Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

ORGANIZATION OF INFORMATION

The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) was prepared to provide the reader with a view and perspective of our business through the eyes of management and should be read in conjunction with our Consolidated Financial Statements and the accompanying notes to those financial statements. Our MD&A is presented in the following sections:

EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS
RESULTS OF OPERATIONS
OPERATING SEGMENT RESULTS
2021 OUTLOOK
LIQUIDITY AND CAPITAL RESOURCES
CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

The following is the discussion and analysis of changes in the financial condition and results of operations for fiscal year 2020 compared to fiscal year 2019. The discussion and analysis of fiscal year 2018 and changes in the financial condition and results of operations for fiscal year 2019 compared to fiscal year 2018 that are not included in this Form 10-K may be found in Part II, ITEM 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the Securities and Exchange Commission (SEC) on February 11, 2020.

EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS

Overview

We are a global power leader that designs, manufactures, distributes and services diesel, natural gas, electric and hybrid powertrains and powertrain-related components including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems, automated transmissions, electric power generation systems, batteries, electrified power systems, hydrogen production and fuel cell products. We sell our products to original equipment manufacturers (OEMs), distributors, dealers and other customers worldwide. We have long-standing relationships with many of the leading manufacturers in the markets we serve, including PACCAR Inc, Navistar International Corporation, Daimler Trucks North America and Stellantis N.V. (Chrysler). We serve our customers through a network of over 500 wholly-owned, joint venture and independent distributor locations and over 9,000 Cummins certified dealer locations with service to approximately 190 countries and territories.

Our reportable operating segments consist of Engine, Distribution, Components, Power Systems and New Power. This reporting structure is organized according to the products and markets each segment serves. The Engine segment produces engines (15 liters and smaller) and associated parts for sale to customers in on-highway and various off-highway markets. Our engines are used in trucks of all sizes, buses and recreational vehicles, as well as in various industrial applications, including construction, agriculture, power generation systems and other off-highway applications. The Distribution segment includes wholly-owned and partially-owned distributorships engaged in wholesaling engines, generator sets and service parts, as well as performing service and repair activities on our products and maintaining relationships with various OEMs throughout the world. The Components segment sells filtration products, aftertreatment systems, turbochargers, electronics, fuel systems and automated transmissions. The Power Systems segment is an integrated power provider, which designs, manufactures and sells engines (16 liters and larger) for industrial applications (including mining, oil and gas, marine and rail), standby and prime power generator sets, alternators and other power components. The New Power segment designs, manufactures, sells and supports hydrogen production solutions as well as electrified power systems ranging from fully electric to hybrid along with innovative components and subsystems, including battery and fuel cell technologies. 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 and stoppages. Economic downturns in markets we serve generally result in reduced sales of our products and can result in price reductions in certain products and/or markets. As a worldwide business, our operations are also affected by currency, political, economic, public health crises, epidemics or pandemics and regulatory matters, including adoption and enforcement of environmental and emission standards, in the countries we serve. As part of our growth strategy, we invest in businesses in certain countries that carry high levels of these risks such as China, Brazil, India, Mexico, Russia and countries in the Middle East and Africa. At the same time, our geographic diversity and broad product and service offerings have helped limit the impact from a drop in demand in any one industry or customer or the economy of any single country on our consolidated results.

COVID-19 Update

The outbreak of COVID-19 spread throughout the world and became a global pandemic with the resultant economic impacts evolving into a worldwide recession. The pandemic triggered a significant downturn in our markets globally, which continued to unfavorably impact market conditions throughout 2020 and these challenging market conditions could continue for an extended period of time. In an effort to contain the spread of COVID-19, maintain the well-being of our employees and stakeholders, match the reduced demand from our customers and in accordance with governmental requirements, we closed or partially shut down certain office, manufacturing, distribution and technical center facilities around the world in March 2020. Although most of our manufacturing, distribution and technical center facilities re-opened early in the second quarter of 2020, some operated at reduced capacities, most of our global office buildings remained closed through the remainder of 2020. Despite many of our markets recovering in the second half of 2020, the ongoing spread of the virus prior to widespread vaccination presents several risks to our business, especially in the first half of 2021.

COVID-19 vaccines are currently being administered around the world with the hope that the majority of the population will have access to the vaccine by the middle of 2021. If the distribution and the effectiveness of the vaccine are consistent with current government and health organization estimates, we anticipate the vaccine will mitigate the spread of the virus by the end of 2021 and allow a return to more normal operations in the second half of the year.

While the impacts of the pandemic and the resulting global recession are expected to be temporary, the duration of the production and supply chain disruptions, and related financial impacts, cannot be estimated at this time. Should the reduced manufacturing and distribution capacities continue for an extended period of time or worsen, the impact on our production and supply chain could have a material adverse effect on our results of operations, financial condition and cash flows. Our Board of Directors (the Board) continues to monitor and evaluate all of these factors along with the continuing impacts of the COVID-19 pandemic on our business and operations.

