 | | | 850 | |
Senior notes, due 2043 | | 4.875% | | 500 | | | 500 | |
Senior notes, due 2050 | | 2.60% | | 650 | | | 650 | |
Debentures, due 2098(4) | | 5.65% | | 165 | | | 165 | |
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Other debt | | | | 109 | | | 121 | |
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Unamortized discount and deferred issuance costs | | | | (63) | | | (64) | |
Fair value adjustments due to hedge on indebtedness | | | | (102) | | | (122) | |
Finance leases | | | | 111 | | | 113 | |
Total long-term debt | | | | 4,978 | | | 5,071 | |
Less: Current maturities of long-term debt | | | | 569 | | | 573 | |
Long-term debt | | | | $ | 4,409 | | | $ | 4,498 | |
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(1) Senior notes, due 2023, are classified as current maturities of long-term debt. |
(2) During the first quarter of 2023, we paid down $100 million of the term loan. |
(3) 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" in NOTE 14, "DERIVATIVES," to our Condensed Consolidated Financial Statements for additional information. |
(4) 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:
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| | |
In millions | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 |
Principal payments | | $ | 13 | | | $ | 563 | | | $ | 43 | | | $ | 2,509 | | | $ | 55 | |
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Interest Rate Risk
Beginning in the second half of 2021, we entered into a series of interest rate swaps to effectively convert our $500 million senior notes, due in 2025, from a fixed rate of 0.75 percent to a floating rate equal to the three-month LIBOR plus a spread, 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 following table summarizes the gains and losses:
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| | Three months ended | | Nine months ended |
In millions | | September 30, 2022 | | October 3, 2021 | | September 30, 2022 | | October 3, 2021 |
Type of Swap | | Gain (Loss) on Swaps | | Gain (Loss) on Borrowings | | Gain (Loss) on Swaps | | Gain (Loss) on Borrowings | | Gain (Loss) on Swaps | | Gain (Loss) on Borrowings | | Gain (Loss) on Swaps | | Gain (Loss) on Borrowings |
Interest rate swaps(1) | | $ | (47) | | | $ | 45 | | | $ | — | | | $ | — | | | $ | (158) | | | $ | 159 | | | $ | — | | | $ | — | |
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(1) The difference between the gain (loss) on swaps and borrowings represents hedge ineffectiveness. | | | | |
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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, net of tax, recognized in other comprehensive income:
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In millions | | Three months ended | | Nine months ended |
Type of Swap | | September 30, 2022 | | October 3, 2021 | | September 30, 2022 | | October 3, 2021 |
Interest rate locks | | $ | 21 | | | $ | — | | | $ | 103 | | | $ | 28 | |
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In millions | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 |
Principal payments | | $ | 559 | | | $ | 46 | | | $ | 1,962 | | | $ | 56 | | | $ | 65 | |
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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 | | September 30, 2022 | | December 31, 2021 | In millions | | March 31, 2023 | | December 31, 2022 |
Fair value of total debt (1) | Fair value of total debt (1) | | $ | 7,635 | | | $ | 4,461 | | Fair value of total debt (1) | | $ | 7,386 | | | $ | 7,400 | |
Carrying value of total debt | Carrying value of total debt | | 8,115 | | | 4,159 | | Carrying value of total debt | | 7,752 | | | 7,855 | |
| (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. |
As a well-known seasoned issuer, we filed an automatic shelf registrationFiltration Contingent Debt Agreement
On September 30, 2022,February 15, 2023, certain of our subsidiaries entered into aan amendment to the $1.0 billion credit agreement (Credit Agreement), consisting of a $400 million revolving credit facility and a $600 million term loan facility (Facilities), in anticipation of the separation of our filtration business.business, which extended the date on which the Credit Agreement terminates from March 30, 2023 to June 30, 2023. Borrowings under the Credit Agreement will not become available under the Credit Agreement unless and until, among other things, there is a sale to the public of shares in our subsidiary that holds the filtration business (Parent Borrower). The Credit Agreement will automatically terminate if no such public sale of shares of Parent Borrower occurs on or prior to MarchJune 30, 2023. Borrowings under the Credit Agreement would be available to Parent Borrower and one or more of its subsidiaries (Borrower). If borrowings become available under the Credit Agreement, the Facilities would mature on September 30, 2027.
Borrowings under the Credit Agreement would bear interest at varying rates, depending on the type of loan and, in some cases, the rates of designated benchmarks and the applicable Borrower’s election. Generally, U.S. dollar-denominated loans would bear interest at adjusted term SOFRSecured Overnight Financing Rate (SOFR) (which includes a 0.10 percent credit spread adjustment to term SOFR) for the applicable interest period plus a rate ranging from 1.125 percent to 1.75 percent depending on Parent Borrower's net leverage ratio.
NOTE 10. 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:
| | | | | | | | | | | | | | |
| | Three months ended |
| | March 31, |
In millions | | 2023 | | 2022 |
Balance, beginning of year | | $ | 2,477 | | | $ | 2,425 | |
Provision for base warranties issued | | 146 | | | 123 | |
Deferred revenue on extended warranty contracts sold | | 102 | | | 70 | |
Provision for product campaigns issued | | 6 | | | 42 | |
Payments made during period | | (143) | | | (132) | |
| | | | |
Amortization of deferred revenue on extended warranty contracts | | (75) | | | (73) | |
Changes in estimates for pre-existing product warranties and campaigns | | 10 | | | (26) | |
Acquisition(1) | | — | | | 95 | |
Foreign currency translation adjustments and other | | 7 | | | (1) | |
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Balance, end of period | | $ | 2,530 | | | $ | 2,523 | |
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(1) See NOTE 16, "ACQUISITION," to our Condensed Consolidated Financial Statements for additional information. |
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We recognized supplier recoveries of $10 million for the three months ended March 31, 2023, compared with $13 million for the comparable period in 2022.
Warranty related deferred revenues and warranty liabilities on our Condensed Consolidated Balance Sheets were as follows:
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In millions | | March 31, 2023 | | December 31, 2022 | | Balance Sheet Location |
Deferred revenue related to extended coverage programs | | | | | | |
Current portion | | $ | 289 | | | $ | 290 | | | Current portion of deferred revenue |
Long-term portion | | 742 | | | 717 | | | Deferred revenue |
Total | | $ | 1,031 | | | $ | 1,007 | | | |
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Product warranty | | | | | | |
Current portion | | $ | 746 | | | $ | 726 | | | Current portion of accrued product warranty |
Long-term portion | | 753 | | | 744 | | | Other liabilities |
Total | | $ | 1,499 | | | $ | 1,470 | | | |
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Total warranty accrual | | $ | 2,530 | | | $ | 2,477 | | | |
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NOTE 12. 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:
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| | Nine months ended |
In millions | | September 30, 2022 | | October 3, 2021 |
Balance, beginning of year | | $ | 2,425 | | | $ | 2,307 | |
Provision for base warranties issued | | 395 | | | 431 | |
Deferred revenue on extended warranty contracts sold | | 215 | | | 210 | |
Provision for product campaigns issued | | 132 | | | 162 | |
Payments made during period | | (476) | | | (409) | |
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Amortization of deferred revenue on extended warranty contracts | | (220) | | | (191) | |
Changes in estimates for pre-existing product warranties | | (80) | | | (131) | |
Acquisitions(1) | | 144 | | | — | |
Foreign currency translation and other | | 19 | | | (4) | |
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Balance, end of period | | $ | 2,554 | | | $ | 2,375 | |
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(1) See NOTE 16, "ACQUISITIONS," to our Condensed Consolidated Financial Statements for additional information. |
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We recognized supplier recoveries of $10 million and $33 million for the three and nine months ended September 30, 2022, compared with $88 million and $97 million for the comparable periods in 2021.
Warranty related deferred revenues and warranty liabilities on our Condensed Consolidated Balance Sheets were as follows:
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In millions | | September 30, 2022 | | December 31, 2021 | | Balance Sheet Location |
Deferred revenue related to extended coverage programs | | | | | | |
Current portion | | $ | 295 | | | $ | 286 | | | Current portion of deferred revenue |
Long-term portion | | 716 | | | 700 | | | Deferred revenue |
Total | | $ | 1,011 | | | $ | 986 | | | |
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Product warranty | | | | | | |
Current portion | | $ | 801 | | | $ | 755 | | | Current portion of accrued product warranty |
Long-term portion | | 742 | | | 684 | | | Accrued product warranty |
Total | | $ | 1,543 | | | $ | 1,439 | | | |
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Total warranty accrual | | $ | 2,554 | | | $ | 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 September 30, 2022, the remaining accrual balance was $54 million.
NOTE 13.11. 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; environmental matters; and asbestos claims. 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 Publicly Traded Company (KAMAZ) was designated to the List of Specially Designated Nationals and Blocked Persons by the U.S. Department of the Treasury’s Office of Foreign Assets Control. We filed blocked property reports for relevant assets and are seeking relevant authorizations to extricate ourselves from our relationship with KAMAZ and its subsidiaries, including the Unconsolidated JV,our unconsolidated joint venture with KAMAZ, 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 EPAEnvironmental Protection Agency (EPA) and CARBCalifornia Air Resources Board (CARB) regarding certification of our engines in model year 2019 RAM 2500 and 3500 trucks. This review is being conducted with external advisors as we strive to ensure the certification and compliance processes for all of our pick-up truck applications are consistent with our internal policies, engineering standards and applicable laws. During conversations with the EPA and CARB about the effectiveness of our pick-up truck applications, the regulators raised concerns that certain aspects of our emissions systems may reduce the effectiveness of our emissions control systems and thereby act as defeat devices. As a result, our internal review focuses, in part, on the regulators’ concerns. 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 and Titan trucks for model years 2016 through 2019. Most recently, the regulators
have also raised concerns regarding the completeness of our disclosures in our certification applications for RAM 2500 and 3500 trucks for model years 2013 through 2023. We have also been in communication with Environmental and Climate Change Canada regarding similar issues relating to some of these very same platforms. In connection with these and other ongoing discussions with the EPA and CARB, we are developing a new software calibration and will recall model years 2013 through 2018 RAM 2500 and 3500 trucks. We accrued $30 million for the RAM recall during the first quarter of 2022, an amount that reflected our current estimate of the cost of that recall. We are also developing a new software calibration and hardware fix and will recall model years 2016 through 2019 Titan trucks. We accrued $29 million for the Titan recall during the third quarter of 2022, an amount that reflected our current estimate of the cost of that recall.
We will continue to work together closely with the relevant regulators to develop and implement recommendations for improvementimprovements and seek to reach further resolutions as part of our ongoing commitment to compliance. Based upon our discussions to date with the regulators which are continuing, such resolutions may involve our agreeing to one or more consent decrees and paying civil penalties. Due to the presence of many unknown facts and circumstances, we are not yet able to estimate any further financial impact of these matters. It is possible that theThe consequences resulting from our formal review and these regulatory processes couldlikely will have a material adverse impact on our results of operations and cash flows.flows, however we cannot yet reasonably estimate a loss or range of loss.
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 September 30, 2022,March 31, 2023, the maximum potential loss related to these guarantees was $48$42 million.
We have arrangements with certain suppliers that require us to purchase minimum volumes or be subject to monetary penalties. At September 30, 2022,March 31, 2023, if we were to stop purchasing from each of these suppliers, the aggregate amount of the penalty would be approximately $138$161 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 September 30, 2022,March 31, 2023, the total commitments under these contracts were $42$38 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 $118$126 million at September 30, 2022.March 31, 2023.
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.
Accounts Receivable Factoring
We assumedNOTE 12. REDEEMABLE NONCONTROLLING INTERESTS
A 19 percent minority shareholder in one of our businesses, Hydrogenics Corporation (Hydrogenics), has, among other rights and subject to related obligations and restrictive covenants, rights that are exercisable between September 2022 and September 2026 to require us to (1) purchase such shareholder's shares (put option) at an accounts receivable factoring program fromamount up to the acquisition of Meritor for trade receivables as follows:
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| | Current Expiration | | Total Facility Size at September 30, 2022 | | Utilized at September 30, 2022 |
In millions | | | EUR | | USD | | EUR | | USD |
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Off-balance sheet arrangements | | | | | | | | | | |
Committed Swedish factoring facility(1)(2) | | March 2024 | | € | 155 | | | $ | 151 | | | € | 144 | | | $ | 139 | |
Committed U.S. factoring facility(1) | | February 2023 | | N/A | | 75 | | | — | | | 76 | |
Uncommitted U.K. factoring facility(3) | | February 2025 | | 25 | | | 24 | | | 2 | | | 2 | |
Uncommitted Italy factoring facility | | June 2025 | | 30 | | | 29 | | | 11 | | | 11 | |
Other uncommitted factoring facilities(4) | | None | | N/A | | N/A | | 7 | | | 7 | |
Total off-balance sheet arrangements | | | | € | 210 | | | $ | 279 | | | € | 164 | | | $ | 235 | |
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(1) Actual amounts may exceed the bank's commitment at the bank's discretion. |
(2) The factoring program is supported by a 364-day committed credit facility through June 22, 2023. |
(3) The U.K. factoring facility enables the factoring of British pound and Euro denominated accounts receivable. |
(4) There is no explicit facility size under the agreement, but the counterparty approves the purchase of receivable tranches as its discretion. |
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We received $108 million of proceeds from receivables sold,fair market value (calculated pursuant to a process outlined in the shareholders' agreement) and costs associated with all(2) sell to such shareholder Hydrogenics' electrolyzer business at an amount up to the fair market value of the off-balance sheet arrangements described above were $1electrolyzer business (calculated pursuant to a process outlined in the shareholders’ agreement). We recorded the estimated fair value of the put option as redeemable noncontrolling interests in our Condensed Consolidated Financial Statements with an offset to additional paid-in capital. The redeemable noncontrolling interest balance was $261 million since the August 3,and $258 million at March 31, 2023 and December 31, 2022, acquisition date.respectively.
NOTE 14. REDEEMABLE NONCONTROLLING INTERESTS
A 19 percent minority shareholder in one of our businesses, Hydrogenics Corporation (Hydrogenics), has, among other rights and subject to related obligations and restrictive covenants, rights that are exercisable between September 2022 and September 2026 to require us to (1) purchase such shareholder's shares (Put Option) at an amount up to the fair market value (calculated pursuant to a process outlined in the shareholders' agreement) and (2) sell to such shareholder Hydrogenics' electrolyzer business at an amount up to the fair market value of the electrolyzer business (calculated pursuant to a process outlined in the shareholders’ agreement). We recorded the estimated fair value of the Put Option as redeemable noncontrolling interests in our Condensed Consolidated Financial Statements with an offset to additional paid-in capital. At September 30, 2022, the redeemable noncontrolling interest balance was $252 million.
NOTE 15.13. ACCUMULATED OTHER COMPREHENSIVE LOSS
Following are the changes in accumulated other comprehensive income (loss) by component for the three 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 June 30, 2022 | | $ | (324) | | | $ | (1,426) | | | | | $ | 54 | | | $ | (1,696) | | | | | |
Other comprehensive income (loss) before reclassifications | | | | | | | | | | | | | | |
Before-tax amount | | — | | | (365) | | | | | 51 | | | (314) | | | $ | (15) | | | $ | (329) | |
Tax benefit (expense) | | | | 1 | | | | | (13) | | | (12) | | | — | | | (12) | |
After-tax amount | | — | | | (364) | | | | | 38 | | | (326) | | | (15) | | | (341) | |
Amounts reclassified from accumulated other comprehensive income (loss)(1) | | 6 | | | — | | | | | 3 | | | 9 | | | — | | | 9 | |
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Net current period other comprehensive income (loss) | | 6 | | | (364) | | | | | 41 | | | (317) | | | $ | (15) | | | $ | (332) | |
Balance at September 30, 2022 | | $ | (318) | | | $ | (1,790) | | | | | $ | 95 | | | $ | (2,013) | | | | | |
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Balance at July 4, 2021 | | $ | (689) | | | $ | (1,231) | | | | | $ | (9) | | | $ | (1,929) | | | | | |
Other comprehensive income (loss) before reclassifications | | | | | | | | | | | | | | |
Before-tax amount | | 1 | | | (2) | | | | | 5 | | | 4 | | | $ | 2 | | | $ | 6 | |
Tax expense | | (1) | | | — | | | | | (3) | | | (4) | | | — | | | (4) | |
After-tax amount | | — | | | (2) | | | | | 2 | | | — | | | 2 | | | 2 | |
Amounts reclassified from accumulated other comprehensive income (loss)(1) | | 17 | | | — | | | | | 1 | | | 18 | | | — | | | 18 | |
Net current period other comprehensive income (loss) | | 17 | | | (2) | | | | | 3 | | | 18 | | | $ | 2 | | | $ | 20 | |
Balance at October 3, 2021 | | $ | (672) | | | $ | (1,233) | | | | | $ | (6) | | | $ | (1,911) | | | | | |
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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. |
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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, 2022 | | $ | (427) | | | $ | (1,552) | | | | | $ | 89 | | | $ | (1,890) | | | | | |
Other comprehensive income (loss) before reclassifications | | | | | | | | | | | | | | |
Before-tax amount | | (13) | | | 75 | | | | | (3) | | | 59 | | | $ | 3 | | | $ | 62 | |
Tax benefit | | 2 | | | 4 | | | | | 1 | | | 7 | | | — | | | 7 | |
After-tax amount | | (11) | | | 79 | | | | | (2) | | | 66 | | | 3 | | | 69 | |
Amounts reclassified from accumulated other comprehensive income (loss)(1) | | 2 | | | — | | | | | (1) | | | 1 | | | — | | | 1 | |
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Net current period other comprehensive (loss) income | | (9) | | | 79 | | | | | (3) | | | 67 | | | $ | 3 | | | $ | 70 | |
Balance at March 31, 2023 | | $ | (436) | | | $ | (1,473) | | | | | $ | 86 | | | $ | (1,823) | | | | | |
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Balance at December 31, 2021 | | $ | (346) | | | $ | (1,208) | | | | | $ | (17) | | | $ | (1,571) | | | | | |
Other comprehensive income (loss) before reclassifications | | | | | | | | | | | | | | |
Before-tax amount | | 14 | | | 11 | | | | | 36 | | | 61 | | | $ | (8) | | | $ | 53 | |
Tax (expense) benefit | | (4) | | | 1 | | | | | (7) | | | (10) | | | — | | | (10) | |
After-tax amount | | 10 | | | 12 | | | | | 29 | | | 51 | | | (8) | | | 43 | |
Amounts reclassified from accumulated other comprehensive income (loss)(1) | | 6 | | | — | | | | | (1) | | | 5 | | | — | | | 5 | |
Net current period other comprehensive income (loss) | | 16 | | | 12 | | | | | 28 | | | 56 | | | $ | (8) | | | $ | 48 | |
Balance at March 31, 2022 | | $ | (330) | | | $ | (1,196) | | | | | $ | 11 | | | $ | (1,515) | | | | | |
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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. |
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Following are the changes in accumulated other comprehensive income (loss) by component for the nine 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, 2021 | | $ | (346) | | | $ | (1,208) | | | | | $ | (17) | | | $ | (1,571) | | | | | |
| Other comprehensive income (loss) before reclassifications | | | | | | | | | | | | | | |
| Before-tax amount | | 14 | | | (589) | | | | | 146 | | | (429) | | | $ | (38) | | | $ | (467) | |
| Tax (expense) benefit | | (3) | | | 7 | | | | | (35) | | | (31) | | | — | | | (31) | |
| After-tax amount | | 11 | | | (582) | | | | | 111 | | | (460) | | | (38) | | | (498) | |
| Amounts reclassified from accumulated other comprehensive income (loss)(1) | | 17 | | | — | | | | | 1 | | | 18 | | | — | | | 18 | |
| Net current period other comprehensive income (loss) | | 28 | | | (582) | | | | | 112 | | | (442) | | | $ | (38) | | | $ | (480) | |
| Balance at September 30, 2022 | | $ | (318) | | | $ | (1,790) | | | | | $ | 95 | | | $ | (2,013) | | | | | |
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| Balance at December 31, 2020 | | $ | (735) | | | $ | (1,204) | | | | | $ | (43) | | | $ | (1,982) | | | | | |
| Other comprehensive income (loss) 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 | |
| 71 | | | $ | (5) | | | $ | 66 | |
| Balance at October 3, 2021 | | $ | (672) | | | $ | (1,233) | | | | | $ | (6) | | | $ | (1,911) | | | | | |
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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. |
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NOTE 16. ACQUISITIONS14. DERIVATIVES
AcquisitionsWe are exposed to financial risk resulting from volatility in foreign exchange rates, interest rates and commodity prices. This risk is closely monitored and managed through the use of physical forward contracts (which are not considered derivatives), and financial derivative instruments including foreign currency forward contracts, commodity swap contracts and interest rate swaps and locks. Financial derivatives are used expressly for hedging purposes and under no circumstances are they used for speculative purposes. When material, we adjust the nine months ended September 30,estimated fair value of our derivative contracts for counterparty or our credit risk. None of our derivative instruments are subject to collateral requirements. Substantially all of our derivative contracts are subject to master netting arrangements, which provide us with the option to settle certain contracts on a net basis when they settle on the same day with the same currency. In addition, these arrangements provide for a net settlement of all contracts with a given counterparty in the event that the arrangement is terminated due to the occurrence of default or a termination event.