2020 Results

A summary of our results is as follows:


	Years ended December 31,
In millions, except per share amounts	2020		2019		2018

Net sales	$	19,811	$	23,571	$	23,771







Net income attributable to Cummins Inc.	1,789		2,260		2,141
Earnings per common share attributable to Cummins Inc.
Basic	$	12.07	$	14.54	$	13.20
Diluted	12.01		14.48		13.15

Worldwide revenues decreased 16 percent in 2020 compared to 2019, as we experienced lower demand in all major operating segments and most geographic regions due to the economic impacts of COVID-19 and the anticipated 2020 down cycle in most of our markets. Net sales in the U.S. and Canada declined by 21 percent primarily due to COVID-19 impacts resulting in decreased demand in the North American on-highway markets, which also negatively impacted our emission solutions, automated transmissions and turbo technologies businesses, reduced sales in all distribution product lines, decreased demand for power generation equipment and lower demand in off-highway markets (especially construction). International demand (excludes the U.S. and Canada) declined by 7 percent compared to 2019, with lower sales in all geographic regions except China. The decrease in international sales was principally due to COVID-19 impacts resulting in lower demand for industrial products (primarily international mining markets), decreased demand for power generation equipment, lower volumes in on-highway markets (mainly medium-duty truck markets), reduced demand in all distribution product lines and unfavorable foreign currency impacts of 2 percent of international sales (primarily the

Brazilian real and Indian rupee), partially offset by higher demand in our emission solutions business in China and India and our electronics and fuel systems business in China.

The following table contains sales and EBITDA (defined as earnings or losses before interest expense, income taxes, depreciation and amortization and noncontrolling interests) by operating segment for the years ended December 31, 2020 and 2019. See Note 22, "OPERATING SEGMENTS," to the Consolidated Financial Statements for additional information and a reconciliation of our segment information to the corresponding amounts in our Consolidated Statements of Net Income.


	Operating Segments
	2020						2019						Percent change
			Percent of Total						Percent of Total				2020 vs. 2019
In millions	Sales		EBITDA		Sales		EBITDA		Sales		EBITDA
Engine	$	8,022	41	%	$	1,235	$	10,056	43	%	$	1,454	(20)	%	(15)	%
Distribution	7,136		36	%	665		8,071		34	%	656		(12)	%	1	%
Components	6,024		31	%	961		6,914		29	%	1,097		(13)	%	(12)	%
Power Systems	3,631		18	%	343		4,460		19	%	512		(19)	%	(33)	%
New Power	72		—	%	(172)		38		—	%	(149)		89	%	(15)	%
Intersegment eliminations	(5,074)		(26)	%	76		(5,968)		(25)	%	42		(15)	%	81	%
Total	$	19,811	100	%	$	3,108	$	23,571	100	%	$	3,612	(16)	%	(14)	%

Net income attributable to Cummins Inc. for 2020 was $1.8 billion, or $12.01 per diluted share, on sales of $19.8 billion, compared to 2019 net income attributable to Cummins Inc. of $2.3 billion, or $14.48 per diluted share, on sales of $23.6 billion. The decrease in net income attributable to Cummins Inc. and earnings per diluted share was driven by lower net sales, decreased gross margin, a higher effective tax rate and unfavorable foreign currency fluctuations (primarily the Brazilian real), partially offset by prior restructuring actions, temporary salary reductions and reduced variable compensation resulting in lower overall compensation expenses, increased equity, royalty and interest income from investees primarily in China (due to stronger demand for construction equipment and trucks) and favorable adjustments related to India Tax Law Changes in March 2020. The decrease in gross margin and gross margin percentage was mainly due to lower volumes, partially offset by prior restructuring actions, temporary salary reductions and lower variable compensation resulting in decreased compensation expenses and lower material costs. Diluted earnings per common share for 2020 benefited $0.24 per share from fewer weighted-average shares outstanding, primarily due to the stock repurchase program.

We generated $2.7 billion of operating cash flows in 2020, compared to $3.2 billion in 2019. 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 December 31, 2020, was 31.7 percent, compared to 21.9 percent at December 31, 2019. The increase was primarily due to a $1,797 million higher total debt balance as the result of our August 2020 debt issuance. At December 31, 2020, we had $3.9 billion in cash and marketable securities on hand and access to our $3.5 billion credit facilities, if necessary, to meet currently anticipated working capital, investment and funding needs.

In the first half of 2020, we entered into additional 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.

In 2020, we repurchased $641 million or 3.9 million shares of common stock. See Note 15, "CUMMINS INC. SHAREHOLDERS' EQUITY" to the Consolidated Financial Statements for additional information.

In June and July of 2020, we settled our February 2014 interest rate swaps, which previously converted our $500 million debt issue, due in 2023, from fixed rate to floating rate based on a LIBOR spread. We will amortize the $24 million gain realized upon settlement over the remaining three-year term of the related debt.

On August 19, 2020, we entered into an amended and restated 364-day credit agreement that allows us to borrow up to $1.5 billion of unsecured funds at any time prior to August 18, 2021. This credit agreement amended and restated the prior $1.5 billion-day credit facility that matured on August 19, 2020.

On August 24, 2020, we issued $2 billion aggregate principal amount of senior unsecured notes consisting of $500 million aggregate principal amount of 0.75% senior unsecured notes due in 2025, $850 million aggregate principal amount of 1.50% senior unsecured notes due in 2030 and $650 million aggregate principal amount of 2.60% senior unsecured notes due in 2050. We received net proceeds of $1.98 billion.

In October 2020, the Board authorized an increase to our quarterly dividend of 3 percent from $1.311 per share to $1.35 per share.

In 2020, the investment gain on our U.S. pension trust was 8.9 percent while our U.K. pension trust gain was 13.7 percent. Our global pension plans, including our unfunded and non-qualified plans, were 112 percent funded at December 31, 2020. Our U.S. defined benefit plan, which represents approximately 52 percent of the worldwide pension obligation, was 128 percent funded, and our U.K. defined benefit plan was 114 percent funded. We expect to contribute approximately $75 million in cash to our global pension plans in 2021. In addition, we expect our 2021 net periodic pension cost to approximate $78 million. See application of critical accounting estimates within MD&A and Note 13, "PENSIONS AND OTHER POSTRETIREMENT BENEFITS," to the Consolidated Financial Statements, for additional information concerning our pension and other postretirement benefit plans.

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 U.S. Environmental Protection Agency and California Air Resources Board regarding certification of our engines in model year 2019 RAM 2500 and 3500 trucks. We voluntarily disclosed our formal internal review to the regulators and to other government agencies, the Department of Justice (DOJ) and the SEC. We fully cooperated with the DOJ’s and the SEC’s information requests and inquiries and, based on recent communications with these agencies, we do not expect further inquiries. Due to the continuing nature of our formal review, our ongoing cooperation with our regulators and the presence of many unknown facts and circumstances, we cannot predict the final outcome of this review and these regulatory processes, and we cannot provide assurance that the matter will not have a materially adverse impact on our results of operations and cash flows. See Note 14, "COMMITMENTS AND CONTINGENCIES," to the 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


							Favorable/(Unfavorable)
	Years ended December 31,						2020 vs. 2019				2019 vs. 2018
In millions (except per share amounts)	2020		2019		2018		Amount		Percent		Amount		Percent
NET SALES	$	19,811	$	23,571	$	23,771	$	(3,760)	(16)	%	$	(200)	(1)	%
Cost of sales	14,917		17,591		18,034		2,674		15	%	443		2	%
GROSS MARGIN	4,894		5,980		5,737		(1,086)		(18)	%	243		4	%
OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses	2,125		2,454		2,437		329		13	%	(17)		(1)	%
Research, development and engineering expenses	906		1,001		902		95		9	%	(99)		(11)	%
Equity, royalty and interest income from investees	452		330		394		122		37	%	(64)		(16)	%


Restructuring actions	—		119		—		119		100	%	(119)		NM
Other operating expense, net	(46)		(36)		(6)		(10)		(28)	%	(30)		NM
OPERATING INCOME	2,269		2,700		2,786		(431)		(16)	%	(86)		(3)	%

Interest expense	100		109		114		9		8	%	5		4	%
Other income, net	169		243		81		(74)		(30)	%	162		NM
INCOME BEFORE INCOME TAXES	2,338		2,834		2,753		(496)		(18)	%	81		3	%
Income tax expense	527		566		566		39		7	%	—		—	%
CONSOLIDATED NET INCOME	1,811		2,268		2,187		(457)		(20)	%	81		4	%
Less: Net income attributable to noncontrolling interests	22		8		46		(14)		NM		38		83	%
NET INCOME ATTRIBUTABLE TO CUMMINS INC.	$	1,789	$	2,260	$	2,141	$	(471)	(21)	%	$	119	6	%
Diluted earnings per common share attributable to Cummins Inc.	$	12.01	$	14.48	$	13.15	$	(2.47)	(17)	%	$	1.33	10	%

"NM" - not meaningful information


							Favorable/(Unfavorable) Percentage Points
Percent of sales	2020		2019		2018		2020 vs. 2019	2019 vs. 2018
Gross margin	24.7	%	25.4	%	24.1	%	(0.7)	1.3
Selling, general and administrative expenses	10.7	%	10.4	%	10.3	%	(0.3)	(0.1)
Research, development and engineering expenses	4.6	%	4.2	%	3.8	%	(0.4)	(0.4)

2020 vs. 2019

Net Sales

Net sales decreased $3,760 million, primarily driven by the following:

Engine segment sales decreased 20 percent due to lower volumes in all North American on-highway markets.
Distribution segment sales decreased 12 percent due to lower demand in all product lines.
Components segment sales decreased 13 percent largely due to decreased demand in North America and Western Europe, partially offset by higher demand in China.
Power Systems segment sales decreased 19 percent primarily due to reduced industrial demand in international mining markets and oil and gas markets in China and North America and lower demand in power generation markets in North America, India and Asia Pacific.
Unfavorable foreign currency impacts of 1 percent of total sales, mainly the Brazilian real and Indian rupee.