Foreign Currency Exchange Rate Risk
We had foreign currency forward contracts with notional amounts of $4.4 billion and $3.6 billion at March 31, 2023 and December 31, 2022, wererespectively. The following currencies comprise 86 percent and 88 percent of outstanding foreign currency forward contracts at March 31, 2023 and December 31, 2022, respectively: British pound, Chinese renminbi, Euro, Canadian dollar and Australian dollar.
We are further exposed to foreign currency exchange risk as follows.
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Entity Acquired (Dollars in millions) | | Date of Acquisition | | Additional Percent Interest Acquired | | Payments to Former Owners | | Acquisition Related Debt Retirements | | Total Purchase Consideration(1) | | | | | | Goodwill Acquired | | Intangibles Recognized(2) | | | |
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Meritor, Inc. | | 08/03/22 | | 100% | | $ | 2,613 | | | $ | 248 | | | $ | 2,861 | | | | | | | $ | 850 | | | $ | 1,610 | | | | |
Jacobs Vehicle Systems | | 04/08/22 | | 100% | | 346 | | | — | | | 346 | | | | | | | 108 | | | 164 | | | | |
Cummins Westport Joint Venture | | 02/07/22 | | 50% | | 42 | | | — | | | 42 | | | | | | | — | | | 20 | | | | |
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(1) The newly consolidated entities were accounted for as business combinations. On the date of acquisition, Meritor, Inc. was included in the Components and New Power segments, Jacobs Vehicle Systems was included in the Components segment and Cummins Westport Joint Venture was included in the Engine segment. | |
(2) Intangible assets acquired in the business combination were mostly technology and customer related. | |
Meritor, Inc.
On August 3,many of our subsidiaries are subject to fluctuations as the functional currencies of the underlying entities are not our U.S. dollar reporting currency. To help minimize movements for certain investments, in the third quarter of 2022 we completedbegan entering into foreign exchange forwards designated as net investment hedges for certain of our investments. Under the acquisitioncurrent terms of Meritor wherebyour foreign exchange forwards, we paid $36.50 per shareagreed with third parties to sell British pound in exchange for each outstanding share of Meritor,U.S. dollar currency at a global leader of drivetrain, mobility, braking, aftermarket and electric powertrain solutions for commercial vehicle and industrial markets. The total purchase price, including debt that was retired onspecified rate at the closing date of $248 million, was $2.9 billion. In addition, we assumed $1.0 billion of additional debt, of which $0.9 billion was retired prior to the endmaturity of the third quarter.contract. The acquisitionnotional amount of these hedges at March 31, 2023, was funded with a combination of $2.0 billion$724 million.
The following table summarizes the net investment hedge activity in new debt (see NOTE 11, "DEBT" for additional details), cash on hand and additional commercial paper borrowings. The integration of Meritor’s people, technology and capabilities position us as one of the few companies able to provide integrated powertrain solutions across combustion and electric power applications at a time when demand for decarbonized solutions is continuing to accelerate. The majority of this business will be included within our Components segment with the exception of the electric powertrain business, which will be included in our New Power segment. The values assigned to individual assets acquired and liabilities assumed are preliminary based on management’s current best estimate and subject to change as certain matters are finalized. The primary areas that are preliminary include, but are not limited to, valuation of intangibles, legal and other contingent liabilities and deferred taxes. The preliminary purchase price allocation was as follows:AOCL:
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In millions | | |
Cash and cash equivalents2023 | | $ | 98 | |
Accounts and notes receivable, netType of Derivative | | 640 | |
InventoriesGain (Loss) Recognized in AOCL | | 752 | |
Property, plant and equipmentGain (Loss) Reclassified from AOCL into Earnings | | 846 | |
Intangible assets | | 1,610 | |
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Investments and advances related to equity method investees | | 382 | |
Goodwill | | 850 | |
Pension assets | | 147 | |
Other current and long-term assets | | 364 | |
Accounts payable (principally trade) | | (711) | |
Net deferred taxes | | (325) | |
Pensions and other postretirement benefits | | (129) | |
Long-term debt | | (962) | |
Other current and long-term liabilities | | (590) | |
Noncontrolling interests | | (111) | |
Total purchase priceForeign exchange forwards | | $ | 2,861(15) | | | | | $ | — | | | | | | | | | | | | | |
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Interest Rate Risk
In 2021, we entered into a series of interest rate swaps to effectively convert our $500 million senior notes, due in 2025, from a fixed rate of 0.75 percent to a floating rate equal to the three-month LIBOR plus a spread. 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. We designated the swaps 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 Condensed Consolidated Financial Statements as interest expense. In March 2023, we settled a portion of our 2021 interest rate swaps with a notional amount of $100 million. The $7 million loss on settlement will be amortized over the remaining term of the related debt.
The following table summarizes the gains and losses:
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In millions | | 2023 | | 2022 | | | | |
Type of Swap | | Gain (Loss) on Swaps | | Gain (Loss) on Borrowings | | Gain (Loss) on Swaps | | Gain (Loss) on Borrowings | | | | | | | | |
Interest rate swaps(1) | | $ | 27 | | | $ | (22) | | | $ | (72) | | | $ | 80 | | | | | | | | | |
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(1) The difference between the gain (loss) on swaps and borrowings represents hedge ineffectiveness. | | | | |
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The estimated fair values (all considered Level 3 measurements)In 2019, we entered into $350 million of interest rate lock agreements, and in 2020 we entered into an additional $150 million of lock agreements to reduce the variability of the identifiable intangible assets acquired, their weighted-average useful lives, the related valuation methodology and key assumptions are as follows:
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| | Fair Value (in millions) | | Weighted-Average Useful Life (in years) | | Valuation Methodology | | Key Assumptions | | | | | |
Customer relationships | | $ | 960 | | | 12 | | Multi-period excess earnings | | Revenue, EBITDA, rate of return, renewal rates | | | | | | | | | |
Technology | | 345 | | | 8 | | Relief-from-royalty | | Royalty rate, rate of return, obsolescence factor | | | | | | | | | |
Trade name | | 305 | | | 21 | | Relief-from-royalty | | Royalty rate, rate of return | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Annual amortizationcash flows of the intangible assets forinterest payments on a total of $500 million of fixed rate debt forecast to be issued in 2023 to replace our senior notes at maturity. The terms of the next five years israte locks mirror the time period of the expected to approximate $142 million per year.
Goodwill was determined based on the residual difference between the fair value of consideration transferredfixed rate debt issuance and the value assignedexpected timing of interest payments on that debt. The gains and losses on these derivative instruments are initially recorded in other comprehensive income and will be released to tangible and intangible assets and liabilities. Goodwill was allocatedearnings in interest expense in future periods to reflect the Components segment ($691 million) anddifference in (1) the New Power segment ($159 million) based onfixed rates economically locked in at the relative value of those businesses compared to the assets and liabilities assigned to them. We do not expect anyinception of the goodwill to be deductible for tax purposes. Amonghedge and (2) the factors contributing to a purchase price resultingactual fixed rates established in the recognitiondebt instrument at issuance. In December 2022, we settled certain rate lock agreements with notional amounts totaling $150 million for $49 million. In February 2023, we settled certain rate lock agreements with notional amounts totaling $100 million for $34 million. The $83 million of goodwill are Meritor’s expected future customers,gains on settlements will remain in other comprehensive income and will be amortized over the term of the anticipated new versions of technologies, an acquired workforce, other economic benefits that are anticipated to arise from future product sales and operational synergies from combiningdebt as discussed above.
The following table summarizes the business with Cummins.interest rate lock activity in AOCL:
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| | Three months ended | | | | | | | | |
| | March 31, | | |
In millions | | 2023 | | 2022 | | | | |
Type of Swap | | Gain (Loss) Recognized in AOCL | | Gain (Loss) Reclassified from AOCL into Interest Expense | | Gain (Loss) Recognized in AOCL | | Gain (Loss) Reclassified from AOCL into Interest Expense | | | | | | | | |
Interest rate locks | | $ | (9) | | | $ | — | | | $ | 39 | | | $ | — | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Cash Flow Hedging
Included in our third quarter results were revenues of $737 million and net loss of $37 million related to this business. In addition,The following table summarizes the effect on a year-to-date basis we have incurred acquisition related costs of $30 million included in selling, general and administrative expenses in our Condensed Consolidated Statements of Net Income. for derivative instruments classified as cash flow hedges. The table does not include amounts related to ineffectiveness as it was not material for the periods presented.
| | | | | | | | | | | | | | | | | | |
| | Three months ended | | | | |
| | March 31, | | |
In millions | | 2023 | | 2022 | | | | |
Gain reclassified from AOCL into income - Net sales(1) | | $ | 1 | | | $ | 3 | | | | | |
Loss reclassified from AOCL into income - Cost of sales(1)(2) | | — | | | (2) | | | | | |
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|
(1) Includes foreign currency forward contracts. | | |
(2) Includes commodity swap contracts. | | |
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Derivatives Not Designated as Hedging Instruments
The following table presentssummarizes the supplemental consolidated resultseffect on our Condensed Consolidated Statements of the CompanyNet Income for the three and nine months ended September 30, 2022 and October 3, 2021, on an unaudited pro-forma basisderivative instruments not classified as if the acquisition had been consummated on January 1, 2021. The primary adjustments reflected in the pro-forma results related to (1) increase in interest expense for debt used to fund the acquisition, (2) removal of acquisition related costs from 2022 (and included in 2021) and (3) changes related to purchase accounting primarily related to amortization of intangibles, fixed assets and joint ventures. The unaudited pro forma financial information presented below does not purport to represent the actual results of operations that Cummins and Meritor would have achieved had the companies been combined during the periods presented and was not intended to project the future results of operations that the combined company could achieve after the acquisition. The unaudited pro forma financial information does not reflect any potential cost savings, operating efficiencies, long-term debt pay down estimates, financial synergies or other strategic benefits as a result of the acquisition or any restructuring costs to achieve those benefits.cash flow hedges:
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(Unaudited) | | Three months ended | | Nine months ended | | | | |
In millions | | September 30, 2022 | | October 3, 2021 | | September 30, 2022 | | October 3, 2021 | | | | |
Net sales | | $ | 7,734 | | | $ | 6,913 | | | $ | 23,071 | | | $ | 21,115 | | | | | |
Net income | | 397 | | | 544 | | | 1,565 | | | 1,662 | | | | | |
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The Meritor acquisition increased net assets in the Components segment by $3.8 billion and New Power segment by $0.3 billion.
Jacobs Vehicle Systems
On April 8, 2022, we completed the acquisition of Jacobs Vehicle Systems business (Jacobs) from Altra Industrial Motion Corp. The purchase price was $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. | | | | | | | | | | | | | | | | | | |
| | Three months ended | | | | |
| | March 31, | | |
In millions | | 2023 | | 2022 | | | | |
Loss recognized in income - Cost of sales(1) | | $ | (2) | | | $ | (1) | | | | | |
Gain recognized in income - Other income (expense), net(1) | | 27 | | | 8 | | | | | |
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(1) Includes foreign currency forward contracts. |
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Fair Value Amount and Location of Derivative Instruments
The preliminary purchase price allocation wasfollowing table summarizes the location and fair value of derivative instruments on our Condensed Consolidated Balance Sheets:
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| | Derivatives Designated as Hedging Instruments | | Derivatives Not Designated as Hedging Instruments |
In millions | | March 31, 2023 | | December 31, 2022 | | March 31, 2023 | | December 31, 2022 |
Notional amount | | $ | 2,898 | | | $ | 3,051 | | | $ | 3,688 | | | $ | 2,900 | |
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Derivative assets | | | | | | | | |
Prepaid expenses and other current assets | | $ | 16 | | | $ | 18 | | | $ | 7 | | | $ | 27 | |
| | | | | | | | |
Other assets | | 35 | | | 80 | | | — | | | — | |
Total derivative assets(1) | | $ | 51 | | | $ | 98 | | | $ | 7 | | | $ | 27 | |
| | | | | | | | |
Derivative liabilities | | | | | | | | |
Other accrued expenses | | $ | 22 | | | $ | 19 | | | $ | 2 | | | $ | 3 | |
Other liabilities | | 118 | | | 151 | | | — | | | — | |
Total derivative liabilities(1) | | $ | 140 | | | $ | 170 | | | $ | 2 | | | $ | 3 | |
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(1) Estimates of the fair value of all derivative assets and liabilities above are derived from Level 2 inputs, which are estimated using actively quoted prices for similar instruments from brokers and observable inputs where available, including market transactions and third-party pricing services, or net asset values provided to investors. We do not currently have any Level 3 input measures and there were no transfers into or out of Level 2 or 3 during the three months ended March 31, 2023, or the year ended December 31, 2022. |
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We elected to present our derivative contracts on a gross basis in our Condensed Consolidated Balance Sheets. Had we chosen to present on a net basis, we would have derivatives in a net asset position of $29 million and $52 million and derivatives in a net liability position of $113 million and $100 million at March 31, 2023 and December 31, 2022, respectively.
NOTE 15. RUSSIAN OPERATIONS
On March 17, 2022, the Board indefinitely suspended our operations in Russia due to the ongoing conflict in Ukraine. At the time of suspension, our Russian operations included a wholly-owned distributor in Russia, an unconsolidated joint venture with KAMAZ (a Russian truck manufacturer) and direct sales into Russia from our other business segments. As a result of the suspension of operations, we evaluated the recoverability of assets in Russia and assessed other potential liabilities. We experienced and expect to continue to experience an inability to collect customer receivables and may be the subject of litigation as follows:a consequence of our suspension of commercial operations in Russia. The following summarizes the costs associated with the suspension of our Russian operations in our Condensed Consolidated Statements of Net Income:
| | | | | | | | |
In millions | | |
Cash and cash equivalents | | $ | 18 | |
Accounts and notes receivable, net | | 24 | |
Inventories | | 15 | |
Property, plant and equipment | | 70 | |
Intangible assets | | 164 | |
| | |
| | Three months ended |
| | | |
GoodwillIn millions | | 108March 31, 2022 | | | | Statement of Net Income Location |
Accounts payable (principally trade) | | (21) | |
Net deferred taxes | | (27) | |
Other, net | | (5) | |
Total purchase priceInventory write-downs | | $ | 34659 | | | | | 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 | | 25 | | | | | Other operating expense, net |
Total | | $ | 158 | | | | | |
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The estimated fair values (all considered Level 3 measurements) of the identifiable intangible assets acquired, their weighted-average useful lives, the related valuation methodology and key assumptions are as follows:
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| | Fair Value (in millions) | | Weighted-Average Useful Life (in years) | | Valuation Methodology | | Key Assumptions | | | | | |
Customer relationships | | $ | 108 | | | 9 | | Multi-period excess earnings | | Rate of return, renewal rates | | | | | | | | | |
Technology | | 31 | | | 7 | | Relief-from-royalty | | Royalty rate, rate of return, obsolescence factor | | | | | | | | | |
Trade name | | 25 | | | 14 | | Relief-from-royalty | | Royalty rate, rate of return | | | | | | | | | |
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Annual amortization of the intangible assets for the next five years is expected to approximate $18 million per year.
Goodwill was determined based on the residual difference between the fair value of consideration transferred and the value assigned to tangible and intangible assets and liabilities. Approximately $9 million of the goodwill is deductible for tax purposes. Among the factors contributing to a purchase price resulting in the recognition of goodwill are Jacob’s expected future customers, new versions of technologies, an acquired workforce and other economic benefits that are anticipated to arise from future product sales and operational synergies from combining the business with Cummins.
Included in our results forFor the three month ended March 31, 2023, there were no material additional costs. We will continue to evaluate the situation as conditions evolve and nine months ended September 30, 2022, were revenues of $43 million and $80 million, respectively, and loss of $2 million and break-even, respectively, related to this business. The results of this business were reportedmay take additional actions as deemed necessary 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.future periods.
Cummins Westport Joint Venture
NOTE 16. ACQUISITION
On February 7, 2022, we purchased Westport Fuel System Inc.'s stake in the Cummins Westport, Joint Venture.Inc. 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.
Pending Acquisition
Prior to our acquisition of Meritor, Meritor signed an agreement with Siemens to purchase its Commercial Vehicles business for approximately €190 million, subject to working capital and other customary adjustments. This business develops, designs and produces electric drive systems including electric motors, inverters, software and related services for the transit, off-highway and specialty markets. We expect the acquisition to close in the fourth quarter of 2022. This acquisition will be included in our New Power segment.
NOTE 17. 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 Chief Executive Officer.
Our reportable operating segments consist of Components, Engine, Distribution, Components, Power Systems and New Power.Accelera. This reporting structure is organized according to the products and markets each segment serves. The Components segment sells filtration products, aftertreatment systems, turbochargers, electronics, fuel systems, automated transmissions, axles, drivelines, brakes and suspension systems. 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, automated transmissions, axles, drivelines, brakes and suspension systems. 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 PowerAccelera segment designs, manufactures, sells and supports hydrogen production solutions as well as electrified power systems with innovative components and subsystems, including battery, fuel cell and electric powertrain technologies. The New PowerAccelera segment is currently in the early stages of commercializing these technologies with efforts primarily focused on the development of our electroloyzerselectrolyzers for hydrogen production and electrified power systems and related components and subsystems. We continue to serve all our markets as they adopt electrification and alternative power technologies, meeting the needs of our OEM partners and end customers.
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 and certain filtration separation costs to individual segments. EBITDA may not be consistent with measures used by other companies.
As previously announced, in March 2023, we rebranded our New Power segment as "Accelera" to better represent our commitment to zero-emission technologies. In addition, we moved our NPROXX joint venture from the Accelera segment to the Engine segment, which adjusted both the equity, royalty and interest income from investees and segment EBITDA line items for the current and prior year. We started to report results for the changes within our operating segments effective January 1, 2023, and reflected these changes in the historical periods presented.