Sales to international markets (excluding the U.S. and Canada), based on location of customers, were 42 percent of total net sales in 2020, compared with 38 percent of total net sales in 2019. 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; engineering support costs; repairs and maintenance; production and warehousing facility property insurance; rent for production facilities and other production overhead.

Gross Margin

Gross margin decreased $1,086 million and 0.7 points as a percentage of sales. The decrease in gross margin and gross margin as a percentage of sales were mainly due to lower volumes, partially offset by prior restructuring actions, temporary salary reductions and lower variable compensation resulting in decreased compensation expenses and lower material costs. The provision for warranties issued as a percentage of sales, was 2.2 percent in 2020 and 1.9 percent in 2019. A more detailed discussion of margin by segment is presented in the "OPERATING SEGMENT RESULTS" section.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $329 million, primarily due to prior restructuring actions, temporary salary reductions and lower variable compensation resulting in decreased compensation expenses and reduced travel expenses. Overall, selling, general and administrative expenses, as a percentage of sales, increased to 10.7 percent in 2020 from 10.4 percent in 2019. The increase in selling, general and administrative expenses as a percentage of sales was primarily due to sales declining faster than selling, general and administrative expenses, despite lower compensation expenses.

Research, Development and Engineering Expenses

Research, development and engineering expenses decreased $95 million, primarily due to prior restructuring actions, temporary salary reductions and lower variable compensation resulting in decreased compensation expenses and reduced consulting expenses. Overall, research, development and engineering expenses, as a percentage of sales, increased to 4.6 percent in 2020 from 4.2 percent in 2019, primarily due to sales declining faster than research, development and engineering expenses decreased, despite lower compensation expenses. Research activities continue to focus on development of new products to meet future emission standards around the world, improvements in fuel economy performance of diesel and natural gas-powered engines and related components as well as development activities around fully electric, hybrid and hydrogen powertrain solutions.

Equity, Royalty and Interest Income From Investees

Equity, royalty and interest income from investees increased $122 million, primarily due to higher earnings at Beijing Foton Cummins Engine Co., Ltd., a $37 million favorable adjustment as the result of tax changes within India's 2020-2021 Union Budget of India (India Tax Law Changes) passed in March 2020 and $18 million of technology fee revenue recorded in the first quarter of 2020. See NOTE 4, "INCOME TAXES" to the Consolidated Financial Statements for additional information on India Tax Law Changes.

Restructuring Actions

In the fourth quarter of 2019, we began executing restructuring actions, primarily in the form of voluntary and involuntary employee separation programs. To the extent these programs involved voluntary separations, a liability was recorded at the time offers to employees were accepted. To the extent these programs provided separation benefits in accordance with pre-existing agreements or policies, a liability was recorded once the amount was probable and reasonably estimable. We incurred a charge of $119 million ($90 million after-tax) in the fourth quarter of 2019 for these actions which impacted approximately 2,300 employees. The voluntary actions were completed by December 31, 2019 and the involuntary actions were completed by June 28, 2020. See Note 21, "RESTRUCTURING ACTIONS," to the Consolidated Financial Statements, for additional information.

Other Operating Expense, Net

Other operating expense, net was as follows:


	Years ended December 31,
In millions	2020		2019
Amortization of intangible assets	$	(22)	$	(20)
Loss on write-off of assets	(20)		(22)		(1)
Loss on sale of assets, net	(10)		(2)
Royalty income, net	5		14
Other, net	1		(6)
Total other operating expense, net	$	(46)	$	(36)



(1) Includes $19 million of the total $33 million charge related to ending production of the 5 liter ISV engine for the U.S. pick-up truck market.

Interest Expense

Interest expense decreased $9 million, mainly due to lower interest rates on average outstanding short-term borrowings, partially offset by increased interest expense associated with our $2 billion senior unsecured notes issued in August of 2020.

Other Income, Net

Other income, net was as follows:


	Years ended December 31,
In millions	2020		2019
Non-service pension and OPEB credit	$	65	$	71
Gain on corporate owned life insurance	57		61
Interest income	21		46
Gain on marketable securities, net	9		11
Rental income	9		8
Foreign currency gain, net	4		28		(1)
Bank charges	(17)		(11)



Other, net	21		29
Total other income, net	$	169	$	243



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

Income Tax Expense

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

The year ended December 31, 2020, contained $26 million, or $0.17 per share, of unfavorable net discrete tax items, primarily due to $33 million of unfavorable changes in tax reserves and $10 million of withholding tax adjustments, partially offset by $15 million of favorable changes due to the India Tax Law Change. The India Tax Law Change eliminated the dividend distribution tax and replaced it with a lower rate withholding tax as the burden shifted from the dividend payor to the dividend recipient for a net favorable income statement impact of $35 million. See NOTE 4, "INCOME TAXES" to the Consolidated Financial Statements for additional information on India Tax Law Changes.

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

The change in effective tax rate for the year ended December 31, 2020, versus year ended December 31, 2019, was primarily due to a $60 million swing from favorable to unfavorable net discrete tax items.

Our effective tax rate for 2021 is expected to approximate 22.5 percent, excluding any discrete items that may arise.

Net Income Attributable to Noncontrolling Interests

Noncontrolling interests eliminate the income or loss attributable to non-Cummins ownership interests in our consolidated entities. Noncontrolling interests in income of consolidated subsidiaries increased $14 million principally due to a $19 million unfavorable adjustment as the result of India Tax Law Changes passed in March 2020. See NOTE 4, "INCOME TAXES" to the Consolidated Financial Statements for additional information on India Tax Law Changes.

Net Income Attributable to Cummins Inc. and Diluted Earnings Per Common Share Attributable to Cummins Inc.

Net income and diluted earnings per share attributable to Cummins Inc. decreased $471 million and $2.47 per share, respectively, primarily due to lower net sales, decreased gross margin, a higher effective tax rate and unfavorable foreign currency fluctuations (primarily the Brazilian real), partially offset by prior restructuring actions, temporary salary reductions and reduced variable compensation resulting in lower overall compensation expenses, increased equity, royalty and interest income from investees primarily in China (due to stronger demand for construction equipment and trucks) and favorable adjustments related to India Tax Law Changes in March 2020. Diluted earnings per common share for 2020 benefited $0.24 per share from fewer weighted-average shares outstanding, primarily due to the stock repurchase program.

2019 vs. 2018

For prior year results of operations comparisons to 2018 see the Results of Operations section of our 2019 Form 10-K.

Comprehensive Income - Foreign Currency Translation Adjustment

The foreign currency translation adjustment was a net gain of $71 million and a net loss of $152 million for the years ended December 31, 2020 and 2019, respectively. The details were as follows:


	Years ended December 31,
	2020			2019
In millions	Translation adjustment		Primary currency driver vs. U.S. dollar	Translation adjustment		Primary currency driver vs. U.S. dollar
Wholly-owned subsidiaries	$	23	Chinese renminbi, offset by Brazilian real and British pound	$	(126)	British pound, Chinese renminbi, Indian rupee, Brazilian real
Equity method investments	58		Chinese renminbi	(21)		Chinese renminbi, British pound
Consolidated subsidiaries with a noncontrolling interest	(10)		Indian rupee	(5)		Indian rupee
Total	$	71		$	(152)

2019 vs. 2018

For prior year foreign currency translation adjustment comparisons to 2018 see the Results of Operations section of our 2019 Form 10-K

OPERATING SEGMENT RESULTS

Our reportable operating segments consist of the Engine, Distribution, Components, Power Systems and New Power segments. This reporting structure is organized according to the products and markets each segment serves. We use segment EBITDA as the primary basis for the Chief Operating Decision Maker to evaluate the performance of each of our reportable operating segments. We believe EBITDA is a useful measure of our operating performance as it assists investors and debt holders in comparing our performance on a consistent basis without regard to financing methods, capital structure, income taxes or depreciation and amortization methods, which can vary significantly depending upon many factors. Segment amounts exclude certain expenses not specifically identifiable to segments. See Note 22, "OPERATING SEGMENTS," to the Consolidated Financial Statements for additional information and a reconciliation of our segment information to the corresponding amounts in our Consolidated Statements of Net Income.

Following is a discussion of results for each of our operating segments.

For all prior year segment results comparisons to 2018 see the Results of Operations section of our 2019 Form 10-K.