Summarized financial information regarding our reportable operating segments for the three months ended is shown in the table below:
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In millions | | Engine | | Distribution | | Components | | Power Systems | | New Power | | Total Segments | | | | |
Three months ended September 30, 2022 | | | | | | | | | | | | | | | | |
External sales | | $ | 2,063 | | | $ | 2,232 | | | $ | 2,220 | | | $ | 773 | | | $ | 45 | | | $ | 7,333 | | | | | |
Intersegment sales | | 716 | | | 7 | | | 483 | | | 576 | | | 5 | | | 1,787 | | | | | |
Total sales | | 2,779 | | | 2,239 | | | 2,703 | | | 1,349 | | | 50 | | | 9,120 | | | | | |
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Research, development and engineering expenses | | 140 | | | 13 | | | 87 | | | 62 | | | 46 | | | 348 | | | | | |
Equity, royalty and interest income (loss) from investees | | 28 | | | 20 | | | 17 | | | 10 | | | (5) | | | 70 | | | | | |
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Interest income | | 3 | | | 4 | | | 4 | | | 3 | | | — | | | 14 | | | | | |
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Russian suspension costs(1) | | — | | | — | | | 1 | | | — | | | — | | | 1 | | | | | |
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Segment EBITDA | | 363 | | | 225 | | | 297 | | (2) | 193 | | | (96) | | | 982 | | | | | |
Depreciation and amortization(3) | | 51 | | | 29 | | | 95 | | | 30 | | | 10 | | | 215 | | | | | |
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Three months ended October 3, 2021 | | | | | | | | | | | | | | | | |
External sales | | $ | 1,961 | | | $ | 1,952 | | | $ | 1,347 | | | $ | 688 | | | $ | 20 | | | $ | 5,968 | | | | | |
Intersegment sales | | 617 | | | 7 | | | 446 | | | 476 | | | 3 | | | 1,549 | | | | | |
Total sales | | 2,578 | | | 1,959 | | | 1,793 | | | 1,164 | | | 23 | | | 7,517 | | | | | |
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Research, development and engineering expenses | | 97 | | | 10 | | | 78 | | | 55 | | | 26 | | | 266 | | | | | |
Equity, royalty and interest income (loss) from investees | | 61 | | | 15 | | | 10 | | | 11 | | | (3) | | | 94 | | | | | |
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Interest income | | 3 | | | 2 | | | 1 | | | 1 | | | — | | | 7 | | | | | |
Segment EBITDA | | 391 | | | 192 | | | 253 | | | 134 | | | (58) | | | 912 | | | | | |
Depreciation and amortization(3) | | 53 | | | 28 | | | 44 | | | 29 | | | 5 | | | 159 | | | | | |
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(1) See NOTE 3, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information. | | | | |
(2) Includes $45 million of costs related to the acquisition and integration of Meritor and $10 million of costs associated with the planned separation of our filtration business. | | | | |
(3) 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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| In millions | | | | | | Components | | Engine | | Distribution | | Power Systems | | Accelera | | Total Segments | | | | |
| Three months ended March 31, 2023 | | | | | | | | | | | | | | | | | | | | |
| External sales | | | | | | $ | 3,043 | | | $ | 2,252 | | | $ | 2,399 | | | $ | 679 | | | $ | 80 | | | $ | 8,453 | | | | | |
| Intersegment sales | | | | | | 514 | | | 734 | | | 7 | | | 664 | | | 5 | | | 1,924 | | | | | |
| Total sales | | | | | | 3,557 | | | 2,986 | | | 2,406 | | | 1,343 | | | 85 | | | 10,377 | | | | | |
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| Research, development and engineering expenses | | | | | | 91 | | | 134 | | | 14 | | | 63 | | | 48 | | | 350 | | | | | |
| Equity, royalty and interest income (loss) from investees | | | | | | 21 | | | 65 | | | 24 | | | 13 | | | (4) | | | 119 | | | | | |
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| Interest income | | | | | | 6 | | | 3 | | | 7 | | | 2 | | | — | | | 18 | | | | | |
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| Segment EBITDA | | | | | | 507 | | (1) | 457 | | | 335 | | | 219 | | | (94) | | | 1,424 | | | | | |
| Depreciation and amortization(2) | | | | | | 123 | | | 51 | | | 28 | | | 29 | | | 14 | | | 245 | | | | | |
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| Three months ended March 31, 2022 | | | | | | | | | | | | | | | | | | | | |
| External sales | | | | | | $ | 1,517 | | | $ | 2,049 | | | $ | 2,111 | | | $ | 683 | | | $ | 25 | | | $ | 6,385 | | | | | |
| Intersegment sales | | | | | | 471 | | | 704 | | | 6 | | | 477 | | | 6 | | | 1,664 | | | | | |
| Total sales | | | | | | 1,988 | | | 2,753 | | | 2,117 | | | 1,160 | | | 31 | | | 8,049 | | | | | |
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| Research, development and engineering expenses | | | | | | 76 | | | 109 | | | 13 | | | 64 | | | 36 | | | 298 | | | | | |
| Equity, royalty and interest income (loss) from investees | | | | | | 28 | | | 42 | | (3) | 16 | | | 11 | | | (1) | | | 96 | | | | | |
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| Interest income | | | | | | 1 | | | 4 | | | 2 | | | 1 | | | — | | | 8 | | | | | |
| Russian suspension costs(4) | | | | | | 6 | | | 32 | | (5) | 100 | | | 20 | | | — | | | 158 | | | | | |
| Segment EBITDA | | | | | | 320 | | | 390 | | | 110 | | | 90 | | | (65) | | | 845 | | | | | |
| Depreciation and amortization(2) | | | | | | 43 | | | 51 | | | 28 | | | 31 | | | 7 | | | 160 | | | | | |
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| (1) Includes $12 million of costs associated with the planned separation of our filtration business. | | | | |
| (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. The amortization of debt discount and deferred costs was $1 million and $1 million for the three months ended March 31, 2023 and March 31, 2022, respectively. A portion of depreciation expense is included in research, development and engineering expenses. |
| (3) 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 15, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information. | | | | |
| (4) See NOTE 15, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information. | | | | |
| (5) Includes $31 million of Russian suspension costs reflected in the equity, royalty and interest income (loss) from investees line above. | | | | |
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Summarized financial information regarding our reportable operating segments for the nine 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 September 30, 2022 | | | | | | | | | | | | | | | | |
| External sales | | $ | 6,204 | | | $ | 6,590 | | | $ | 5,214 | | | $ | 2,190 | | | $ | 106 | | | $ | 20,304 | | | | | |
| Intersegment sales | | 2,103 | | | 19 | | | 1,427 | | | 1,522 | | | 17 | | | 5,088 | | | | | |
| Total sales | | 8,307 | | | 6,609 | | | 6,641 | | | 3,712 | | | 123 | | | 25,392 | | | | | |
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| Research, development and engineering expenses | | 365 | | | 39 | | | 236 | | | 184 | | | 121 | | | 945 | | | | | |
| Equity, royalty and interest income (loss) from investees | | 131 | | (1) | 57 | | | 54 | | | 31 | | | (12) | | | 261 | | | | | |
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| Interest income | | 8 | | | 9 | | | 7 | | | 5 | | | — | | | 29 | | | | | |
| Russian suspension costs(2) | | 33 | | (3) | 55 | | | 5 | | | 19 | | | — | | | 112 | | | | | |
| Segment EBITDA | | 1,177 | | | 632 | | | 969 | | (4) | 411 | | | (243) | | | 2,946 | | | | | |
| Depreciation and amortization(5) | | 151 | | | 86 | | | 187 | | | 92 | | | 25 | | | 541 | | | | | |
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| 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 | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| 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 | | | | | |
| | | | | | | | | | | | | | | | | |
| Interest income | | 7 | | | 5 | | | 3 | | | 3 | | | — | | | 18 | | | | | |
| Segment EBITDA | | 1,147 | | | 553 | | | 975 | | | 399 | | | (169) | | | 2,905 | | | | | |
| Depreciation and amortization(5) | | 154 | | | 88 | | | 138 | | | 97 | | | 17 | | | 494 | | | | | |
| | | | | | | | | | | | | | | | | |
| |
| (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) Includes $56 million of costs related to the acquisition and integration of Meritor and $15 million of costs associated with the planned separation of our filtration business. | | | | |
| (5) Depreciation and amortization, as shown on a segment basis, excludes the amortization of debt discount and deferred costs included in the Condensed Consolidated Statements of Net Income as Interest expense. The amortization of debt discount and deferred costs was $3 million and $3 million for the nine months ended September 30, 2022 and October 3, 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 |
In millions | | September 30, 2022 | | October 3, 2021 | | September 30, 2022 | | October 3, 2021 |
Total segment sales | | $ | 9,120 | | | $ | 7,517 | | | $ | 25,392 | | | $ | 22,592 | |
Elimination of intersegment sales | | (1,787) | | | (1,549) | | | (5,088) | | | (4,421) | |
Total net sales | | $ | 7,333 | | | $ | 5,968 | | | $ | 20,304 | | | $ | 18,171 | |
| | | | | | | | |
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 | |
| | | Three months ended | | Nine months ended | | | March 31, | |
In millions | In millions | | September 30, 2022 | | October 3, 2021 | | September 30, 2022 | | October 3, 2021 | In millions | | 2023 | | 2022 | |
TOTAL SEGMENT EBITDA | TOTAL SEGMENT EBITDA | | $ | 982 | | | $ | 912 | | | $ | 2,946 | | | $ | 2,905 | | TOTAL SEGMENT EBITDA | | $ | 1,424 | | | $ | 845 | | |
| Intersegment eliminations and other(1) | Intersegment eliminations and other(1) | | (98) | | | (50) | | | (252) | | | (89) | | Intersegment eliminations and other(1) | | (63) | | | (90) | | |
| Less: | Less: | | Less: | | |
Interest expense | Interest expense | | 61 | | | 28 | | | 112 | | | 85 | | Interest expense | | 87 | | | 17 | | |
Depreciation and amortization | Depreciation and amortization | | 215 | | | 159 | | | 541 | | | 494 | | Depreciation and amortization | | 245 | | | 160 | | |
INCOME BEFORE INCOME TAXES | INCOME BEFORE INCOME TAXES | | 608 | | | 675 | | | 2,041 | | | 2,237 | | INCOME BEFORE INCOME TAXES | | $ | 1,029 | | | $ | 578 | | |
Less: Income tax expense | | 199 | | | 134 | | | 502 | | | 473 | | |
CONSOLIDATED NET INCOME | | 409 | | | 541 | | | 1,539 | | | 1,764 | | |
Less: Net income attributable to noncontrolling interests | | 9 | | | 7 | | | 19 | | | 27 | | |
NET INCOME ATTRIBUTABLE TO CUMMINS INC. | | $ | 400 | | | $ | 534 | | | $ | 1,520 | | | $ | 1,737 | | |
| (1)Intersegment eliminations and other included $6 million and $47 million of costs associated with the planned separation of our Filtration business for the three and nine months ended September 30, 2022. | |
| | | (1)Intersegment eliminations and other included $6 million and $17 million of costs associated with the planned separation of our filtration business for the three months ended March 31, 2023 and 2022. | | (1)Intersegment eliminations and other included $6 million and $17 million of costs associated with the planned separation of our filtration business for the three months ended March 31, 2023 and 2022. |
|
NOTE 18. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In September 2022, the Financial Accounting Standards Board issued a standard related to the disclosure of additional information about the use of supplier finance programs. Under the new standard, entities are required to disclose (1) key terms of the programs, (2) the amount outstanding that remains unpaid as of the end of the period, including where amounts are recorded in the balance sheets and (3) an annual rollforward of those obligations, including the amount of obligations confirmed and the amount of obligations subsequently paid. We adopted the new standard on January 1, 2023, on a retrospective basis other than the rollforward, which we currently plan to early adopt on a prospective basis beginning with our 2023 annual financial statements. The adoption did not have a material impact on our financial statements. See "Supply Chain Financing" section in NOTE 1, "NATURE OF OPERATIONS AND BASIS OF PRESENTATION," for additional information.
NOTE 18.19. SUBSEQUENT EVENT
In October 2022,On April 3, 2023, we signed an agreement to purchasepurchased all of the equity ownership interest of Teksid Hierro de Mexico, S.A. de C.V. (Teksid MX) and Teksid, Inc. from Stellantis N.V. for approximately €115€138 million, subject to certain adjustments set forth in the agreement. Teksid MX operates a cast iron foundry located in Monclova, Mexico, which primarily forges blocks and heads used in Cumminsour and other manufacturers’ engines. Teksid, Inc. facilitates the commercialization of Teksid MX products in North America. The transaction, which is subject to customary closing conditions and receipt of applicable regulatory approvals, is expected to close as soon as December 2022. Since Cummins iswe are the primary customer of the foundry, the acquisition is not expected to result in material incremental sales to our business. This businessThe acquisition will be included in our Engine segment.segment starting in the second quarter of 2023. Due to the timing of the acquisition, the initial purchase accounting is not yet complete and will follow in the second quarter Form 10-Q filing.
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;
•changes in international, national and regional trade laws, regulations and policies;
•any adverse effects of the U.S. government's COVID-19 vaccine mandates;
•changes in taxation;
•global legal and ethical compliance costs and risks;
•increasingly stringentevolving environmental laws and regulations;climate change legislation and regulatory initiatives;
•future bans or limitations on the use of diesel-powered products;
BUSINESSBUSINESS CONDITIONS / DISRUPTIONS
•failure to successfully integrate and / or failure to fully realize all of the anticipated benefits of the acquisition of Meritor, Inc. (Meritor);
•raw material, transportation and labor price fluctuations and supply shortages;
•any adverse effects of the conflict between Russia and Ukraine and the global response (including government bans or restrictions on doing business in Russia);
•failure to successfully 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 shortages;
•aligning our capacity and production with our demand;
•the actions of, 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, bankruptcy or change in 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;
•product liability claims;
•our sales mix of products;
GENERAL
•failure to complete, adverse results from or failure to realize the expected benefits of the separation of our 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;
•increasing interest rates;
•challenging markets for talent and ability to attract, develop and retain key personnel;
•climate change, and global warming;warming, more stringent climate change regulations, accords, mitigation efforts, greenhouse gas regulations or other legislation designed to address climate change;
•exposure to potential security breaches or other disruptions to our information technology environment and data security;
•political, economic and other risks from operations in numerous 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;
•failure to meet environmental, social and governance (ESG) expectations or standards, or achieve our ESG goals;
•labor relations or work stoppages;
•foreign currency exchange rate changes;
•the performance of our pension plan assets and volatility of discount rates;
•the price and availability of energy;
•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
•RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
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, axles, drivelines, brakes, suspension systems, electric power generation systems, batteries, electrified power systems, electric powertrains, hydrogen production and fuel cell products. We sell our products to original equipment manufacturers (OEMs), distributors, dealers and other customers worldwide. We have long-standing relationships with many of the leading manufacturers in the markets we serve, including PACCAR Inc, Traton Group, (formerly Navistar International Corporation), Daimler Trucks North America and Stellantis N.V. We serve our customers through a service network of approximately 500460 wholly-owned, joint venture and independent distributor locations and more than 10,000 Cummins certified dealer locations in approximately 190 countries and territories.
As previously announced, beginning in the first quarter of 2023, we realigned certain businesses and regions within our reportable segments to be consistent with how our segment managers monitor the performance of our segments. We reorganized the businesses within our Components segment to carve out the electronics business into the newly formed software and electronics business and combined the turbo technologies and fuel systems businesses into the newly formed engine components business. Our Components segment now consists of the following businesses: axles and brakes, emission solutions, engine components, filtration, automated transmissions and software and electronics. As a result of the indefinite suspension of operations in Russia, we reorganized the regional management structure of our Distribution segment and moved all Commonwealth of Independent States (CIS) sales into the Europe and Africa and Middle East regions. The Russian portion of prior period CIS sales moved to the Europe region. In March 2023, we rebranded our New Power segment as "Accelera" to better represent our commitment to zero-emission technologies. In addition, we moved our NPROXX joint venture from the Accelera segment to the Engine segment, which adjusted both the equity, royalty and interest income from investees and segment EBITDA line items for the current and prior year. We started to report results for the changes within our operating segments effective January 1, 2023, and reflected these changes in the historical periods presented.
Our reportable operating segments consist of Components, Engine, Distribution, Components, Power Systems and New Power.Accelera. This reporting structure is organized according to the products and markets each segment serves. The Components segment sells filtration products, aftertreatment systems, turbochargers, electronics, fuel systems, automated transmissions, axles, drivelines, brakes and suspension systems. 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, automated transmissions, axles, drivelines, brakes and suspension systems. 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 PowerAccelera segment designs, manufactures, sells and supports hydrogen production solutions as well as electrified power systems with innovative components and subsystems, including battery, fuel cell and electric powertrain technologies. The New PowerAccelera segment is currently in the early stages of commercializing these technologies with efforts primarily focused on the development of our electroloyzerselectrolyzers for hydrogen production and electrified power systems and related
components and subsystems. We continue to serve all our markets as they adopt electrification and alternative power technologies, meeting the needs of our OEM partners and end customers.
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 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 fluctuations, political and economic uncertainty, public health crises epidemics(epidemics or pandemicspandemics) and regulatory matters, including adoption and enforcement of environmental and emission standards, in the countries we serve. As part of our growth strategy, we invest in businesses in certain countries that carry higher levels of these risks such as China, Brazil, India, Mexico and countries in the Middle East and Africa. At the same time, our geographic diversity and broad product and service offerings have helped limit the impact from a drop in demand in any one industry, or customer orregion, the economy of any single country or customer on our consolidated results.
Meritor Acquisition
On August 3, 2022, we completed the acquisition of Meritor, Inc. (Meritor) with a purchase price of $2.9 billion (including debt repaid concurrent with the acquisition). Our consolidated results and segment results include Meritor's activity since the date of acquisition. The results are included in our Components segment in the axles and brakes business while the electric powertrain portion is included in our New Power segment. See NOTE 16, "ACQUISITIONS," to the Condensed Consolidated Financial Statements for additional information.
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, 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. In the third quarter, we incurred $4 million of additional contract termination charges, and we recovered certain bad debt expenses and inventory amounts reserved in the first quarter for a net charge of $1 million. As of September 30, 2022, we had approximately $13 million of inventory and $15 million of receivables in Russia, all of which are fully reserved. In addition, we have cash balances of $71 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 | | Nine months ended | | |
In millions | | September 30, 2022 | | September 30, 2022 | | |
Inventory write-downs | | $ | (2) | | | $ | 17 | | | |
Accounts receivable reserves | | (1) | | | 42 | | | |
Impairment and other joint venture costs | | — | | | 31 | | | |
| | | | | | |
Other | | 4 | | | 22 | | | |
Total | | $ | 1 | | | $ | 112 | | | |
| | | | | | |
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, increased price levels and related financial impacts reflected as increased cost of sales.sales and inventory holdings. Our industry continues to be unfavorably impacted by supply chain constraints leading to shortages and price increases across multiple componentscomponent 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 Third2023 First Quarter and Year-to-Date Results
A summary of our results is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended | | | | |
In millions, except per share amounts | | September 30, 2022 | | October 3, 2021 | | September 30, 2022 | | October 3, 2021 | | | | |
Net sales | | $ | 7,333 | | | $ | 5,968 | | | $ | 20,304 | | | $ | 18,171 | | | | | |
Net income attributable to Cummins Inc. | | 400 | | | 534 | | | 1,520 | | | 1,737 | | | | | |
Earnings per common share attributable to Cummins Inc. | | | | | | | | | | | | |
Basic | | $ | 2.83 | | | $ | 3.72 | | | $ | 10.74 | | | $ | 11.96 | | | | | |
Diluted | | 2.82 | | | 3.69 | | | 10.68 | | | 11.86 | | | | | |
| | | | | | | | | | | | |
Our industry's sales continue to be unfavorably impacted by supply chain constraints leading to shortages across multiple components categories and limiting our collective ability to meet end-user demand. Our customers are also experiencing other supply chain issues limiting full production capabilities. | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | | | | | | | |
| | March 31, | | | | | | |
In millions, except per share amounts | | 2023 | | 2022 | | | | | | | | |
Net sales | | $ | 8,453 | | | $ | 6,385 | | | | | | | | | |
Net income attributable to Cummins Inc. | | 790 | | | 418 | | | | | | | | | |
Earnings per common share attributable to Cummins Inc. | | | | | | | | | | | | |
Basic | | $ | 5.58 | | | $ | 2.94 | | | | | | | | | |
Diluted | | 5.55 | | | 2.92 | | | | | | | | | |
| | | | | | | | | | | | |
Worldwide revenues increased 2332 percent in the three months ended September 30, 2022,March 31, 2023, compared to the same period in 2021,2022, due to axles and brakes sales in the Components segment of $1.3 billion from the Meritor sales of $737 million since the date of acquisition favorable pricing andhigher demand in all operating segments and most geographic regions, except forpartially offset by decreases in Russia and China.due to the indefinite suspension of our Russian operations. Net sales in the U.S. and Canada improved 2939 percent, primarily due to incremental sales of brakesaxles and axlesbrakes in North America, since the acquisition of Meritorincreased demand in addition to favorable pricingall Distribution product lines and increasedstronger demand in North American on-highwayheavy-duty and medium-duty truck markets, which positively impacted most components businesses, and all distribution product lines.Components businesses. International demand (excludes the U.S. and Canada) improved 1524 percent, with lower sales in Russia (due to suspension of our Russian operations) and China (due to a slowdown in construction markets, exacerbated by COVID lockdowns) more than offset by higher sales in most other geographic regions. The increase in international sales was principally due to incremental sales of brakesaxles and axlesbrakes in Western Europe and Latin America since the acquisition of Meritor.America. Unfavorable foreign currency fluctuations impacted international sales by 75 percent (primarily the Euro, British pound, Chinese renminbi, Indian rupee and Indian rupee)Euro).
Worldwide revenues increased 12 percent in the nine months ended September 30, 2022, compared to the same period in 2021, due to Meritor salesTable of $737 million since the date of acquisition, favorable pricing and higher demand in most operating segments and most geographic regions except for China and Russia. Net sales in the U.S. and Canada improved 19 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, as well as incremental sales of brakes and axles in North America since the acquisition of Meritor. International demand (excludes the U.S. and Canada) improved by 3 percent, with lower sales in China (due to a sharp slowdown in truck and construction markets, exacerbated by COVID lockdowns) more than offset by higher sales in most other geographic regions. The increase in international sales was principally due to incremental sales of brakes and axles in Western Europe and Latin America since the acquisition of Meritor, favorable pricing and higher demand for power generation and industrial equipment (especially oil and gas) and most distribution product lines. Unfavorable foreign currency fluctuations impacted international sales by 4 percent (primarily the Euro, British pound and Indian rupee).ContentsThe following tables containtable contains sales and EBITDA (defined as earnings or losses before interest expense, income taxes, depreciation and amortization and noncontrolling interests) by operating segment, including adjusted prior year balances for the NPROXX changes noted above, for the three and nine months ended September 30, 2022March 31, 2023 and October 3, 2021.2022. See NOTE 17, "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 |
Operating Segments | | September 30, 2022 | | October 3, 2021 | | Percent change |
| | | | Percent | | | | | | Percent | | | | 2022 vs. 2021 |
In millions | | Sales | | of Total | | EBITDA | | Sales | | of Total | | EBITDA | | Sales | | EBITDA |
Engine | | $ | 2,779 | | | 38 | % | | $ | 363 | | | $ | 2,578 | | | 43 | % | | $ | 391 | | | 8 | % | | (7) | % |
Distribution | | 2,239 | | | 30 | % | | 225 | | | 1,959 | | | 33 | % | | 192 | | | 14 | % | | 17 | % |
Components | | 2,703 | | | 37 | % | | 297 | | | 1,793 | | | 30 | % | | 253 | | | 51 | % | | 17 | % |
Power Systems | | 1,349 | | | 18 | % | | 193 | | | 1,164 | | | 20 | % | | 134 | | | 16 | % | | 44 | % |
New Power | | 50 | | | 1 | % | | (96) | | | 23 | | | — | % | | (58) | | | NM | | (66) | % |
Intersegment eliminations | | (1,787) | | | (24) | % | | (98) | | | (1,549) | | | (26) | % | | (50) | | | 15 | % | | 96 | % |
| | | | | | | | | | | | | | | | |
Total | | $ | 7,333 | | | 100 | % | | $ | 884 | | (1) | $ | 5,968 | | | 100 | % | | $ | 862 | | | 23 | % | | 3 | % |
| | | | | | | | | | | | | | | | |
"NM" - not meaningful information | | | | | | | | | | | | | | |
(1) EBITDA includes $45 million of costs related to the acquisition and integration of Meritor, $16 million of costs associated with the planned separation of our Filtration business and $1 million of costs associated with the suspension of our Russian operations. |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, |
Operating Segments | | 2023 | | 2022 | | Percent change |
| | | | Percent | | | | | | Percent | | | | 2023 vs. 2022 |
In millions | | Sales | | of Total | | EBITDA | | Sales | | of Total | | EBITDA | | Sales | | EBITDA |
Components | | 3,557 | | | 42 | % | | 507 | | | 1,988 | | | 31 | % | | 320 | | | 79 | % | | 58 | % |
Engine | | 2,986 | | | 36 | % | | 457 | | | 2,753 | | | 43 | % | | 390 | | | 8 | % | | 17 | % |
Distribution | | 2,406 | | | 28 | % | | 335 | | | 2,117 | | | 33 | % | | 110 | | | 14 | % | | NM |
Power Systems | | 1,343 | | | 16 | % | | 219 | | | 1,160 | | | 18 | % | | 90 | | | 16 | % | | NM |
Accelera | | 85 | | | 1 | % | | (94) | | | 31 | | | 1 | % | | (65) | | | NM | | (45) | % |
Intersegment eliminations | | (1,924) | | | (23) | % | | (63) | | | (1,664) | | | (26) | % | | (90) | | | 16 | % | | (30) | % |
| | | | | | | | | | | | | | | | |
Total | | $ | 8,453 | | | 100 | % | | $ | 1,361 | | (1) | $ | 6,385 | | | 100 | % | | $ | 755 | | (2) | 32 | % | | 80 | % |
| | | | | | | | | | | | | | | | |
"NM" - not meaningful information | | | | | | | | | | | | | | |
(1) EBITDA includes $18 million of costs associated with the planned separation of our filtration business. |
(2) EBITDA includes $158 million of costs associated with the suspension of our Russian operations and $17 million of costs associated with the planned separation of our filtration business. See NOTE 15, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information. |
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Net income attributable to Cummins Inc. was $0.4 billion,$790 million, or $2.82$5.55 per diluted share, on sales of $7.3$8.5 billion for the three months ended September 30, 2022,March 31, 2023, versus the comparable prior year period net income attributable to Cummins Inc. of $0.53 billion,$418 million, or $3.69$2.92 per diluted share, on sales of $6.0$6.4 billion. The decreasesincreases in net income attributable to Cummins Inc. and earnings per diluted share were driven by unfavorable discrete tax items, Meritor acquisitionhigher net sales and integrationthe absence of costs one-time employee recognition expenses,associated with the suspension of our Russian operations, partially offset by increased compensation costs, higher interest expense related to increased floating interest rates and new borrowings losses in corporate owned life insurance, lower equity, royalty and interest incomehigher amortization of intangible assets resulting from investees (principally in China) and a higher effective tax rate, partially offset by higher net sales and lower variable compensation.our acquisitions. The increase in gross margin was primarily due to favorable pricing, higher volumes (including sales of axles and lower variable compensation expenses,brakes due to the Meritor acquisition) and favorable pricing, partially offset by higher material costs, increased freight costs and one-time employee recognitioncompensation expenses. The 1.3 percentage point decrease in gross margin as a percentage of net sales was principally due to the addition of Meritor activity since the date of acquisition which had a lower gross margin percentage than our legacy business.
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| |
| | | Nine months ended |
| Operating Segments | | September 30, 2022 | | October 3, 2021 | | Percent change |
| | | | | Percent | | | | | | Percent | | | | 2022 vs. 2021 |
| In millions | | Sales | | of Total | | EBITDA | | Sales | | of Total | | EBITDA | | Sales | | EBITDA |
| Engine | | $ | 8,307 | | | 41 | % | | $ | 1,177 | | | $ | 7,528 | | | 41 | % | | $ | 1,147 | | | 10 | % | | 3 | % |
| Distribution | | 6,609 | | | 32 | % | | 632 | | | 5,714 | | | 31 | % | | 553 | | | 16 | % | | 14 | % |
| Components | | 6,641 | | | 33 | % | | 969 | | | 5,939 | | | 33 | % | | 975 | | | 12 | % | | (1) | % |
| Power Systems | | 3,712 | | | 18 | % | | 411 | | | 3,329 | | | 18 | % | | 399 | | | 12 | % | | 3 | % |
| New Power | | 123 | | | 1 | % | | (243) | | | 82 | | | 1 | % | | (169) | | | 50 | % | | (44) | % |
| Intersegment eliminations | | (5,088) | | | (25) | % | | (252) | | | (4,421) | | | (24) | % | | (89) | | | 15 | % | | NM |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 20,304 | | | 100 | % | | $ | 2,694 | | (1) | $ | 18,171 | | | 100 | % | | $ | 2,816 | | | 12 | % | | (4) | % |
| | | | | | | | | | | | | | | | | |
| "NM" - not meaningful information | | | | | | | | | | | | | | |
| (1) EBITDA includes $112 million of costs associated with the suspension of our Russian operations, $62 million of costs associated with the planned separation of our Filtration business and $56 million of costs related to the acquisition and integration of Meritor. |
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| | | | | | | | | | | | | | | | | |
Net income attributable to Cummins Inc. was $1.52 billion, or $10.68 per diluted share, on sales of $20.3 billion for the nine months ended September 30, 2022, versus the comparable prior year period net income attributable to Cummins Inc. of $1.74 billion, or $11.86 per diluted share, on sales of $18.2 billion. The decreases in net income attributable to Cummins Inc. and earnings per diluted share were driven by lower equity, royalty and interest income from investees (primarily in China), losses in corporate owned life insurance, costs associated with the suspension of our Russian operations, costs associated with the planned separation of our filtration business, Meritor acquisition and integration costs, one-time employee recognition expenses, unfavorable discrete tax items, higher consulting expenses and increased interest expense related to new borrowings, partially offset by higher net sales and increased gross margin. 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, increased volumes and lower variable compensation expenses, partially offset by higher material costs, increased freight costs due to supply chain constraints and one-time employee recognition expenses. Diluted earnings per common share for the nine months ended September 30, 2022, benefited $0.10 from fewer weighted-average shares outstanding due to the stock repurchase program.
We generated $1.15 billion$495 million of cash from operations for the ninethree months ended September 30, 2022,March 31, 2023, compared to $1.52 billion$164 million for the comparable period in 2021.2022. 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 September 30, 2022,March 31, 2023, was 46.442.2 percent, compared to 31.544.1 percent at December 31, 2021.2022. The increasedecrease was primarily due to higherthe increased equity balance from strong first quarter earnings and lower debt balances since December 31, 2021, resulting from funding the acquisition of Meritor, Inc. (Meritor).2022. At September 30, 2022,March 31, 2023, we had $3.0$2.4 billion in cash and marketable securities on hand and access to our $4.0 billion credit facilities, if necessary, to meet acquisition, working capital, investment and funding needs.
In the first nine months of 2022, we purchased $370 million, or 1.9 million shares, of our common stock.
On September 30, 2022,February 15, 2023, certain of our subsidiaries entered into aan amendment to the $1.0 billion credit agreement (Credit Agreement), consisting of a $400 million revolving credit facility and a $600 million term loan facility, in anticipation of the separation of our filtration business. See NOTE 11, "DEBT,"business, which extended the date on which the Credit Agreement terminates from March 30, 2023 to our Condensed Consolidated Financial Statements for additional information.
On August 17, 2022, we entered into an amended and restated 364-day credit agreement and an incremental 364-day credit agreement, which allow us to borrow up to $1.5 billion and $500 million, respectively, of unsecured funds at any time prior to August 16,June 30, 2023.
On July 13, 2022, we entered into a loan agreement under which we may obtain delayed-draw loans in an amount up to $2.0 billion in the aggregate prior to October 13, 2022. We drew down the entire $2.0 billion balance on August 2, 2022, to fund the acquisition of Meritor.
In July 2022, the Board authorized an increase to our quarterly dividend of approximately 8 percent from $1.45 per share to $1.57 per share.
In the first ninethree months of 2022,2023, the investment lossgain on our U.S. pension trusttrusts was 5.11.49 percent while our U.K. pension trust losstrusts' gain was 21.70.41 percent. We anticipate making additional defined benefit pension contributions during the remainder of 20222023 of $7$20 million for our U.S. and U.K. qualified and non-qualified pension plans. We expect our 20222023 annual net periodic pension cost to approximate $20 million.be near zero.
On April 3, 2023, we purchased all of the equity ownership interest of Teksid Hierro de Mexico, S.A. de C.V. and Teksid, Inc. from Stellantis N.V. for approximately €138 million, subject to certain adjustments set forth in the agreement. See NOTE 19, "SUBSEQUENT EVENT," to the Condensed Consolidated Financial Statements for additional information.
As of the date of this filing, our credit ratings and outlooks from the credit rating agencies remain unchanged.
RESULTS OF OPERATIONS
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| | | | | | | | | | | | | | | | | | | |
| | | | | Three months ended | | Favorable/ | | Nine months ended | | Favorable/ |
| | | | | September 30, 2022 | | October 3, 2021 | | (Unfavorable) | | September 30, 2022 | | October 3, 2021 | | (Unfavorable) |
| | In millions, except per share amounts | | | | Amount | | Percent | | | | Amount | | Percent |
| | NET SALES | | $ | 7,333 | | | $ | 5,968 | | | $ | 1,365 | | | 23 | % | | $ | 20,304 | | | $ | 18,171 | | | $ | 2,133 | | | 12 | % |
| | Cost of sales | | 5,691 | | | 4,554 | | | (1,137) | | | (25) | % | | 15,404 | | | 13,793 | | | (1,611) | | | (12) | % |
| | GROSS MARGIN | | 1,642 | | | 1,414 | | | 228 | | | 16 | % | | 4,900 | | | 4,378 | | | 522 | | | 12 | % |
| | OPERATING EXPENSES AND INCOME | | | | | | | | | | | | | | | | |
| | Selling, general and administrative expenses | | 708 | | | 571 | | | (137) | | | (24) | % | | 1,945 | | | 1,745 | | | (200) | | | (11) | % |
| | Research, development and engineering expenses | | 348 | | | 266 | | | (82) | | | (31) | % | | 945 | | | 802 | | | (143) | | | (18) | % |
| | Equity, royalty and interest income from investees | | 70 | | | 94 | | | (24) | | | (26) | % | | 261 | | | 397 | | | (136) | | | (34) | % |
| | | | | | | | | | | | | | | | | | |
| | Other operating expense, net | | 30 | | | 5 | | | (25) | | | NM | | 144 | | | 17 | | | (127) | | | NM |
| | OPERATING INCOME | | 626 | | | 666 | | | (40) | | | (6) | % | | 2,127 | | | 2,211 | | | (84) | | | (4) | % |
| | | | | | | | | | | | | | | | | | |
| | Interest expense | | 61 | | | 28 | | | (33) | | | NM | | 112 | | | 85 | | | (27) | | | (32) | % |
| | Other income, net | | 43 | | | 37 | | | 6 | | | 16 | % | | 26 | | | 111 | | | (85) | | | (77) | % |
| | INCOME BEFORE INCOME TAXES | | 608 | | | 675 | | | (67) | | | (10) | % | | 2,041 | | | 2,237 | | | (196) | | | (9) | % |
| | Income tax expense | | 199 | | | 134 | | | (65) | | | (49) | % | | 502 | | | 473 | | | (29) | | | (6) | % |
| | CONSOLIDATED NET INCOME | | 409 | | | 541 | | | (132) | | | (24) | % | | 1,539 | | | 1,764 | | | (225) | | | (13) | % |
| | Less: Net income attributable to noncontrolling interests | | 9 | | | 7 | | | (2) | | | (29) | % | | 19 | | | 27 | | | 8 | | | 30 | % |
| | NET INCOME ATTRIBUTABLE TO CUMMINS INC. | | $ | 400 | | | $ | 534 | | | $ | (134) | | | (25) | % | | $ | 1,520 | | | $ | 1,737 | | | $ | (217) | | | (12) | % |
| | Diluted Earnings Per Common Share Attributable to Cummins Inc. | | $ | 2.82 | | | $ | 3.69 | | | $ | (0.87) | | | (24) | % | | $ | 10.68 | | | $ | 11.86 | | | $ | (1.18) | | | (10) | % |
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| | "NM" - not meaningful information | | | | | | | | | | | | | | | |
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| | | | | Three months ended | | Favorable/ | | | | |
| | | | | March 31, | | (Unfavorable) | | | | | | |
| | In millions, except per share amounts | | 2023 | | 2022 | | Amount | | Percent | | | | | | |
| | NET SALES | | $ | 8,453 | | | $ | 6,385 | | | $ | 2,068 | | | 32 | % | | | | | | | | |
| | Cost of sales | | 6,424 | | | 4,853 | | | (1,571) | | | (32) | % | | | | | | | | |
| | GROSS MARGIN | | 2,029 | | | 1,532 | | | 497 | | | 32 | % | | | | | | | | |
| | OPERATING EXPENSES AND INCOME | | | | | | | | | | | | | | | | |
| | Selling, general and administrative expenses | | 753 | | | 615 | | | (138) | | | (22) | % | | | | | | | | |
| | Research, development and engineering expenses | | 350 | | | 298 | | | (52) | | | (17) | % | | | | | | | | |
| | Equity, royalty and interest income from investees | | 119 | | | 96 | | | 23 | | | 24 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Other operating expense, net | | 19 | | | 111 | | | 92 | | | 83 | % | | | | | | | | |
| | OPERATING INCOME | | 1,026 | | | 604 | | | 422 | | | 70 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Interest expense | | 87 | | | 17 | | | (70) | | | NM | | | | | | | | |
| | Other income (expense), net | | 90 | | | (9) | | | 99 | | | NM | | | | | | | | |
| | INCOME BEFORE INCOME TAXES | | 1,029 | | | 578 | | | 451 | | | 78 | % | | | | | | | | |
| | Income tax expense | | 223 | | | 155 | | | (68) | | | (44) | % | | | | | | | | |
| | CONSOLIDATED NET INCOME | | 806 | | | 423 | | | 383 | | | 91 | % | | | | | | | | |
| | Less: Net income attributable to noncontrolling interests | | 16 | | | 5 | | | (11) | | | NM | | | | | | | | |
| | NET INCOME ATTRIBUTABLE TO CUMMINS INC. | | $ | 790 | | | $ | 418 | | | $ | 372 | | | 89 | % | | | | | | | | |
| | Diluted Earnings Per Common Share Attributable to Cummins Inc. | | $ | 5.55 | | | $ | 2.92 | | | $ | 2.63 | | | 90 | % | | | | | | | | |
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| | "NM" - not meaningful information | | | | | | | | | | | | | | | |
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| | Three months ended | | Favorable/ (Unfavorable) | | Nine months ended | | Favorable/ (Unfavorable) |
| | September 30, 2022 | | October 3, 2021 | | | September 30, 2022 | | October 3, 2021 | |
Percent of sales | | | | Percentage Points | | | | Percentage Points |
Gross margin | | 22.4 | % | | 23.7 | % | | (1.3) | | | 24.1 | % | | 24.1 | % | | — | |
Selling, general and administrative expenses | | 9.7 | % | | 9.6 | % | | (0.1) | | | 9.6 | % | | 9.6 | % | | — | |
Research, development and engineering expenses | | 4.7 | % | | 4.5 | % | | (0.2) | | | 4.7 | % | | 4.4 | % | | (0.3) | |
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| | | | | | | | | | | | |
Meritor Acquisition
On August 3, 2022, we completed the acquisition of Meritor. Our results of operations include all activity of Meritor since the acquisition date. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Favorable/ (Unfavorable) | | | | |
| | March 31, | | | | | | |
Percent of sales | | 2023 | | 2022 | | Percentage Points | | | | |
Gross margin | | 24.0 | % | | 24.0 | % | | — | | | | | | | |
Selling, general and administrative expenses | | 8.9 | % | | 9.6 | % | | 0.7 | | | | | | | |
Research, development and engineering expenses | | 4.1 | % | | 4.7 | % | | 0.6 | | | | | | | |
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Net Sales
Net sales for the three months ended September 30, 2022,March 31, 2023, increased by $1,365 million$2.1 billion versus the comparable period in 2021.2022. The primary drivers were as follows:
•Components segment sales increased 5179 percent largely due to axles and brakes sales since the completion offrom the Meritor acquisition.
•Distribution segment sales increased 14 percent principally due to higher demand across mostall product lines in North America.America.
•Engine segment sales increased 8 percent principally due to favorable pricing and stronger on-highwaystrong heavy-duty truck demand (including higher aftermarket sales) in North America.
•Power Systems segment sales increased 16 percent primarily due to favorable pricing and higher demand in power generation markets and stronger demand in industrial markets with higher aftermarket sales and increased oil and gas demandmarkets in North America.
These increases were partially offset by unfavorable foreign currency fluctuations of 3 percent of total sales, primarily in the Euro, British pound, Chinese renminbi and Indian rupee.
Net sales for the nine months ended September 30, 2022, increased $2,133 millionversus the comparable period in 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 10 percent due to favorable pricing and stronger on-highway demand (including higher aftermarket sales) in North America.
•Components segment sales increased 12 percent largely due to axles and brakes sales since the completion of the Meritor acquisition.
•Power Systems segment sales increased 12 percent primarily due to stronger demand in industrial markets with higher aftermarket sales and increased oil and gas demand in North America and China and favorable pricing and higher demand in power generation markets in Latin America, India and China.
These increases were partially offset by unfavorable foreign currency fluctuations of 2 percent of total sales, primarily in the Euro, British poundChinese renminbi, Indian rupee and Indian rupee.Euro.
Sales to international markets (excluding the U.S. and Canada), based on location of customers, for the three and nine months ended September 30, 2022,March 31, 2023, were 40 percent and 4039 percent of total net sales compared with 43 percent and 4442 percent of total net sales for the comparable periodsperiod in 2021.2022. 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 facilities; charges for the write-downs of inventories in Russia and other production overhead.
Gross Margin
Gross margin increased $228$497 million for the three months ended September 30, 2022March 31, 2023 and decreased 1.3 pointsremained flat as a percentage of net sales versus the comparable period in 2021.2022. The increase in gross margin was primarily due to favorable pricing, higher volumes (including sales of axles and lower variable compensation expenses,brakes due to the Meritor acquisition) and favorable pricing, partially offset by higher material costs, increased freight costs and one-time employee recognition expenses. The 1.3 percentage point decrease in gross margin as a percentage of net sales was principally due to the addition of Meritor activity since the date of acquisition which had a lower gross margin percentage than our legacy business.
Gross margin increased $522 million for the nine months ended September 30, 2022 and remained flat at 24.1 points as a percentage of sales versus the comparable period in 2021. The increase in gross margin was primarily due to favorable pricing, increased volumes and lower variable compensation expenses, partially offset by higher material costs, increased freight costs due to supply chain constraints and one-time employee recognition expenses.
The provision for base warranties issued as a percent of sales for the three and nine months ended September 30, 2022,March 31, 2023, was 1.7 percent and 1.9 percent, respectively, compared to 2.2 percent and 2.41.9 percent for the comparable periodsperiod in 2021.2022.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $137$138 million for the three months ended September 30, 2022,March 31, 2023, versus the comparable period in 2021,2022, primarily due to Meritor acquisitionhigher compensation expenses and integration costs, higher consulting expenses. Compensation and related expenses driven by acquisitions and the work towards separation of the filtration business, increased travel expenses and one-time employee recognition expenses, partially offset by lowerinclude variable compensation, expenses.salaries and fringe benefits. Overall, selling, general and administrative expenses as a percentage of net sales increaseddecreased to 9.78.9 percent in the three months ended September 30, 2022,March 31, 2023, from 9.6 percent in the comparable period in 2021.
Selling, general and administrative expenses increased $200 million for the nine months ended September 30, 2022, versus the comparable period2022. The decrease in 2021, primarily due to higher consulting expenses driven by acquisitions, integration and the work towards the separation of the filtration business, increased travel expenses and one-time employee recognition expenses, partially offset by lower variable compensation expenses. Overall, selling, general and administrative expenses as a percentage of net sales remained flatwas due to net sales increasing at 9.6 percent versus the comparable period in 2021.a faster rate than selling, general and administrative expenses.