Engine Segment Results

Financial data for the Engine segment was as follows:


										Favorable/(Unfavorable)
	Years ended December 31,									2020 vs. 2019				2019 vs. 2018
In millions	2020			2019			2018			Amount		Percent		Amount		Percent
External sales	$	5,925		$	7,570		$	8,002		$	(1,645)	(22)	%	$	(432)	(5)	%
Intersegment sales	2,097			2,486			2,564			(389)		(16)	%	(78)		(3)	%
Total sales	8,022			10,056			10,566			(2,034)		(20)	%	(510)		(5)	%

Research, development and engineering expenses	290			337			311			47		14	%	(26)		(8)	%
Equity, royalty and interest income from investees	312			200			238			112		56	%	(38)		(16)	%
Interest income	9			15			11			(6)		(40)	%	4		36	%

Segment EBITDA (excluding restructuring actions)	1,235			1,472			1,446			(237)		(16)	%	26		2	%


Restructuring actions	—			18			—			18		100	%	(18)		NM

Segment EBITDA	1,235			1,454			1,446			(219)		(15)	%	8		1	%

										Percentage Points				Percentage Points

Segment EBITDA as a percentage of total sales	15.4		%	14.5		%	13.7		%			0.9				0.8

"NM" - not meaningful information

Sales for our Engine segment by market were as follows:


							Favorable/(Unfavorable)
	Years ended December 31,						2020 vs. 2019				2019 vs. 2018
In millions	2020		2019		2018		Amount		Percent		Amount		Percent
Heavy-duty truck	$	2,648	$	3,555	$	3,652	$	(907)	(26)	%	$	(97)	(3)	%
Medium-duty truck and bus	2,066		2,707		2,855		(641)		(24)	%	(148)		(5)	%
Light-duty automotive	1,547		1,804		1,819		(257)		(14)	%	(15)		(1)	%
Total on-highway	6,261		8,066		8,326		(1,805)		(22)	%	(260)		(3)	%
Off-highway	1,761		1,990		2,240		(229)		(12)	%	(250)		(11)	%
Total sales	$	8,022	$	10,056	$	10,566	$	(2,034)	(20)	%	$	(510)	(5)	%

Unit shipments by engine classification (including unit shipments to Power Systems and off-highway engine units included in their respective classification) were as follows:


				Favorable/(Unfavorable)
	Years ended December 31,			2020 vs. 2019			2019 vs. 2018
	2020	2019	2018	Amount	Percent		Amount	Percent
Heavy-duty	92,500	122,600	128,500	(30,100)	(25)	%	(5,900)	(5)	%
Medium-duty	220,900	283,400	311,100	(62,500)	(22)	%	(27,700)	(9)	%
Light-duty	215,800	245,900	273,400	(30,100)	(12)	%	(27,500)	(10)	%
Total unit shipments	529,200	651,900	713,000	(122,700)	(19)	%	(61,100)	(9)	%

2020 vs. 2019

Sales

Engine segment sales decreased $2,034 million across all markets. The following were the primary drivers by market:

Heavy-duty truck engine sales decreased $907 million principally due to lower volumes in North America with lower shipments of 35 percent, partially offset by stronger demand in China.
Medium-duty truck and bus sales decreased $641 million mainly due to lower demand in North America with decreased shipments of 30 percent.
Light-duty automotive sales decreased $257 million primarily due to lower pick-up sales in North America with decreased shipments of 16 percent.
Off-highway sales decreased $229 million principally due to lower demand in construction markets in North America, Western Europe and Asia Pacific, partially offset by higher construction demand in China.
Unfavorable foreign currency fluctuations, primarily in the Brazilian real.

Total on-highway-related sales for 2020 were 78 percent of total engine segment sales, compared to 80 percent in 2019.

Segment EBITDA

Engine segment EBITDA decreased $219 million, primarily due to lower gross margin, partially offset by increased equity, royalty and interest income from investees, lower selling, general and administrative expenses and decreased research, development and engineering expenses. Gross margin and gross margin as a percentage of sales decreased mainly due to lower volumes, partially offset by prior restructuring actions, temporary salary reductions and lower variable compensation resulting in lower compensation expenses and decreased material costs. Selling, general and administrative expenses decreased principally due to prior restructuring actions, temporary salary reductions and lower variable compensation resulting in decreased compensation expenses, reduced consulting expenses and lower travel expenses. Research, development and engineering expenses decreased principally due to prior restructuring actions, temporary salary reductions and lower variable compensation resulting in decreased compensation expenses and reduced consulting expenses. Equity, royalty and interest income from investees increased largely due to higher earnings at Beijing Foton Cummins Engine Co., Ltd. and increased earnings at Tata Cummins Ltd., mainly due to an $18 million favorable adjustment related to India Tax Law Changes passed in March 2020 and $18 million of technology fee revenue recorded in the first quarter of 2020. See NOTE 4, "INCOME TAXES" to the Consolidated Financial Statements for additional information on India Tax Law Changes.