Research, Development and Engineering Expenses
Research, development and engineering expenses increased $82$52 million for the three months ended September 30, 2022,March 31, 2023, versus the comparable period in 2021,2022, primarily due to increasedhigher compensation costs including one-time employee recognition expenses Meritorand lower expense recovery. Compensation and related expenses since the date of acquisition, higher spending on prototypesinclude variable compensation, salaries and testing, and increased consulting expenses.fringe benefits. Overall, research, development and engineering expenses as a percentage of net sales increaseddecreased to 4.74.1 percent in the three months ended September 30, 2022,March 31, 2023, from 4.54.7 percent in the comparable period in 2021.
Research, development and engineering expenses increased $143 million for the nine months ended September 30, 2022, versus the comparable period2022. The decrease in 2021, primarily due to higher compensation costs including one-time employee recognition expenses, increased consulting expenses, Meritor expenses since the date of acquisition and higher spending on prototypes, testing and supplies. Overall, research, development and engineering expenses as a percentage of net sales increasedwas due to 4.7 percent in the nine months ended September 30, 2022, from 4.4 percent in the comparable period in 2021.net sales increasing at a faster rate than research, development and engineering expenses.
Research activities continue to focus on development of new products to meet future emission standards around the world, improvements in fuel economy performance of diesel and natural gas poweredgas-powered engines and related components as well as development activities around battery electric, fuel cell electric and hydrogen engine solutions.
Equity, Royalty and Interest Income from Investees
Equity, royalty and interest income from investees decreased $24increased $23 million for the three months ended September 30, 2022,March 31, 2023, versus the comparable period in 2021,2022, primarily due to decreasedthe absence of the $28 million impairment of our Russian joint venture with KAMAZ in the first quarter of 2022 and higher earnings at Beijing FotonKomatsu Cummins Engine Co.Chile, Ltda., Ltd.partially offset by lower royalty and the February 7, 2022, purchase of Westport Fuel System Inc.'s stake in Cummins Westport Joint Venture.interest income from investees. See NOTE 16, "ACQUISITIONS,15, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information.
Equity, royalty and interest income from investees decreased $136 million for the nine months ended September 30, 2022, versus the comparable period in 2021, mainly due to decreased earnings at Beijing Foton Cummins Engine Co., Ltd., the $28 million impairmentTable of our Russian joint venture with KAMAZ, lower earnings at Dongfeng Cummins Engine Co., Ltd. and the February 7, 2022 purchase of Westport Fuel System Inc.'s stake in Cummins Westport Joint Venture. See NOTE 3, "RUSSIAN OPERATIONS," and NOTE 16, "ACQUISITIONS," to our ContentsCondensed Consolidated Financial Statements for additional information.Other Operating Expense, Net
Other operating (expense) income, net was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | Three months ended | | |
| | | Three months ended | | | Nine months ended | | | | March 31, | | |
In millions | In millions | | September 30, 2022 | | October 3, 2021 | | | September 30, 2022 | | October 3, 2021 | | In millions | | 2023 | | 2022 | | |
Amortization of intangible assets | Amortization of intangible assets | | $ | (25) | | | $ | (6) | |
| | $ | (39) | | | $ | (17) | | | Amortization of intangible assets | | $ | (32) | | | $ | (5) | |
| |
Loss on write-off of assets | | Loss on write-off of assets | | (1) | | | (5) | | | |
Russian suspension costs | Russian suspension costs | | (3) | | (1) | — | | | | (64) | | (1) | — | | | Russian suspension costs | | — | | | (68) | | (1) | |
Asset impairments and other charges | Asset impairments and other charges | | — | | | — | | | | (36) | | | — | | | Asset impairments and other charges | | — | | | (36) | | | |
Loss on write-off of assets | | — | | | (3) | | | | (8) | | | (7) | | | |
Gain on sale of assets, net | | — | | | 2 | | | | 1 | | | 1 | | | |
Royalty income, net | | 1 | | | 2 | | | | 6 | | | 7 | | | |
| Other, net | Other, net | | (3) | | | — | | | | (4) | | | (1) | | | Other, net | | 14 | | | 3 | | | |
Total other operating expense, net | Total other operating expense, net | | $ | (30) | | | $ | (5) | | | | $ | (144) | | | $ | (17) | | | Total other operating expense, net | | $ | (19) | | | $ | (111) | | | |
| | (1) See NOTE 3, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information. | | |
(1) See NOTE 15, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information. | | (1) See NOTE 15, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information. | |
| |
Interest Expense
Interest expense increased $33 million and $27$70 million for the three and nine months ended September 30, 2022,March 31, 2023, versus the comparable periods in 2021.2022. The overall increase in debt in the third quarter was primarily related to the Meritor acquisition. The three and nine month increases were primarily due to the overall increase in floating interest rates, higher short-term borrowings (including commercial paper) and new term loan borrowings and higher short-term borrowings, including commercial paper.
Other Income (Expense), Net
Other income (expense) income,, net was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | | Nine months ended | |
In millions | | September 30, 2022 | | | October 3, 2021 | | | September 30, 2022 | | | October 3, 2021 | |
Non-service pension and OPEB credit | | $ | 37 | | | | $ | 23 | | | | $ | 102 | | | | $ | 72 | | |
Foreign currency gain, net | | 20 | | | | 7 | | | | 7 | | | | 5 | | |
Interest income | | 14 | | | | 7 | | | | 29 | | | | 18 | | |
(Loss) gain on marketable securities, net | | (3) | | | | 2 | | | | (12) | | | | 5 | | |
(Loss) gain on corporate owned life insurance | | (29) | | | | 1 | | | | (114) | | | | (11) | | |
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Other, net | | 4 | | | | (3) | | | | 14 | | | | 22 | | |
Total other income, net | | $ | 43 | | | | $ | 37 | | | | $ | 26 | | | | $ | 111 | | |
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| | Three months ended | | | | | | | |
| | March 31, | | | | |
In millions | | 2023 | | | 2022 | | | | | | | |
Non-service pension and OPEB income | | $ | 31 | | | | $ | 33 | | | | | | | | |
Gain (loss) on corporate owned life insurance | | 19 | | | | (37) | | | | | | | | |
Interest income | | 18 | | | | 8 | | | | | | | | |
Foreign currency gain (loss), net | | 12 | | | | (12) | | | | | | | | |
Gain (loss) on marketable securities, net | | 5 | | | | (4) | | | | | | | | |
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Other, net | | 5 | | | | 3 | | | | | | | | |
Total other income (expense), net | | $ | 90 | | | | $ | (9) | | | | | | | | |
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Income Tax Expense
Our effective tax rate for 20222023 is expected to approximate 22.0 percent, (increased 0.5 percent from prior quarter), excluding any discrete items that may arise.
Our effective tax rates for the three and nine months ended September 30,March 31, 2023 and 2022, were 32.721.7 percent and 24.6 percent, respectively. Our effective tax rates for the three and nine months ended October 3, 2021, were 19.9 percent and 21.126.8 percent, respectively.
The three months ended September 30, 2022,March 31, 2023, contained unfavorablefavorable discrete tax items of $57$3 million, primarily due to $51 million of unfavorableshare-based compensation tax costs associated with internal restructuring ahead of the planned separation of our filtration business and $10 million of unfavorable return to provision adjustments, partially offset by $4 million of net favorable other discrete tax items.
The nine months ended September 30, 2022, contained unfavorable net discrete tax items of $52 million, primarily due to $69 million of unfavorable tax costs associated with internal restructuring ahead of the planned separation of our filtration business and $10 million of unfavorable return to provision adjustments, partially offset by $27 million of favorable changes in tax reserves.benefits.
The three months ended October 3, 2021,March 31, 2022, contained favorableunfavorable discrete items of $11$31 million, primarily due to a $16$18 million favorable release of tax reservesunfavorable changes associated with the settlementindefinite suspension of tax positions, partially offset by $5Russian operations, $9 million of net unfavorable return to provision adjustments.
The nine months ended October 3, 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.).
On August 16, 2022, the U.S. federal government enacted the Inflation Reduction Actreserves and $4 million of 2022 into law effective beginning in 2023. The bill includes numerousnet unfavorable other discrete tax provisions, including a 15 percent corporate minimum tax as well as a one percent excise tax on share repurchases. We are evaluating the potential impacts of the Act on our financial results but do not currently expect the legislation will have a material effect on our results of operations or liquidity.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 nine months ended September 30, 2022,March 31, 2023, increased $2$11 million and decreased $8 million, respectively, versus the comparable periodsperiod in 2021. The increase for the three months ended September 30, 2022 was primarily due to higher earnings at Eaton Cummins Joint Venture. The decrease for the nine months ended September 30, 2022, was principally due to lower earnings at Hydrogenics Corporation.
Net Income Attributable toVenture and 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 September 30, 2022, decreased $134 million and $0.87 per diluted share versus the comparable period in 2021, primarily due to unfavorable discrete tax items, Meritor acquisition and integration costs, one-time employee recognition expenses, higher interest expense related to new borrowings, losses in corporate owned life insurance, lower equity, royalty and interest income from investees (principally in China) and a higher effective tax rate, partially offset by higher net sales and lower variable compensation.India Limited.
Net income and diluted earnings per common share attributable to Cummins Inc. for the nine months ended September 30, 2022, decreased $217 million and $1.18 per diluted share versus the comparable period in 2021, primarily due to lower equity, royalty and interest income from investees (primarily in China), losses in corporate owned life insurance, costs associated with the suspension of our Russian operations, costs associated with the planned separation of our filtration business, Meritor acquisition and integration costs, one-time employee recognition expenses, unfavorable discrete tax items, higher consulting expenses and increased interest expense related to new borrowings, partially offset by higher net sales and increased gross margin. See NOTE 3, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information. Diluted earnings per common share for the nine months ended September 30, 2022, benefited $0.10 from fewer weighted-average shares outstanding due to the stock repurchase program.
Comprehensive Income - Foreign Currency Translation Adjustment
The foreign currency translation adjustment was a net lossgain of $379$82 million and $620 million, respectively, for the three and nine months ended September 30, 2022,March 31, 2023, compared to flat anda net lossgain of $34$4 million respectively, for the three and nine months ended October 3, 2021,March 31, 2022, driven by the following:
| | | | | | | | | | | | | | | | | | | | | | | | | Three months ended |
| | Three months ended | | March 31, |
| | September 30, 2022 | | October 3, 2021 | | 2023 | | 2022 |
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 | | $ | (306) | | | Chinese renminbi, British pound, Indian rupee | | $ | (8) | | | Brazilian real, partially offset by Indian rupee, Chinese renminbi | Wholly-owned subsidiaries | | $ | 73 | | | British pound, Brazilian real, Euro | | $ | 16 | | | Brazilian real, partially offset by Indian rupee, British pound, Euro |
Equity method investments | Equity method investments | | (58) | | | Chinese renminbi | | 6 | | | Chinese renminbi, Indian rupee | Equity method investments | | 6 | | | Brazilian real, Chinese renminbi | | (4) | | | Indian rupee |
Consolidated subsidiaries with a noncontrolling interest | Consolidated subsidiaries with a noncontrolling interest | | (15) | | | Indian rupee | | 2 | | | Indian rupee | Consolidated subsidiaries with a noncontrolling interest | | 3 | | | Indian rupee | | (8) | | | Indian rupee |
Total | Total | | $ | (379) | | | $ | — | | | Total | | $ | 82 | | | $ | 4 | | |
| | | | Nine months ended | |
| | September 30, 2022 | | October 3, 2021 | |
In millions | | Translation adjustment | | Primary currency driver vs. U.S. dollar | | Translation adjustment | | Primary currency driver vs. U.S. dollar | |
Wholly-owned subsidiaries | | $ | (465) | | | Chinese renminbi, British pound, Indian rupee | | $ | (36) | | | British pound, Brazilian real, Indian rupee, Euro, partially offset by Chinese renminbi | |
Equity method investments | | (117) | | | Chinese renminbi | | 7 | | | Chinese renminbi, partially offset by Indian rupee | |
Consolidated subsidiaries with a noncontrolling interest | | (38) | | | Indian rupee | | (5) | | | Indian rupee | |
Total | | $ | (620) | | | $ | (34) | | | |
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OPERATING SEGMENT RESULTS
As previously announced, beginning in the first quarter of 2023, we realigned certain businesses and regions within our reportable segments to be consistent with how our segment managers monitor the performance of our segments. We reorganized the businesses within our Components segment to carve out the electronics business into the newly formed software and electronics business and combined the turbo technologies and fuel systems businesses into the newly formed engine components business. Our Components segment now consists of the following businesses: axles and brakes, emission solutions, engine components, filtration, automated transmissions and software and electronics. As a result of the indefinite suspension of operations in Russia, we reorganized the regional management structure of our Distribution segment and moved all Commonwealth of Independent States (CIS) sales into the Europe and Africa and Middle East regions. The Russian portion of prior period CIS sales moved to the Europe region. In March 2023, we rebranded our New Power segment as "Accelera" to better represent our commitment to zero-emission technologies. In addition, we moved our NPROXX joint venture from the Accelera segment to the Engine segment, which adjusted both the equity, royalty and interest income from investees and segment EBITDA line items for the current and prior year. We started to report results for the changes within our operating segments effective January 1, 2023, and reflected these changes in the historical periods presented.
Our reportable operating segments consist of the Components, Engine, Distribution, Components, Power Systems and New PowerAccelera 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 MakerCODM 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 17, "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.
On August 3, 2022, we completed the acquisition of Meritor. Segment results include Meritor's activity since the date of acquisition. The results are included in our Components segment in the axles and brakes business while the electric powertrain portion is included in our New Power segment.
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.
Following is a discussion of results for each of our operating segments.
Components Segment Results
Financial data for the Components segment was as follows:
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| | Three months ended | | Favorable/ | | | | |
| | March 31, | | (Unfavorable) | | | | | | |
In millions | | 2023 | | 2022 | | Amount | | Percent | | | | | | | | |
External sales | | $ | 3,043 | | $ | 1,517 | | $ | 1,526 | | | NM | | | | | | | | |
Intersegment sales | | 514 | | 471 | | 43 | | | 9 | % | | | | | | | | |
Total sales | | 3,557 | | 1,988 | | 1,569 | | | 79 | % | | | | | | | | |
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Research, development and engineering expenses | | 91 | | 76 | | (15) | | | (20) | % | | | | | | | | |
Equity, royalty and interest income from investees | | 21 | | 28 | | (7) | | | (25) | % | | | | | | | | |
Interest income | | 6 | | 1 | | 5 | | | NM | | | | | | | | |
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Russian suspension costs | | — | | 6 | (1) | 6 | | | 100 | % | | | | | | | | |
Segment EBITDA | | 507 | (2) | 320 | | 187 | | | 58 | % | | | | | | | | |
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Segment EBITDA as a percentage of total sales | | 14.3 | % | | 16.1 | % | | | | (1.8) | | | | | | | | | |
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"NM" - not meaningful information | | | | | | | | | | | | | | | | |
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(1) See NOTE 15, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information. |
(2) Includes $12 million of costs associated with the planned separation of our filtration business. |
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As noted above, the descriptions of the two new businesses are as follows:
•Engine components - We design, manufacture and market turbocharger, valvetrain and fuel system technologies for light-duty, mid-range, heavy-duty and high-horsepower markets across North America, Europe, China and India.
•Software and electronics - We develop, supply and remanufacture control units, specialty sensors, power electronics, actuators and software for on-highway, off-highway and power generation applications. We primarily serve markets in the Americas, China, India and Europe.
Sales for our Components segment by business, including adjusted prior year balances for the changes noted above, were as follows:
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| | Three months ended | | Favorable/ | | | | |
| | March 31, | | (Unfavorable) | | | | | | |
In millions | | 2023 | | 2022 | | Amount | | Percent | | | | | | | | |
Axles and brakes | | $ | 1,272 | | | $ | — | | | $ | 1,272 | | | NM | | | | | | | | |
Emission solutions | | 1,056 | | | 910 | | | 146 | | | 16 | % | | | | | | | | |
Engine components | | 581 | | | 502 | | | 79 | | | 16 | % | | | | | | | | |
Filtration | | 417 | | | 382 | | | 35 | | | 9 | % | | | | | | | | |
Automated transmissions | | 179 | | | 134 | | | 45 | | | 34 | % | | | | | | | | |
Software and electronics | | 52 | | | 60 | | | (8) | | | (13) | % | | | | | | | | |
Total sales | | $ | 3,557 | | | $ | 1,988 | | | $ | 1,569 | | | 79 | % | | | | | | | | |
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"NM" - not meaningful information | | | | | | | | | | | | | | | | |
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Sales
Components segment sales for the three months ended March 31, 2023, increased $1.6 billion versus the comparable period in 2022. The following were the primary drivers by business:
•Axles and brakes sales added $1.3 billion in sales due to the Meritor acquisition.
•Emission solutions sales increased $146 million primarily due to stronger demand in North America and China.
•Engine components sales increased $79 million largely due to higher demand in North America and China.
These increases were partially offset by unfavorable foreign currency fluctuations primarily in the Chinese renminbi, Euro and Indian rupee.
Segment EBITDA
Components segment EBITDA for the three months ended March 31, 2023, increased $187 million versus the comparable period in 2022, mainly due to higher volumes (including sales of axles and brakes due to the Meritor acquisition) and favorable pricing, partially offset by higher compensation expenses.
Engine Segment Results
Financial data for the Engine segment was as follows:
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| | Three months ended | | Favorable/ | | Nine months ended | | Favorable/ |
| | September 30, | | October 3, | | (Unfavorable) | | September 30, | | October 3, | | (Unfavorable) |
In millions | | 2022 | | 2021 | | Amount | | Percent | | 2022 | | 2021 | | Amount | | Percent |
External sales | | $ | 2,063 | | | $ | 1,961 | | $ | 102 | | | 5 | % | | $ | 6,204 | | $ | 5,776 | | | $ | 428 | | | 7 | % |
Intersegment sales | | 716 | | | 617 | | 99 | | | 16 | % | | 2,103 | | 1,752 | | | 351 | | | 20 | % |
Total sales | | 2,779 | | | 2,578 | | 201 | | | 8 | % | | 8,307 | | 7,528 | | | 779 | | | 10 | % |
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Research, development and engineering expenses | | 140 | | | 97 | | (43) | | | (44) | % | | 365 | | 288 | | | (77) | | | (27) | % |
Equity, royalty and interest income from investees | | 28 | | | 61 | | (33) | | | (54) | % | | 131 | (1) | 278 | | | (147) | | | (53) | % |
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Interest income | | 3 | | | 3 | | — | | | — | % | | 8 | | 7 | | | 1 | | | 14 | % |
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Russian suspension costs(2) | | — | | | — | | — | | | — | % | | 33 | (3) | — | | | (33) | | | NM |
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Segment EBITDA | | 363 | | | 391 | | (28) | | | (7) | % | | 1,177 | | 1,147 | | | 30 | | | 3 | % |
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| | | | | | Percentage Points | | | | | | Percentage Points |
Segment EBITDA as a percentage of total sales | | 13.1 | % | | 15.2 | % | | | | (2.1) | | | 14.2 | % | | 15.2 | % | | | | (1.0) | |
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"NM" - not meaningful information | | | | | | | | | | | | | | | | |
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(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 16, "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. |
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| | Three months ended | | Favorable/ | | | | |
| | March 31, | | (Unfavorable) | | | | | | |
In millions | | 2023 | | 2022 | | Amount | | Percent | | | | | | | | |
External sales | | $ | 2,252 | | | $ | 2,049 | | $ | 203 | | | 10 | % | | | | | | | | |
Intersegment sales | | 734 | | | 704 | | 30 | | | 4 | % | | | | | | | | |
Total sales | | 2,986 | | | 2,753 | | 233 | | | 8 | % | | | | | | | | |
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Research, development and engineering expenses | | 134 | | | 109 | | (25) | | | (23) | % | | | | | | | | |
Equity, royalty and interest income from investees | | 65 | | | 42 | (1) | 23 | | | 55 | % | | | | | | | | |
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Interest income | | 3 | | | 4 | | (1) | | | (25) | % | | | | | | | | |
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Russian suspension costs | | — | | | 32 | (2) | 32 | | | 100 | % | | | | | | | | |
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Segment EBITDA | | 457 | | | 390 | | 67 | | | 17 | % | | | | | | | | |
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| | | | | | Percentage Points | | | | | | |
Segment EBITDA as a percentage of total sales | | 15.3 | % | | 14.2 | % | | | | 1.1 | | | | | | | | | |
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(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 15, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information. |
(2) Includes $31 million of Russian suspension costs reflected in the equity, royalty and interest income from investees line above. See NOTE 15, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information. |
Sales for our Engine segment by market were as follows:
| | | | Three months ended | | Favorable/ | | Nine months ended | | Favorable/ | | | Three months ended | | Favorable/ | |
| | September 30, | | October 3, | | (Unfavorable) | | September 30, | | October 3, | | (Unfavorable) | | March 31, | | (Unfavorable) | |
In millions | In millions | | 2022 | | 2021 | | Amount | | Percent | | 2022 | | 2021 | | Amount | | Percent | In millions | | 2023 | | 2022 | | Amount | | Percent | |
Heavy-duty truck | Heavy-duty truck | | $ | 972 | | | $ | 861 | | $ | 111 | | | 13 | % | | $ | 2,881 | | $ | 2,527 | | $ | 354 | | | 14 | % | Heavy-duty truck | | $ | 1,114 | | | $ | 908 | | $ | 206 | | | 23 | % | |
Medium-duty truck and bus | Medium-duty truck and bus | | 868 | | | 713 | | 155 | | | 22 | % | | 2,591 | | 2,075 | | 516 | | | 25 | % | Medium-duty truck and bus | | 903 | | | 848 | | 55 | | | 6 | % | |
Light-duty automotive | Light-duty automotive | | 466 | | | 515 | | (49) | | | (10) | % | | 1,420 | | 1,480 | | (60) | | | (4) | % | Light-duty automotive | | 439 | | | 498 | | (59) | | | (12) | % | |
Total on-highway | Total on-highway | | 2,306 | | | 2,089 | | 217 | | | 10 | % | | 6,892 | | 6,082 | | 810 | | | 13 | % | Total on-highway | | 2,456 | | | 2,254 | | 202 | | | 9 | % | |
Off-highway | Off-highway | | 473 | | | 489 | | (16) | | | (3) | % | | 1,415 | | 1,446 | | (31) | | | (2) | % | Off-highway | | 530 | | | 499 | | 31 | | | 6 | % | |
Total sales | Total sales | | $ | 2,779 | | | $ | 2,578 | | $ | 201 | | | 8 | % | | $ | 8,307 | | $ | 7,528 | | $ | 779 | | | 10 | % | Total sales | | $ | 2,986 | | | $ | 2,753 | | $ | 233 | | | 8 | % | |
| | | | | | | Percentage Points | | | | | | Percentage Points | | | | | | Percentage Points | |
On-highway sales as percentage of total sales | On-highway sales as percentage of total sales | | 83 | % | | 81 | % | | | | 2 | | | 83 | % | | 81 | % | | | | 2 | | On-highway sales as percentage of total sales | | 82 | % | | 82 | % | | | | — | | |
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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/ | | | Three months ended | | Favorable/ | |
| | | September 30, | | October 3, | | (Unfavorable) | | September 30, | | October 3, | | (Unfavorable) | | | March 31, | | (Unfavorable) | |
| | | 2022 | | 2021 | | Amount | | Percent | | 2022 | | 2021 | | Amount | | Percent | | | 2023 | | 2022 | | Amount | | Percent | |
Heavy-duty | Heavy-duty | | 30,200 | | | 29,200 | | | 1,000 | | | 3 | % | | 89,700 | | | 89,300 | | | 400 | | | — | % | Heavy-duty | | 34,700 | | | 28,600 | | | 6,100 | | | 21 | % | |
Medium-duty | Medium-duty | | 69,800 | | | 65,200 | | | 4,600 | | | 7 | % | | 211,200 | | | 205,800 | | | 5,400 | | | 3 | % | Medium-duty | | 78,900 | | | 72,600 | | | 6,300 | | | 9 | % | |
Light-duty | Light-duty | | 58,300 | | | 73,900 | | | (15,600) | | | (21) | % | | 185,200 | | | 210,500 | | | (25,300) | | | (12) | % | Light-duty | | 55,000 | | | 66,500 | | | (11,500) | | | (17) | % | |
Total unit shipments | Total unit shipments | | 158,300 | | | 168,300 | | | (10,000) | | | (6) | % | | 486,100 | | | 505,600 | | | (19,500) | | | (4) | % | Total unit shipments | | 168,600 | | | 167,700 | | | 900 | | | 1 | % | |
Sales
Engine segment sales for the three months ended September 30, 2022,March 31, 2023, increased $201$233 million versus the comparable period in 2021.2022. The following were the primary drivers by market:
•Medium-duty truck and bus sales increased $155 million mainly due to favorable pricing and higher demand (including higher aftermarket sales), especially in North America.
•Heavy-duty truck sales increased $111$206 million principally due to favorable pricing and stronger demand (including higher aftermarket sales) in North America with higher shipments of 1626 percent.
•Medium-duty truck and bus sales increased $55 million mainly due to higher demand (including higher aftermarket sales) especially in North America.
These increases were partially offset by decreased light-duty automotive sales of $49$59 million primarily due to lower sales to Stellantis and our indefinite suspension of operations in Russia and lower sales to Stellantis.
Engine segment sales for the nine months ended September 30, 2022, increased $779 million versus the comparable period in 2021. The following were the primary drivers by market:
•Medium-duty truck and bus sales increased $516 million mainly due to favorable pricing and higher demand (including higher aftermarket sales), especially in North America.
•Heavy-duty truck sales increased $354 million principally due to favorable pricing and stronger demand (including higher aftermarket sales), especially in North America with higher shipments of 9 percent.Russia.
Segment EBITDA
Engine segment EBITDA for the three months ended September 30, 2022, decreased $28March 31, 2023, increased $67 million versus the comparable period in 2021,2022, primarily due to higher material costs, increased research, development and engineering expenses, increased product coverage, lower equity, royalty and interest income from investees (principally Beijing Foton Cummins Engine Co., Ltd. and the February 7, 2022, purchase of Westport Fuel System Inc.'s stake in Cummins Westport Joint Venture) and manufacturing inefficiencies, partially offset by favorable pricing. See NOTE 16, "ACQUISITIONS," to our Condensed Consolidated Financial Statements for additional information.
Engine segment EBITDA for the nine months ended September 30, 2022, increased $30 million versus the comparable period in 2021, mainly due to favorable pricing, the absence of costs related to asset impairments and other charges recorded in the first quarter of 2022 and the absence of costs associated with the suspension of our Russian operations (including impairment of our joint venture with KAMAZ), partially offset by higher materialcompensation expenses, increased materials costs lower equity, royalty and interest income from investees (principally decreased earnings at Beijing Foton Cummins Engine Co., Ltd., the $28 million impairment of our Russian joint venture with KAMAZ, lower earnings at Dongfeng Cummins Engine Co., Ltd. and the February 7, 2022, purchase of Westport Fuel System Inc.'s stake in Cummins Westport Joint Venture) and increased research, development and engineering expenses.unfavorable mix. See NOTE 3,15, "RUSSIAN OPERATIONS," and NOTE 16, "ACQUISITIONS," to our Condensed Consolidated Financial Statements for additional information.
Distribution Segment Results
Financial data for the Distribution segment was as follows:
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| | Three months ended | | Favorable/ | | Nine months ended | | Favorable/ |
| | September 30, | | October 3, | | (Unfavorable) | | September 30, | | October 3, | | (Unfavorable) |
In millions | | 2022 | | 2021 | | Amount | | Percent | | 2022 | | 2021 | | Amount | | Percent |
External sales | | $ | 2,232 | | $ | 1,952 | | $ | 280 | | | 14 | % | | $ | 6,590 | | $ | 5,692 | | $ | 898 | | | 16 | % |
Intersegment sales | | 7 | | 7 | | — | | | — | % | | 19 | | 22 | | (3) | | | (14) | % |
Total sales | | 2,239 | | 1,959 | | 280 | | | 14 | % | | 6,609 | | 5,714 | | 895 | | | 16 | % |
| | | | | | | | | | | | | | | | |
Research, development and engineering expenses | | 13 | | 10 | | (3) | | | (30) | % | | 39 | | 35 | | (4) | | | (11) | % |
Equity, royalty and interest income from investees | | 20 | | 15 | | 5 | | | 33 | % | | 57 | | 47 | | 10 | | | 21 | % |
Interest income | | 4 | | 2 | | 2 | | | 100 | % | | 9 | | 5 | | 4 | | | 80 | % |
| | | | | | | | | | | | | | | | |
Russian suspension costs(1) | | — | | — | | — | | | — | % | | 55 | | — | | (55) | | | NM |
Segment EBITDA | | 225 | | 192 | | 33 | | | 17 | % | | 632 | | 553 | | 79 | | | 14 | % |
| | | | | | | | | | | | | | | | |
| | | | | | Percentage Points | | | | | | Percentage Points |
Segment EBITDA as a percentage of total sales | | 10.0 | % | | 9.8 | % | | | | 0.2 | | | 9.6 | % | | 9.7 | % | | | | (0.1) | |
| | | | | | | | | | | | | | | | |
"NM" - not meaningful information | | | | | | | | | | | | | | | | |
| | | | | | | | |
(1) See NOTE 3, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information. |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Favorable/ | | | | |
| | March 31, | | (Unfavorable) | | | | | | |
In millions | | 2023 | | 2022 | | Amount | | Percent | | | | | | | | |
External sales | | $ | 2,399 | | $ | 2,111 | | $ | 288 | | | 14 | % | | | | | | | | |
Intersegment sales | | 7 | | 6 | | 1 | | | 17 | % | | | | | | | | |
Total sales | | 2,406 | | 2,117 | | 289 | | | 14 | % | | | | | | | | |
| | | | | | | | | | | | | | | | |
Research, development and engineering expenses | | 14 | | 13 | | (1) | | | (8) | % | | | | | | | | |
Equity, royalty and interest income from investees | | 24 | | 16 | | 8 | | | 50 | % | | | | | | | | |
Interest income | | 7 | | 2 | | 5 | | | NM | | | | | | | | |
| | | | | | | | | | | | | | | | |
Russian suspension costs | | — | | 100 | (1) | 100 | | | 100 | % | | | | | | | | |
Segment EBITDA | | 335 | | 110 | | 225 | | | NM | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | Percentage Points | | | | | | |
Segment EBITDA as a percentage of total sales | | 13.9 | % | | 5.2 | % | | | | 8.7 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
"NM" - not meaningful information | | | | | | | | | | | | | | | | |
| | | | | | | | |
(1) See NOTE 15, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information. |
| | | | | | | | | | | | | | | | |
Sales for our Distribution segment by region, including adjusted prior year balances for the changes noted above, were as follows:
| | | | Three months ended | | Favorable/ | | Nine months ended | | Favorable/ | | | Three months ended | | Favorable/ | |
| | | September 30, | | October 3, | | (Unfavorable) | | September 30, | | October 3, | | (Unfavorable) | | | March 31, | | (Unfavorable) | |
In millions | In millions | | 2022 | | 2021 | | Amount | | Percent | | 2022 | | 2021 | | Amount | | Percent | In millions | | 2023 | | 2022 | | Amount | | Percent | |
North America | North America | | $ | 1,512 | | | $ | 1,236 | | | $ | 276 | | | 22 | % | | $ | 4,373 | | | $ | 3,637 | | | $ | 736 | | | 20 | % | North America | | $ | 1,695 | | | $ | 1,367 | | | $ | 328 | | | 24 | % | |
Asia Pacific | Asia Pacific | | 260 | | | 238 | | | 22 | | | 9 | % | | 748 | | | 679 | | | 69 | | | 10 | % | Asia Pacific | | 240 | | | 246 | | | (6) | | | (2) | % | |
Europe | Europe | | 175 | | | 144 | | | 31 | | | 22 | % | | 503 | | | 468 | | | 35 | | | 7 | % | Europe | | 195 | | | 281 | | | (86) | | | (31) | % | |
China | China | | 92 | | | 81 | | | 11 | | | 14 | % | | 274 | | | 245 | | | 29 | | | 12 | % | China | | 102 | | | 83 | | | 19 | | | 23 | % | |
Africa and Middle East | Africa and Middle East | | 73 | | | 74 | | | (1) | | | (1) | % | | 174 | | | 197 | | | (23) | | | (12) | % | Africa and Middle East | | 62 | | | 50 | | | 12 | | | 24 | % | |
India | | India | | 59 | | | 49 | | | 10 | | | 20 | % | |
Latin America | Latin America | | 58 | | | 48 | | | 10 | | | 21 | % | | 155 | | | 136 | | | 19 | | | 14 | % | Latin America | | 53 | | | 41 | | | 12 | | | 29 | % | |
India | | 56 | | | 51 | | | 5 | | | 10 | % | | 158 | | | 142 | | | 16 | | | 11 | % | |
Russia(1) | | 13 | | | 87 | | | (74) | | | (85) | % | | 224 | | | 210 | | | 14 | | | 7 | % | |
| Total sales | Total sales | | $ | 2,239 | | | $ | 1,959 | | | $ | 280 | | | 14 | % | | $ | 6,609 | | | $ | 5,714 | | | $ | 895 | | | 16 | % | Total sales | | $ | 2,406 | | | $ | 2,117 | | | $ | 289 | | | 14 | % | |
| | (1) The Distribution segment is organized and managed by geographic regions. The Russia region contains sales to several countries in the geographic area. | |
| |
Sales for our Distribution segment by product line were as follows:
| | | | Three months ended | | Favorable/ | | Nine months ended | | Favorable/ | | | Three months ended | | Favorable/ | |
| | | September 30, | | October 3, | | (Unfavorable) | | September 30, | | October 3, | | (Unfavorable) | | | March 31, | | (Unfavorable) | |
In millions | In millions | | 2022 | | 2021 | | Amount | | Percent | | 2022 | | 2021 | | Amount | | Percent | In millions | | 2023 | | 2022 | | Amount | | Percent | |
Parts | Parts | | $ | 945 | | | $ | 800 | | | $ | 145 | | | 18 | % | | $ | 2,859 | | | $ | 2,322 | | | $ | 537 | | | 23 | % | Parts | | $ | 1,057 | | | $ | 924 | | | $ | 133 | | | 14 | % | |
Power generation | | Power generation | | 492 | | | 401 | | | 91 | | | 23 | % | |
Engines | Engines | | 449 | | | 377 | | | 72 | | | 19 | % | | 1,319 | | | 1,062 | | | 257 | | | 24 | % | Engines | | 456 | | | 441 | | | 15 | | | 3 | % | |
Power generation | | 431 | | | 438 | | | (7) | | | (2) | % | | 1,273 | | | 1,310 | | | (37) | | | (3) | % | |
Service | Service | | 414 | | | 344 | | | 70 | | | 20 | % | | 1,158 | | | 1,020 | | | 138 | | | 14 | % | Service | | 401 | | | 351 | | | 50 | | | 14 | % | |
Total sales | Total sales | | $ | 2,239 | | | $ | 1,959 | | | $ | 280 | | | 14 | % | | $ | 6,609 | | | $ | 5,714 | | | $ | 895 | | | 16 | % | Total sales | | $ | 2,406 | | | $ | 2,117 | | | $ | 289 | | | 14 | % | |
|
Sales
Distribution segment sales for the three months ended September 30, 2022,March 31, 2023, increased $280$289 million versus the comparable period in 2021.2022. The following were the primary drivers by region:
•North American sales increased $276$328 million representing 99 percent of the total change in Distribution segment sales, mainly due to higher demand for parts and vocational engines.across all product lines.
The increase was partially offset by the following:
•RussianEurope sales decreased $74$86 million as a result of our indefinite suspension of operations in Russia.
•Unfavorable foreign currency fluctuations, primarily in the Euro,Chinese renminbi, Canadian dollar, Indian rupee, Australian dollar South African rand, Indian rupee and Japanese yen.Euro.
Distribution segment sales for the nine months ended September 30, 2022, increased $895 million versus the comparable period in 2021. The following were the primary drivers by region:
•North American sales increased $736 million, representing 82 percent of the total change in Distribution segment sales, largely due to higher demand for parts and vocational engines.
The increase was partially offset by unfavorable foreign currency fluctuations, mainly in the Euro, Australian dollar, Japanese yen and Indian rupee.
Segment EBITDA
Distribution segment EBITDA for the three months ended September 30, 2022,March 31, 2023, increased $33$225 million versus the comparable period in 2021,2022, primarily due to higher volumes, partially offset by higher compensation expenses, unfavorable foreign currency fluctuations (principally in the South African rand, Japanese yen, Euro, Australian dollar and Indian rupee) and an inventory write-off.
Distribution segment EBITDA for the nine months ended September 30, 2022, increased $79 million versus the comparable period in 2021, mainly due to higher volumes, partially offset by unfavorable foreign currency fluctuations (principally in emerging market currencies, South African rand, Australian dollar and Japanese yen),absence of costs associated with the suspension of our Russian operations, favorable mix and increased freight costs due to supply chain constraints, an inventory write-off and higher compensation expenses.volumes. See NOTE 3,15, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information.
Components Segment Results
Financial data for the Components segment was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Favorable/ | | Nine months ended | | Favorable/ |
| | September 30, | | October 3, | | (Unfavorable) | | September 30, | | October 3, | | (Unfavorable) |
In millions | | 2022 | | 2021 | | Amount | | Percent | | 2022 | | 2021 | | Amount | | Percent |
External sales | | $ | 2,220 | | $ | 1,347 | | $ | 873 | | | 65 | % | | $ | 5,214 | | $ | 4,627 | | $ | 587 | | | 13 | % |
Intersegment sales | | 483 | | 446 | | 37 | | | 8 | % | | 1,427 | | 1,312 | | 115 | | | 9 | % |
Total sales | | 2,703 | | 1,793 | | 910 | | | 51 | % | | 6,641 | | 5,939 | | 702 | | | 12 | % |
| | | | | | | | | | | | | | | | |
Research, development and engineering expenses | | 87 | | 78 | | (9) | | | (12) | % | | 236 | | 232 | | (4) | | | (2) | % |
Equity, royalty and interest income from investees | | 17 | | 10 | | 7 | | | 70 | % | | 54 | | 41 | | 13 | | | 32 | % |
Interest income | | 4 | | 1 | | 3 | | | NM | | 7 | | 3 | | 4 | | | NM |
| | | | | | | | | | | | | | | | |
Russian suspension costs(1) | | 1 | | — | | (1) | | | NM | | 5 | | — | | (5) | | | NM |
Segment EBITDA | | 297 | (2) | 253 | | 44 | | | 17 | % | | 969 | (3) | 975 | | (6) | | | (1) | % |
| | | | | | | | | | | | | | | | |
| | | | | | Percentage Points | | | | | | Percentage Points |
Segment EBITDA as a percentage of total sales | | 11.0 | % | | 14.1 | % | | | | (3.1) | | | 14.6 | % | | 16.4 | % | | | | (1.8) | |
| | | | | | | | | | | | | | | | |
"NM" - not meaningful information | | | | | | | | | | | | | | | | |
| | | | | | | | |
(1) See NOTE 3, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information. |
(2) Includes $45 million of costs related to the acquisition and integration of Meritor and $10 million of costs associated with the planned separation of our filtration business. |
(3) Includes $56 million of costs related to the acquisition and integration of Meritor and $15 million of costs associated with the planned separation of our filtration business. |
| | | | | | | | | | | | | | | | |
Sales for our Components segment by business were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Favorable/ | | Nine months ended | | Favorable/ |
| | September 30, | | October 3, | | (Unfavorable) | | September 30, | | October 3, | | (Unfavorable) |
In millions | | 2022 | | 2021 | | Amount | | Percent | | 2022 | | 2021 | | Amount | | Percent |
Emission solutions | | $ | 853 | | | $ | 793 | | | $ | 60 | | | 8 | % | | $ | 2,626 | | | $ | 2,710 | | | $ | (84) | | | (3) | % |
Axles and brakes | | 732 | | | — | | | 732 | | | NM | | 732 | | | — | | | 732 | | | NM |
Filtration | | 399 | | | 354 | | | 45 | | | 13 | % | | 1,172 | | | 1,100 | | | 72 | | | 7 | % |
Turbo technologies | | 367 | | (1) | 325 | | | 42 | | | 13 | % | | 1,068 | | (1) | 1,043 | | | 25 | | | 2 | % |
Electronics and fuel systems | | 193 | | | 210 | | | (17) | | | (8) | % | | 607 | | | 714 | | | (107) | | | (15) | % |
Automated transmissions | | 159 | | | 111 | | | 48 | | | 43 | % | | 436 | | | 372 | | | 64 | | | 17 | % |
Total sales | | $ | 2,703 | | | $ | 1,793 | | | $ | 910 | | | 51 | % | | $ | 6,641 | | | $ | 5,939 | | | $ | 702 | | | 12 | % |
| | | | | | | | | | | | | | | | |
"NM" - not meaningful information | | | | | | | | | | | | | | | | |
(1) The three and nine months ended September 30, 2022, included sales of $43 million and $80 million, respectively, related to the newly acquired Jacobs Vehicle Systems business. See NOTE 16, "ACQUISITIONS," to our Condensed Consolidated Financial Statements for additional information. |
| | | | | | | | | | | | | | | | |
Sales
Components segment sales for the three months ended September 30, 2022, increased $910 million versus the comparable period in 2021. The following were the primary drivers by business:
•Axles and brakes sales added $732 million in sales since the completion of the Meritor acquisition.