Distribution Segment Results

Financial data for the Distribution segment was as follows:


										Favorable/(Unfavorable)
	Years ended December 31,									2020 vs. 2019				2019 vs. 2018
In millions	2020			2019			2018			Amount		Percent		Amount		Percent
External sales	$	7,110		$	8,040		$	7,807		$	(930)	(12)	%	$	233	3	%
Intersegment sales	26			31			21			(5)		(16)	%	10		48	%
Total sales	7,136			8,071			7,828			(935)		(12)	%	243		3	%

Research, development and engineering expenses	31			28			20			(3)		(11)	%	(8)		(40)	%
Equity, royalty and interest income from investees	62			52			46			10		19	%	6		13	%
Interest income	4			15			13			(11)		(73)	%	2		15	%

Segment EBITDA (excluding restructuring actions)	665			693			563			(28)		(4)	%	130		23	%
Restructuring actions	—			37			—			37		100	%	(37)		NM
Segment EBITDA	665			656			563			9		1	%	93		17	%

										Percentage Points				Percentage Points

Segment EBITDA as a percentage of total sales	9.3		%	8.1		%	7.2		%			1.2				0.9

"NM" - not meaningful information

Sales for our Distribution segment by region were as follows:


							Favorable/(Unfavorable)
	Years ended December 31,						2020 vs. 2019				2019 vs. 2018
In millions	2020		2019		2018		Amount		Percent		Amount		Percent
North America	$	4,696	$	5,533	$	5,341	$	(837)	(15)	%	$	192	4	%
Asia Pacific	805		878		856		(73)		(8)	%	22		3	%
Europe	598		531		538		67		13	%	(7)		(1)	%
China	346		358		320		(12)		(3)	%	38		12	%
Africa and Middle East	200		235		241		(35)		(15)	%	(6)		(2)	%
Russia	194		159		169		35		22	%	(10)		(6)	%
India	150		201		194		(51)		(25)	%	7		4	%
Latin America	147		176		169		(29)		(16)	%	7		4	%
Total sales	$	7,136	$	8,071	$	7,828	$	(935)	(12)	%	$	243	3	%

Sales for our Distribution segment by product line were as follows:


							Favorable/(Unfavorable)
	Years ended December 31,						2020 vs. 2019				2019 vs. 2018
In millions	2020		2019		2018		Amount		Percent		Amount		Percent
Parts	$	2,931	$	3,290	$	3,234	$	(359)	(11)	%	$	56	2	%
Power generation	1,692		1,784		1,486		(92)		(5)	%	298		20	%
Service	1,263		1,479		1,474		(216)		(15)	%	5		—	%
Engines	1,250		1,518		1,634		(268)		(18)	%	(116)		(7)	%
Total sales	$	7,136	$	8,071	$	7,828	$	(935)	(12)	%	$	243	3	%

2020 vs. 2019

Sales

Distribution segment sales decreased $935 million across all product lines. The following were the primary drivers by region:

North American sales decreased $837 million, representing 90 percent of the total change in Distribution segment sales, due to decreased demand in all product lines, especially parts and engines sales in oil and gas markets.
Unfavorable foreign currency fluctuations, principally in the Brazilian real, Indian rupee, Australian dollar and South African rand.

Segment EBITDA

Distribution segment EBITDA increased $9 million, primarily due to decreased selling, general and administrative expenses, lower restructuring charges and higher equity, royalty and interest income from investees, partially offset by lower gross margin. Gross margin decreased mainly due to lower volumes, partially offset by prior restructuring actions, temporary salary reductions and lower variable compensation resulting in decreased compensation expenses and favorable pricing. Gross margin as a percentage of sales increased primarily due to prior restructuring actions, temporary salary reductions and lower variable compensation resulting in decreased compensation expenses and favorable pricing. Selling, general and administrative expenses decreased due to prior restructuring actions, temporary salary reductions and lower variable compensation resulting in decreased compensation expenses and reduced travel expenses, partially offset by higher consulting expenses. Equity, royalty and interest income from investees increased principally due to a $5 million favorable adjustment related to India Tax Law Changes passed in March 2020. See NOTE 4, "INCOME TAXES" to the Consolidated Financial Statements for additional information on India Tax Law Changes.

Components Segment Results

Financial data for the Components segment was as follows:


										Favorable/(Unfavorable)
	Years ended December 31,									2020 vs. 2019				2019 vs. 2018
In millions	2020			2019			2018			Amount		Percent		Amount		Percent
External sales	$	4,650		$	5,253		$	5,331		$	(603)	(11)	%	$	(78)	(1)	%
Intersegment sales	1,374			1,661			1,835			(287)		(17)	%	(174)		(9)	%
Total sales	6,024			6,914			7,166			(890)		(13)	%	(252)		(4)	%

Research, development and engineering expenses	264			300			272			36		12	%	(28)		(10)	%
Equity, royalty and interest income from investees	61			40			54			21		53	%	(14)		(26)	%
Interest income	4			8			5			(4)		(50)	%	3		60	%

Segment EBITDA (excluding restructuring actions)	961			1,117			1,030			(156)		(14)	%	87		8	%

Restructuring actions	—			20			—			20		100	%	(20)		NM
Segment EBITDA	961			1,097			1,030			(136)		(12)	%	67		7	%