•Emission solutions sales increased $60 million primarily due to stronger demand in North America.
•Automated transmissions sales increased $48 million principally due to higher demand in North America.
•Filtration sales increased $45 million mainly due to stronger demand in North America and Latin America.
•Turbo technologies sales increased $42 million largely due to higher demand in North America, partially offset by weaker demand in China.
These increases were partially offset by unfavorable foreign currency fluctuations primarily in the Euro, Indian rupee and Chinese renminbi.
Components segment sales for the nine months ended September 30, 2022, increased $702 million versus the comparable period in 2021. The following were the primary drivers by business:
•Axles and brakes sales added $732 million in sales since the completion of the Meritor acquisition.
•Filtration sales increased $72 million mainly due to stronger demand in North America and Latin America, partially offset by lower demand in China.
These increases were partially offset by the following:
•Electronics and fuel systems sales decreased $107 million principally due to weaker demand in China, partially offset by higher demand in North America.
•Unfavorable foreign currency fluctuations, primarily in the Euro, Indian rupee and British pound.
Segment EBITDA
Components segment EBITDA for the three months ended September 30, 2022, increased $44 million versus the comparable period in 2021, mainly due to favorable pricing and higher volumes, partially offset by Meritor acquisition and integration costs.
Components segment EBITDA for the nine months ended September 30, 2022, decreased $6 million versus the comparable period in 2021, primarily due to higher material costs and Meritor acquisition and integration costs, partially offset by favorable pricing.
Power Systems Segment Results
Financial data for the Power Systems segment was as follows:
| | | | Three months ended | | Favorable/ | | Nine months ended | | Favorable/ | | | Three months ended | | Favorable/ | |
| | | September 30, | | October 3, | | (Unfavorable) | | September 30, | | October 3, | | (Unfavorable) | | | March 31, | | (Unfavorable) | |
In millions | In millions | | 2022 | | 2021 | | Amount | | Percent | | 2022 | | 2021 | | Amount | | Percent | In millions | | 2023 | | 2022 | | Amount | | Percent | |
External sales | External sales | | $ | 773 | | $ | 688 | | $ | 85 | | | 12 | % | | $ | 2,190 | | $ | 1,999 | | $ | 191 | | | 10 | % | External sales | | $ | 679 | | $ | 683 | | $ | (4) | | | (1) | % | |
Intersegment sales | Intersegment sales | | 576 | | 476 | | 100 | | | 21 | % | | 1,522 | | 1,330 | | 192 | | | 14 | % | Intersegment sales | | 664 | | 477 | | 187 | | | 39 | % | |
Total sales | Total sales | | 1,349 | | 1,164 | | 185 | | | 16 | % | | 3,712 | | 3,329 | | 383 | | | 12 | % | Total sales | | 1,343 | | 1,160 | | 183 | | | 16 | % | |
| Research, development and engineering expenses | Research, development and engineering expenses | | 62 | | 55 | | (7) | | | (13) | % | | 184 | | 172 | | (12) | | | (7) | % | Research, development and engineering expenses | | 63 | | 64 | | 1 | | | 2 | % | |
Equity, royalty and interest income from investees | Equity, royalty and interest income from investees | | 10 | | 11 | | (1) | | | (9) | % | | 31 | | 32 | | (1) | | | (3) | % | Equity, royalty and interest income from investees | | 13 | | 11 | | 2 | | | 18 | % | |
Interest income | Interest income | | 3 | | 1 | | 2 | | | NM | | 5 | | 3 | | 2 | | | 67 | % | Interest income | | 2 | | 1 | | 1 | | | 100 | % | |
| Russian suspension costs(1) | Russian suspension costs(1) | | — | | — | | — | | | — | % | | 19 | | — | | (19) | | | NM | Russian suspension costs(1) | | — | | 20 | (1) | 20 | | | 100 | % | |
Segment EBITDA | Segment EBITDA | | 193 | | 134 | | 59 | | | 44 | % | | 411 | | 399 | | 12 | | | 3 | % | Segment EBITDA | | 219 | | 90 | | 129 | | | NM | |
| | | | | | | | Percentage Points | | | | | | Percentage Points | | | | | | | Percentage Points | |
Segment EBITDA as a percentage of total sales | Segment EBITDA as a percentage of total sales | | 14.3 | % | | 11.5 | % | | | | 2.8 | | | 11.1 | % | | 12.0 | % | | | | (0.9) | | Segment EBITDA as a percentage of total sales | | 16.3 | % | | 7.8 | % | | | | 8.5 | | |
| "NM" - not meaningful information | "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 15, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information. | | (1) See NOTE 15, "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/ |
| | September 30, | | October 3, | | (Unfavorable) | | September 30, | | October 3, | | (Unfavorable) |
In millions | | 2022 | | 2021 | | Amount | | Percent | | 2022 | | 2021 | | Amount | | Percent |
Power generation | | $ | 739 | | | $ | 664 | | | $ | 75 | | | 11 | % | | $ | 2,060 | | | $ | 1,930 | | | $ | 130 | | | 7 | % |
Industrial | | 483 | | | 412 | | | 71 | | | 17 | % | | 1,304 | | | 1,135 | | | 169 | | | 15 | % |
Generator technologies | | 127 | | | 88 | | | 39 | | | 44 | % | | 348 | | | 264 | | | 84 | | | 32 | % |
Total sales | | $ | 1,349 | | | $ | 1,164 | | | $ | 185 | | | 16 | % | | $ | 3,712 | | | $ | 3,329 | | | $ | 383 | | | 12 | % |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Favorable/ | | | | |
| | March 31, | | (Unfavorable) | | | | |
In millions | | 2023 | | 2022 | | Amount | | Percent | | | | | | | | |
Power generation | | $ | 770 | | | $ | 664 | | | $ | 106 | | | 16 | % | | | | | | | | |
Industrial | | 455 | | | 393 | | | 62 | | | 16 | % | | | | | | | | |
Generator technologies | | 118 | | | 103 | | | 15 | | | 15 | % | | | | | | | | |
Total sales | | $ | 1,343 | | | $ | 1,160 | | | $ | 183 | | | 16 | % | | | | | | | | |
| | | | | | | | | | | | | | | | |
Sales
Power Systems segment sales for the three months ended September 30, 2022,March 31, 2023, increased $185$183 million versus the comparable period in 2021.2022. The following were the primary drivers by product line:
•Power generation sales increased $75106 million primarily due to higher demand in North America, Asia Pacific, Western Europe, Latin America the Middle East and Asia Pacific and favorable pricing,India, partially offset by weaker demand in China.
•Industrial sales increased $71$62 million principally due to stronger aftermarket demand and improved oil and gas sales in North America.
•Generator technologies sales increased $39 million mainly due to highermarket demand in Europe, China, India and North America.
These increases were partially offset by unfavorable foreign currency fluctuations, primarily in the Euro,Indian rupee, Chinese renminbi and British pound and Indian rupee.
Power Systems segment sales for the nine months ended September 30, 2022, increased $383 million versus the comparable period in 2021. The following were the primary drivers by product line:
•Industrial sales increased $169 million due to stronger aftermarket demand and improved oil and gas sales in North America and China.
•Power generation sales increased $130 million due to improved pricing and higher demand in Latin America, India and the Middle East.
•Generator technologies sales increased $84 million due to higher demand in Europe and India.
These increases were partially offset by unfavorable foreign currency fluctuations, primarily in the Euro, British pound and Indian rupee.pound.
Segment EBITDA
Power Systems segment EBITDA for the three months ended September 30, 2022,March 31, 2023, increased $59$129 million versus the comparable period in 2021,2022, mainly due to favorable pricing, partially offset by higher material costs.
Power Systems segment EBITDA forincreased volumes, favorable foreign currency fluctuations (principally in the nine months ended September 30, 2022, increased $12 million versusBritish pound and Indian rupee) and the comparable period in 2021, primarily due to favorable pricing, partially offset by higher material costs, increased freight costs due to supply chain constraints andabsence of costs associated with the suspension of our Russian operations.operations, partially offset by higher compensation expenses. See NOTE 15, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information.
New PowerAccelera Segment Results
The New Power segment designs, manufactures, sells and supports hydrogen production solutions as well as electrified power systems with innovative components and subsystems, including battery, fuel cell and electric powertrain technologies. The New Power segment is currently in the early stages of commercializing these technologies with efforts primarily focused on the development of our electroloyzers for hydrogen production and electrified power systems and related components and subsystems.
Financial data for the New PowerAccelera segment was as follows:
| | | | | Three months ended | | Favorable/ | | Nine months ended | | Favorable/ | | | Three months ended | | Favorable/ | |
| | | September 30, | | October 3, | | (Unfavorable) | | September 30, | | October 3, | | (Unfavorable) | | | March 31, | | (Unfavorable) | |
In millions | In millions | | 2022 | | 2021 | | Amount | | Percent | | 2022 | | 2021 | | Amount | | Percent | In millions | | 2023 | | 2022 | | Amount | | Percent | |
External sales | External sales | | $ | 45 | | $ | 20 | | $ | 25 | | | NM | | $ | 106 | | $ | 77 | | $ | 29 | | | 38 | % | External sales | | $ | 80 | | $ | 25 | | $ | 55 | | | NM | |
Intersegment sales | Intersegment sales | | 5 | | 3 | | 2 | | | 67 | % | | 17 | | 5 | | 12 | | | NM | Intersegment sales | | 5 | | 6 | | (1) | | | (17) | % | |
Total sales | Total sales | | 50 | | 23 | | 27 | | | NM | | 123 | | 82 | | 41 | | | 50 | % | Total sales | | 85 | | 31 | | 54 | | | NM | |
| Research, development and engineering expenses | Research, development and engineering expenses | | 46 | | 26 | | (20) | | | (77) | % | | 121 | | 75 | | (46) | | | (61) | % | Research, development and engineering expenses | | 48 | | 36 | | (12) | | | (33) | % | |
Equity, royalty and interest loss from investees | Equity, royalty and interest loss from investees | | (5) | | (3) | | (2) | | | (67) | % | | (12) | | (1) | | (11) | | | NM | Equity, royalty and interest loss from investees | | (4) | | (1) | | (3) | | | NM | |
| Segment EBITDA | Segment EBITDA | | (96) | | (58) | | (38) | | | (66) | % | | (243) | | (169) | | (74) | | | (44) | % | Segment EBITDA | | (94) | | (65) | | (29) | | | (45) | % | |
| | | | "NM" - not meaningful information | "NM" - not meaningful information | | "NM" - not meaningful information | | |
|
Accelera segment sales for the three months ended March 31, 2023, increased $54 million versus the comparable period in 2022 principally due to incremental sales of central drive systems, e-axles and accessory systems since the acquisitions of Siemens' Commercial Vehicles Propulsion business and Meritor as well as improved electrified components and fuel cell sales.
OUTLOOK
Supply Chain Disruptions
We continue to experience supply chain disruptions, increased price levels and related financial impacts reflected as increased cost of sales.sales and inventory holdings. Our industry continues to be unfavorably impacted by supply chain constraints leading to shortages and price increases across multiple componentscomponent 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.
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 2022.2023.
Positive Trends
•We expect demand for pick-up, medium-duty and heavy-duty trucks in North America to remain strong.
•We believe market demand for trucks in India will continue to be strong.
•We expect demand within our Power Systems business to remain strong, including the power generation, mining, oil and gas and marine markets.
•We anticipate demand in our aftermarket business will continue to be robust, driven primarily by increased truck utilization in North America and improvedcontinued strong demand in our Power Systems business.
Challenges
•Supply constraints driven by strongWe expect demand for trucks in multiple end markets and regions may leadChina to increased costs, including higher freight and conversion costs.improve from the low demand levels in 2022.
Challenges
•Continued increases in material and labor costs, as well as other inflationary pressures, could negatively impact earnings.
•Our industry's sales continue to be unfavorably impacted by supply chain constraints leading to shortages across multiple components categories and limiting our collective ability to meet end-user demand. Our customers are also experiencing other supply chain issues limiting full production capabilities.
•Resurgence of COVID-19 lockdowns in several cities in China negatively impacted the economy and our end markets. Future lockdowns will contribute to further disruptions in the global supply chain, reducing both our revenues and profitability.
•We expect market demand in truck and construction markets in China to remain at low levels through the remainder of 2022, impacting our revenues, joint venture earnings and net income.
•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.
•We expect to continue to incur incremental expenses as a result of the completion of the Meritor, Inc. acquisition and its integration into our business.
•The completion of the Meritor, Inc. acquisitionin 2022 impacted our liquidity and resulted in incremental interest expense for debt utilized in funding the transaction and increased amortization of intangible assets, which will negatively impact futurenet income.
•Increasing interest rates could increase borrowing costs and negatively impact net income.
•We expect the planned separation of our filtration business, into a stand-alone company, will continue to result in incremental expenses.
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 | | September 30, 2022 | | December 31, 2021 | Dollars in millions | | March 31, 2023 | | December 31, 2022 |
Working capital (1) | Working capital (1) | | $ | 3,868 | | | $ | 5,225 | | Working capital (1) | | $ | 3,445 | | | $ | 3,030 | |
Current ratio | Current ratio | | 1.37 | | | 1.74 | | Current ratio | | 1.29 | | | 1.27 | |
Accounts and notes receivable, net | Accounts and notes receivable, net | | $ | 4,799 | | | $ | 3,990 | | Accounts and notes receivable, net | | $ | 5,834 | | | $ | 5,202 | |
Days' sales in receivables | Days' sales in receivables | | 59 | | | 59 | | Days' sales in receivables | | 60 | | | 60 | |
Inventories | Inventories | | $ | 5,543 | | | $ | 4,355 | | Inventories | | $ | 5,878 | | | $ | 5,603 | |
Inventory turnover | Inventory turnover | | 4.0 | | | 4.6 | | Inventory turnover | | 4.4 | | | 4.2 | |
Accounts payable (principally trade) | Accounts payable (principally trade) | | $ | 4,000 | | | $ | 3,021 | | Accounts payable (principally trade) | | $ | 4,636 | | | $ | 4,252 | |
Days' payable outstanding | Days' payable outstanding | | 59 | | | 57 | | Days' payable outstanding | | 62 | | | 60 | |
Total debt | Total debt | | $ | 8,115 | | | $ | 4,159 | | Total debt | | $ | 7,752 | | | $ | 7,855 | |
Total debt as a percent of total capital | Total debt as a percent of total capital | | 46.4 | % | | 31.5 | % | Total debt as a percent of total capital | | 42.2 | % | | 44.1 | % |
| (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:
| | | | | | | | | | | | | | | | | | | | Three months ended | |
| | | Nine months ended | | | | | March 31, | | |
In millions | In millions | | September 30, 2022 | | October 3, 2021 | | Change | In millions | | 2023 | | 2022 | | Change |
Net cash provided by operating activities | Net cash provided by operating activities | | $ | 1,145 | | | $ | 1,524 | | | $ | (379) | | Net cash provided by operating activities | | $ | 495 | | | $ | 164 | | | $ | 331 | |
Net cash used in investing activities | Net cash used in investing activities | | (3,496) | | | (278) | | | (3,218) | | Net cash used in investing activities | | (228) | | | (10) | | | (218) | |
Net cash provided by (used in) financing activities | | 2,111 | | | (2,079) | | | 4,190 | | |
Net cash used in financing activities | | Net cash used in financing activities | | (363) | | | (497) | | | 134 | |
Effect of exchange rate changes on cash and cash equivalents | Effect of exchange rate changes on cash and cash equivalents | | 147 | | | 20 | | | 127 | | Effect of exchange rate changes on cash and cash equivalents | | (25) | | | 27 | | | (52) | |
Net decrease in cash and cash equivalents | Net decrease in cash and cash equivalents | | $ | (93) | | | $ | (813) | | | $ | 720 | | Net decrease in cash and cash equivalents | | $ | (121) | | | $ | (316) | | | $ | 195 | |
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Net cash provided by operating activities decreased $379increased $331 million for the ninethree months ended September 30, 2022,March 31, 2023, versus the comparable period in 2021,2022, primarily due to higher working capital requirementsnet income of $253$383 million and lower net incomeworking capital requirement of $225$36 million, partially offset by $107 millionthe absence of increasesRussian suspension costs in other miscellaneous items.2023. The higherlower working capital requirements resulted in a cash outflow of $719$494 million compared to a cash outflow of $466$530 million in the comparable period in 2021,of 2022, mainly due to decreasedincreased accrued expenses as a result of lower(from higher variable compensation accruals in 2023 and higher variable compensation payments in the first quarter of 2022 for the previous year), partially offset by aincreased accounts and notes receivable balances and lower spend in inventories.accounts payable balances.
Net cash used in investing activities increased $3.2 billion$218 million for the ninethree months ended September 30, 2022,March 31, 2023, versus the comparable period in 2021,2022, primarily due to higher capital expenditures of $89 million and the acquisitionsabsence of Meritor, Jacobs Vehicle Systems and Cummins Westport Joint Venture, net$83 million of cash acquired from the acquisition of $3.0 billion.Cummins Westport Inc., net of purchase price, in the first quarter of 2022.
Net cash provided byused in financing activities decreased $4.2 billion$134 million for the ninethree months ended September 30, 2022,March 31, 2023, versus the comparable period in 2021,2022, primarily due to higher net borrowingsthe absence of commercial paper of $2.2 billion, increased proceeds from borrowings of $2.0 billion (principally our $2.0 billion term loan) and lower repurchases of common stock of $0.9 billion,$311 million, partially offset by higher payments on borrowings and finance lease obligations of $1.0 billion ($0.9 billion$118 million and higher net payments of which relates to debt assumed in the Meritor acquisition that was retired during the third quartercommercial paper of 2022).$27 million.
The effect of exchange rate changes on cash and cash equivalents for the ninethree months ended September 30, 2022,March 31, 2023, versus the comparable period in 2021, increased $1272022, changed $52 million primarily due to favorableunfavorable fluctuations in the British pound, partially offset by unfavorable fluctuations in the Chinese renminbi.pound.
Sources of Liquidity
We generate significant ongoing cash flow. Cash provided by operations is our principal source of liquidity with $1,145$495 million generated in the ninethree months ended September 30, 2022.March 31, 2023. Our sources of liquidity include:
| | | September 30, 2022 | | March 31, 2023 |
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 | | $ | 2,499 | | | $ | 866 | | | $ | 1,633 | | | China, Singapore, Belgium, Australia, Mexico, Canada | Cash and cash equivalents | | $ | 1,980 | | | $ | 658 | | | $ | 1,322 | | | Singapore, China, Belgium, Canada, Australia, Mexico, India |
| Marketable securities (1) | Marketable securities (1) | | 466 | | | 96 | | | 370 | | | India | Marketable securities (1) | | 459 | | | 89 | | | 370 | | | India |
Total | Total | | $ | 2,965 | | | $ | 962 | | | $ | 2,003 | | | Total | | $ | 2,439 | | | $ | 747 | | | $ | 1,692 | | |
Available credit capacity | Available credit capacity | | | | | | | | Available credit capacity | | | | | | | |
Revolving credit facilities (2) | Revolving credit facilities (2) | | $ | 1,607 | | | Revolving credit facilities (2) | | $ | 1,455 | | |
International and other uncommitted domestic credit facilities | International and other uncommitted domestic credit facilities | | $ | 230 | | | International and other uncommitted domestic credit facilities | | $ | 215 | | |
| | (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, the 364-day credit facility for $1.5 billion and the $500 million incremental 364-day credit facility, maturing August 2026 and August 2023, respectively, are maintained primarily to provide backup liquidity for our commercial paper borrowings and general corporate purposes. At September 30, 2022, we had $2,393 million of commercial paper outstanding, which effectively reduced our available capacity under our revolving credit facilities to $1.6 billion. | |
(2) The five-year credit facility for $2.0 billion, the 364-day credit facility for $1.5 billion and the $500 million incremental 364-day credit facility, maturing August 2026 and August 2023, respectively, are maintained primarily to provide backup liquidity for our commercial paper borrowings and general corporate purposes. At March 31, 2023, we had $2.5 billion of commercial paper outstanding, which effectively reduced our available capacity under our revolving credit facilities to $1.5 billion. | | (2) The five-year credit facility for $2.0 billion, the 364-day credit facility for $1.5 billion and the $500 million incremental 364-day credit facility, maturing August 2026 and August 2023, respectively, are maintained primarily to provide backup liquidity for our commercial paper borrowings and general corporate purposes. At March 31, 2023, we had $2.5 billion of commercial paper outstanding, which effectively reduced our available capacity under our revolving credit facilities to $1.5 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, Canada (including underlying subsidiaries) and Netherlands domiciled subsidiaries. At present, we do not foresee a need to repatriate any earnings for which we assertedassert 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 July 13, 2022, we entered into a loan agreement under which we may obtain delayed-draw loans in an amount up to $2.0 billion in the aggregate prior to October 13, 2022. We drew down the entire $2.0 billion balance on August 2, 2022, to help fund the acquisition of Meritor. The interest rate is based on SOFR for the one-month interest period plus the relevant spread. The loan will mature on August 1, 2025. The agreement contains customary events of default and financial and other covenants, including maintaining a net debt to capital ratio of no more than 0.65 to 1.0.
On August 17, 2022, we entered into an amended and restated 364-day credit agreement, which allows us to borrow up to $1.5 billion of unsecured funds at any time prior to August 16, 2023. This credit agreement amended and restated the prior $1.5 billion 364-day credit facility that matured on August 17, 2022. On August 17, 2022, we also entered into an incremental 364-day credit agreement, which allows us to borrow up to $500 million of unsecured funds at any time prior to August 16, 2023.
In connection with the new credit agreements, on August 17, 2022, we entered into an amendment to our $2.0 billion five-year facility to replace LIBOR with SOFR as an interest rate benchmark and to make other conforming changes to interest rate determinations.
We have access to committed credit facilities totaling $4.0 billion, including the $1.5 billion 364-day facility that expires August 16, 2023, $500 million incremental 364-day facility that expires August 16, 2023, and 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. There were no outstanding borrowings under these facilities at September 30, 2022.
We can issue up to $4.0 billion of unsecured, short-term promissory notes (commercial paper) pursuant to the Board authorized commercial paper programs. These 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 $4.0 billion. At September 30, 2022,March 31, 2023, we had $2.4$2.5 billion of commercial paper outstanding, which effectively reduced our available capacity under our revolving credit facilities to $1.6$1.5 billion.
In 2021, we entered into a series of interest rate swaps to effectively convert our $500 million senior notes, due in 2025, from a fixed rate of 0.75 percent to a floating rate equal to the three-month LIBOR plus a spread. We also entered into a series of interest rate swaps to effectively convert $765 million of our $850 million senior notes, due in 2030, from a fixed rate of 1.50 percent to a floating rate equal to the three-month LIBOR plus a spread. The swaps were designated and are accounted for as fair value hedges. In March
2023, we settled a portion of our 2021 interest rate swaps with a notional amount of $100 million. The $7 million loss on settlement will be amortized over the remaining term of the related debt.
In 2019 we entered into $350 million of interest rate lock agreements, and in 2020 we entered into an additional $150 million of lock agreements to reduce the variability of the cash flows of the interest payments on a total of $500 million of fixed rate debt forecast to be issued in 2023 to replace our senior notes at maturity. In December 2022, we settled certain rate lock agreements with notional amounts totaling $150 million for $49 million. In February 2023, we settled certain rate lock agreements with notional amounts totaling $100 million for $34 million. The $83 million of gains on settlements will remain in other comprehensive income and will be amortized over the term of the anticipated new debt.
As a well-known seasoned issuer, we filed an automatic shelf registration of an undetermined amount of debt and equity with the Securities and Exchange Commission (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),LIBOR, announced it intends to phase out LIBOR by the end of 2021. The cessation date for submission and publication of rates for certain tenors of LIBOR has since been extended until mid-2023. Various central bank committees and working groups continue to discuss replacement of benchmark rates, the process for amending existing LIBOR-based contracts and the potential economic impacts of different alternatives. The Alternative Reference Rates Committee has identified the SOFRSecured 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 do not believe the change will materially impact us due to our operational and system readiness coupled with relevant contractual fallback language, we continue to evaluate all eventual transition risks. In anticipation of LIBOR's phase out, our most recent revolving credit and term loan agreements includeincorporate the use of SOFR as a well-documented transition mechanismreplacement for selecting a benchmark replacement rate for LIBOR, subjectLIBOR. Our 5-year credit facility maturing August 18, 2026, as amended to our agreement.date, also incorporates SOFR. Additionally, with respect to our $1.3$1.2 billion in LIBOR-based fixed to variable rate swaps maturing in 2025 and 2030, we reviewed and believe our adherence to the 2020 LIBOR fallback protocol will allow for a smooth transition to the designated replacement rate when that transition occurs.
On September 30, 2022,February 15, 2023, certain of our subsidiaries entered into aan amendment to the $1.0 billion credit agreement (Credit Agreement), consisting of a $400 million revolving credit facility and a $600 million term loan facility (Facilities), in anticipation of the separation of our filtration business.business, which extended the date on which the Credit Agreement terminates from March 30, 2023 to June 30, 2023. Borrowings under the Credit Agreement will not become available under the Credit Agreement unless and until, among other things, there is a sale to the public of shares in our subsidiary that holds the filtration business (Parent Borrower). The Credit Agreement will automatically terminate if no such public sale of shares of Parent Borrower occurs on or prior to MarchJune 30, 2023. Borrowings under the Credit Agreement would be available to Parent Borrower and one or more of its subsidiaries (Borrower). If borrowings become available under the Credit Agreement, the Facilities would mature on September 30, 2027.
Borrowings under the Credit Agreement would bear interest at varying rates, depending on the type of loan and, in some cases, the rates of designated benchmarks and the applicable Borrower’s election. Generally, U.S. dollar-denominated loans would bear interest at adjusted term SOFR (which includes a 0.10 percent credit spread adjustment to term SOFR) for the applicable interest period plus a rate ranging from 1.125 percent to 1.75 percent depending on Parent Borrower's net leverage ratio.
Supply Chain Financing
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 scheduledoriginal due date. The maximum amount that we may have outstanding under the program is $495$532 million. We do not reimburse vendors for any costs they incur for participation in the program, and their participation is completely voluntary.voluntary and there are no assets pledged as security or other forms of guarantees provided for the committed payment to the finance provider or intermediary. As a result, all amounts owed to the financial intermediaries are presented as Accountsaccounts payable in our Condensed Consolidated Balance Sheets. Amounts due to the financial intermediaries reflected in accounts payable at September 30, 2022,March 31, 2023, were $227$253 million.
Accounts Receivable Factoring Arrangements
We assumed an accounts receivable factoring program from the acquisition of Meritor with a total amount utilized at September 30, 2022, of $235 million, of which $215 million was attributable to committed factoring facilities. The remaining amount of $20 million was related to factoring by certain of Meritor's European subsidiaries under uncommitted factoring facilities with financial institutions. The receivables under all of these programs are sold at face value and are excluded from the Condensed Consolidated Balance Sheets. Total facility size, utilized amounts, readily available amounts and expiration dates for each of these programs are shown in the table below.
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| | Current Expiration | | Total Facility Size at September 30, 2022 | | Utilized at September 30, 2022 |
In millions | | | EUR | | USD | | EUR | | USD |
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Off-balance sheet arrangements | | | | | | | | | | |
Committed Swedish factoring facility(1)(2) | | March 2024 | | € | 155 | | | $ | 151 | | | € | 144 | | | $ | 139 | |
Committed U.S. factoring facility(1) | | February 2023 | | N/A | | 75 | | | — | | | 76 | |
Uncommitted U.K. factoring facility(3) | | February 2025 | | 25 | | | 24 | | | 2 | | | 2 | |
Uncommitted Italy factoring facility | | June 2025 | | 30 | | | 29 | | | 11 | | | 11 | |
Other uncommitted factoring facilities(4) | | None | | N/A | | N/A | | 7 | | | 7 | |
Total off-balance sheet arrangements | | | | € | 210 | | | $ | 279 | | | € | 164 | | | $ | 235 | |
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(1) Actual amounts may exceed the bank's commitment at the bank's discretion. |
(2) The factoring program is supported by a 364-day committed credit facility through June 22, 2023. |
(3) The U.K. factoring facility enables the factoring of British pound and Euro denominated accounts receivable. |
(4) There is no explicit facility size under the agreement, but the counterparty approves the purchase of receivable tranches as its discretion. |
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The Swedish facility is backed by a 364-day liquidity commitment, which was renewed through June 22, 2023. Commitments under all of Meritor's factoring facilities are subject to standard terms and conditions for these types of arrangements (including, in the case of the U.K. and Italy commitments, a sole discretion clause whereby the bank retains the right to not purchase receivables, which has not been invoked since the inception of the respective programs).
We received $108 million of proceeds from receivables sold, and costs associated with all of the off-balance sheet arrangements described above were $1 million since the August 3, 2022, acquisition date.
We intend to wind down existing Meritor factoring programs into 2023.
Uses of Cash
Meritor Acquisition
On August 3, 2022, we completed the acquisition of Meritor, Inc. (Meritor). The total purchase price, including debt that was retired on the closing date, was $2.9 billion. In addition, we assumed $1.0 billion of additional debt, of which $0.9 billion was retired prior to the end of the third quarter. See NOTE 16, "ACQUISITIONS," to our Condensed Consolidated Financial Statements for additional information.
Dividends
We paid dividends of $633$222 million during the ninethree months ended September 30, 2022. In July 2022, the Board authorized an increase to our quarterly dividend of approximately 8 percent from $1.45 per share to $1.57 per share.
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 nine months of 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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March 31 | | 1.6 | | | $ | 199.27 | | | $ | 311 | | | | | $ | 2,281 | |
June 30 | | 0.1 | | | 194.00 | | | 36 | | | | | 2,245 | |
September 30 | | 0.2 | | | 197.72 | | | 23 | | | | | 2,222 | |
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Total | | 1.9 | | | 198.65 | | | $ | 370 | | | | | |
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(1) The remaining $222 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 2022 to enhance shareholder value.March 31, 2023.
Capital Expenditures
Capital expenditures including spending on internal use software, for the ninethree months ended September 30, 2022,March 31, 2023, were $497$193 million versus $398$104 million in the comparable period in 2021.2022. We continue to invest in new product lines and targeted capacity expansions. We plan to spend an estimated $850 million$1.2 billion to $900 million$1.3 billion in 20222023 on capital expenditures related to our legacy Cummins businesses and an additional $40 million to $50 million for Meritor, excluding internal use software, with over 60 percent of these expenditures expected to be invested in North America. In addition, we plan to spend an estimated $55 million to $65 million on internal use software in 2022.
Current Maturities of Short and Long-Term Debt
We had $2.4$2.5 billion of commercial paper outstanding at September 30, 2022,March 31, 2023, that matures in less than one year. The maturity schedule of our existing long-term debt does not requirerequires significant cash outflows untilin 2023 when our 3.65 percent senior notes are due and in 2025 when our term loan and 0.75 percent senior notes are due. Required annual long-term debt principal payments range from $13$46 million to $2.5$2.0 billion over the next five years (including the remainder of 2022)2023). In 2023, we intend to have a greater emphasis on the repayment of debt to maintain our strong credit ratings. See NOTE 11,9, "DEBT," to the Condensed Consolidated Financial Statements for additional information.
Pensions
Our global pension plans, including our unfunded and non-qualified plans, were 121120 percent funded at December 31, 2021.2022. Our U.S. defined benefit plan,plans (qualified and non-qualified), which represented approximately 5269 percent of the worldwide pension obligation, was 138were 121 percent funded, and our U.K. defined benefit plan was 127plans were 119 percent funded at December 31, 2021. As part of the Meritor acquisition, we recorded assets of $147 million and liabilities of $105 million on our Condensed Consolidated Balance Sheets related to Meritor's postretirement benefit plans.2022. The funded status of our pension plans is dependent upon a variety of variables and assumptions including return on invested assets, market interest rates and levels of voluntary contributions to the plans. In the first ninethree months of 2022,2023, the investment lossgain on our U.S. pension trusttrusts was 5.11.49 percent while our U.K. pension trust losstrusts' gain was 21.70.41 percent. We anticipate making additional defined benefit pension contributions during the remainder of 20222023 of $7$20 million for our U.S. and U.K. qualified and non-qualified pension 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 20222023 annual net periodic pension cost to approximate $20 million.be near zero.
Stock Repurchases
In December 2021, the Board authorized the acquisition of up to $2.0 billion of additional common stock upon completion of the $2.0 billion repurchase plan authorized in 2019. We did not make any repurchases of common stock in the first three months of 2023.
Redeemable Noncontrolling Interests
A .1919 percent minority shareholder in one of our businesses, Hydrogenics Corporation (Hydrogenics), has, among other rights and subject to related obligations and restrictive covenants, rights that are exercisable between September 2022 and September 2026 to require us to (1) purchase such shareholder's shares (Put Option)(put option) at an amount up to the fair market value (calculated pursuant to a process outlined in the shareholders' agreement) and (2) sell to such shareholder Hydrogenics' electrolyzer business at an amount up to the fair market value of the electrolyzer business (calculated pursuant to a process outlined in the shareholders’ agreement). We recorded the estimated fair value of the Put Optionput option as redeemable noncontrolling interests in our Condensed Consolidated Financial Statements with an offset to additional paid-in capital. At September 30, 2022,March 31, 2023, the redeemable noncontrolling interest balance was $252$261 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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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 access to capital markets, our existing cash and marketable securities, operating cash flow and revolving credit facilities provide us with the financial flexibility needed to fund repayment of debt obligations, dividend payments, acquisitions, targeted capital expenditures, common stock repurchases, dividend payments, targeted capital expenditures, projected pension obligations and working capital and debt service obligations through 20222023 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 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, fair value of intangible assets, assessing goodwill impairment, accounting for income taxes and pension benefits. Fair Value of Intangible Assets
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
We make strategic acquisitions that may have a material impact on our consolidated results of operations or financial position. We allocate the purchase price of acquired businesses to the assets acquired and liabilities assumedSee Note 18, "RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS," in the transaction at their estimated fair values. The determination of the fair value of intangible assets, which represent a significant portion of the purchase price in many of our acquisitions can be complex and requires the use of significant judgment with regardNotes to (i) the fair value and (ii) the period and the method by which the intangible asset will be amortized. We use information available to us to make fair value determinations and engage independent valuation specialists, when necessary, to assist in the fair value determination of significant acquired intangibles. We estimate the fair value of acquisition-related intangible assets principally based on projections of cash flows that will arise from identifiable intangible assets of acquired businesses, which includes estimates of discount rates, revenue growth rates, EBITDA, royalty rates, customer attrition rates and technology obsolesce rates. The projected cash flows are discounted to determine the present value of the assets at the dates of acquisition. Although we believe the projections, assumptions and estimates made were reasonable and appropriate, these estimates require significant judgment by management, are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Any adjustments subsequent to the measurement period are recorded to our consolidated statements of income. See NOTE 16, "ACQUISITIONS," to our Condensed Consolidated Financial Statementsfor additional information about our recent business combinations.information.
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). As permitted by SEC guidance for newly acquired businesses, the evaluation did not include an assessment of those disclosure controls and procedures that are subsumed by and did not include an assessment of internal control over financial reporting as it relates to Meritor, Inc. (Meritor), which was acquired on August 3, 2022. 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
Except as described below, there has beenThere were no changechanges in our internal control over financial reporting during the quarter ended September 30, 2022,March 31, 2023, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
On August 3, 2022, we completed the acquisition of Meritor. As part of our ongoing integration of the Meritor business, we are continuing to incorporate our controls and procedures into Meritor and to augment our company-wide controls to reflect the risks inherent in an acquisition of this type. As permitted by the SEC guidance for newly acquired businesses, our report on our internal control over financial reporting in the Annual Report on Form 10-K for the year ending December 31, 2022, will include a scope exception that excludes the acquired Meritor business in order for management to have sufficient time to evaluate and implement our internal control structure over the operations of the Meritor business.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The matters described under "Legal Proceedings" in NOTE 13,11, "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 factorsfactor 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, 20212022, 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 20212022 Annual Report on Form 10-K or the "CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION" in this Quarterly 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 EPAEnvironmental Protection Agency (EPA) and CARBCalifornia Air Resources Board (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 couldlikely will have a material adverse impact on ourthe 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 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 and Titan trucks for model years 2016 through 2019. Most recently, the regulators have also raised concerns regarding the completeness of our disclosures in our certification applications for RAM 2500 and 3500 trucks for model years 2013 through 2023. We have also been in communication with Environmental and Climate Change Canada regarding similar issues relating to some of these very same platforms. In connection with these and other ongoing discussions with the EPA and CARB, we are developing a new software calibration and will recall model years 2013 through 2018 RAM 2500 and 3500 trucks. We accrued $30 million for the RAM recall during the first quarter of 2022, an amount that reflected our current estimate of the cost of that recall. We are also developing a new software calibration and hardware fix and will recall model years 2016 through 2019 Titan trucks. We accrued $29 million for the Titan recall during the third quarter of 2022, an amount that reflected our current estimate of the cost of that recall.
We will continue to work together closely with the relevant regulators to develop and implement recommendations for improvementimprovements and seek to reach further resolutions as part of our ongoing commitment to compliance. Based upon our discussions to date with the regulators which are continuing, such resolutions may involve our agreeing to one or more consent decrees and paying civil penalties. Due to the presence of many unknown facts and circumstances, we are not yet able to estimate any further financial impact of these matters. It is possible that theThe consequences resulting from our formal review and these regulatory processes couldlikely will have a material adverse impact on our results of operations and cash flows.
BUSINESS CONDITIONS / DISRUPTIONS
The ongoing conflict between Russia and Ukraine, and the global response (including government bansflows, however we cannot yet reasonably estimate a loss or restrictions on doing business in Russia), could have a material adverse impact on our resultsrange of operations, financial condition and cash flows.
Given the nature of our business and our global operations, political, economic, and other conditions in foreign 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. 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. In the third quarter, we incurred $4 million of additional contract termination charges, and we recovered certain bad debt expenses and inventory amounts reserved in the first quarter for a net charge of $1 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 inability to collect customer receivables and may be the subject of litigation in connection with our suspension of commercial operations in Russia. Theloss.
broader consequences of this conflict, which may include further sanctions, embargoes, regional instability, and geopolitical shifts; potential retaliatory action by the Russian government against companies, including possible nationalization of foreign businesses in Russia; increased tensions between the United States and countries in which we operate; and the extent of the conflict’s effect on our business and results of operations as well as the global economy, cannot be predicted. To the extent the current conflict between Russia and Ukraine adversely affects our business, it may also have the effect of heightening many other risks disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, any of 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 sales goals. 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. As part of the purchase accounting associated with the acquisition, significant goodwill and intangible asset balances were recorded on the consolidated balance sheet. If cash flows from the acquisition fall short of our anticipated amounts, these assets could be subject to non-cash impairment charges, negatively impacting our earnings.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following information is provided pursuant to Item 703 of Regulation S-K:
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| | Issuer Purchases of Equity Securities |
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 1 - July 31 | | 73,856 | | | $ | 193.02 | | | 73,856 | | | $ | 2,231 | |
August 1 - August 31 | | — | | | — | | | — | | | 2,231 | |
September 1 - September 30 | | 42,589 | | | 205.86 | | | 42,589 | | | 2,222 | |
Total | | 116,445 | | | 197.72 | | | 116,445 | | | |
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(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. |
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| | Issuer Purchases of Equity Securities |
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) |
January 1 - January 31 | | — | | | $ | — | | | — | | | $ | 2,218 | |
February 1 - February 28 | | — | | | — | | | — | | | 2,218 | |
March 1 - March 31 | | — | | | — | | | — | | | 2,218 | |
Total | | — | | | — | | | — | | | |
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(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. |
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.plan authorized in 2019. During the three months ended September 30, 2022,March 31, 2023, we repurchased $23 milliondid not make any repurchases of common stock under the 2019 authorization.stock. The dollar value remaining available for future purchases under the 2019 program at September 30, 2022,March 31, 2023, was $222$218 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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| | Amendment No. 1 to Amended and Restated Credit Agreement, dated as of August 17, 2022, by andFebruary 15, 2023, among Cummins Inc., the subsidiary borrowers referred to therein, the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent. (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by Cummins Inc. with the Securities and Exchange Commission on August 19, 2022 (File No.001-04949)). |
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| | Credit Agreement, dated as of September 30, 2022, among FILT Red,Atmus Filtration Technologies Inc., Cummins Filtration Inc.,Inc, the lenders party thereto, and Bank of America, N.A., as administrative agent.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 on September 30, 2022February 15, 2023 (File No.001-04949)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 nine months ended September 30,March 31, 2023 and March 31, 2022 and October 3, 2021,, (ii) the Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30,March 31, 2023 and March 31, 2022 and October 3, 2021,, (iii) the Condensed Consolidated Balance Sheets at September 30, 2022March 31, 2023 and December 31, 2021,2022, (iv) the Condensed Consolidated Statements of Cash Flows for the ninethree months ended September 30,March 31, 2023 and March 31, 2022 and
October 3, 2021,, (v) the Condensed Consolidated Statements of Changes in Redeemable Noncontrolling Interests and Equity for the three and nine months ended September 30,March 31, 2023 and March 31, 2022 and October 3, 2021 and (vi) Notes to Condensed Consolidated Financial Statements.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 4, 2022May 2, 2023 | | | |
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| By: | /s/ MARK A. SMITH | | By: | /s/ LUTHER E. PETERS |
| | Mark A. Smith | | | Luther E. Peters |
| | Vice President and Chief Financial Officer | | | Vice President-Controller |
| | (Principal Financial Officer) | | | (Principal Accounting Officer) |