										Percentage Points				Percentage Points

Segment EBITDA as a percentage of total sales	16.0		%	15.9		%	14.4		%			0.1				1.5

"NM" - not meaningful information

Sales for our Components segment by business were as follows:


							Favorable/(Unfavorable)
	Years ended December 31,						2020 vs. 2019				2019 vs. 2018
In millions	2020		2019		2018		Amount		Percent		Amount		Percent
Emission solutions	$	2,632	$	3,122	$	3,177	$	(490)	(16)	%	$	(55)	(2)	%
Filtration	1,232		1,281		1,265		(49)		(4)	%	16		1	%
Turbo technologies	1,098		1,218		1,343		(120)		(10)	%	(125)		(9)	%
Electronics and fuel systems	754		759		838		(5)		(1)	%	(79)		(9)	%
Automated transmissions	308		534		543		(226)		(42)	%	(9)		(2)	%
Total sales	$	6,024	$	6,914	$	7,166	$	(890)	(13)	%	$	(252)	(4)	%

2020 vs. 2019

Sales

Components segment sales decreased $890 million across all businesses. The following were the primary drivers by business:

Emission solutions sales decreased $490 million primarily due to weaker demand in North America and Western Europe, partially offset by stronger demand in China and India.
Automated transmissions sales decreased $226 million primarily due to lower heavy-duty truck demand in North America.
Turbo technologies sales decreased $120 million, principally due to lower demand in North America and Western Europe, partially offset by higher demand in China.
Unfavorable currency fluctuations, primarily in the Brazilian real.

Segment EBITDA

Components segment EBITDA decreased $136 million, mainly due to lower gross margin and unfavorable foreign currency fluctuations (primarily in the Brazilian real), partially offset by lower selling, general and administrative expenses, decreased research, development and engineering expenses and higher equity, royalty and interest income from investees. Gross margin and gross margin as a percentage of sales decreased mainly due to lower volumes, partially offset by prior restructuring actions, temporary salary reductions and lower variable compensation resulting in decreased compensation expenses and lower material costs. Selling, general and administrative expenses and research, development and engineering expenses decreased due to prior restructuring actions, temporary salary reductions and lower variable compensation resulting in decreased compensation expenses and reduced consulting expenses. Equity, royalty and interest income from investees increased principally due to higher earnings at Fleetguard Filtration Systems India Pvt. driven by a $14 million favorable adjustment related to India Tax Law Changes passed in March 2020 and increased earnings at Dongfeng Cummins Emission Solutions Co., Ltd. See NOTE 4, "INCOME TAXES" to the Consolidated Financial Statements for additional information on India Tax Law Changes.

Power Systems Segment Results

Financial data for the Power Systems segment was as follows:


										Favorable/(Unfavorable)
	Years ended December 31,									2020 vs. 2019				2019 vs. 2018
In millions	2020			2019			2018			Amount		Percent		Amount		Percent
External sales	$	2,055		$	2,670		$	2,625		$	(615)	(23)	%	$	45	2	%
Intersegment sales	1,576			1,790			2,001			(214)		(12)	%	(211)		(11)	%
Total sales	3,631			4,460			4,626			(829)		(19)	%	(166)		(4)	%

Research, development and engineering expenses	212			230			230			18		8	%	—		—	%
Equity, royalty and interest income from investees	21			38			56			(17)		(45)	%	(18)		(32)	%
Interest income	4			8			6			(4)		(50)	%	2		33	%

Segment EBITDA (excluding restructuring actions)	343			524			614			(181)		(35)	%	(90)		(15)	%
Restructuring actions	—			12			—			12		100	%	(12)		NM
Segment EBITDA	343			512			614			(169)		(33)	%	(102)		(17)	%

										Percentage Points				Percentage Points

Segment EBITDA as a percentage of total sales	9.4		%	11.5		%	13.3		%			(2.1)				(1.8)

"NM" - not meaningful information

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


							Favorable/(Unfavorable)
	Years ended December 31,						2020 vs. 2019				2019 vs. 2018
In millions	2020		2019		2018		Amount		Percent		Amount		Percent
Power generation	$	2,167	$	2,518	$	2,586	$	(351)	(14)	%	$	(68)	(3)	%
Industrial	1,188		1,576		1,663		(388)		(25)	%	(87)		(5)	%
Generator technologies	276		366		377		(90)		(25)	%	(11)		(3)	%
Total sales	$	3,631	$	4,460	$	4,626	$	(829)	(19)	%	$	(166)	(4)	%

2020 vs. 2019

Sales

Power Systems segment sales decreased $829 million across all product lines. The following were the primary drivers:

Industrial sales decreased $388 million due to lower demand in international mining markets and decreased demand in oil and gas markets in China and North America.
Power generation sales decreased $351 million due to lower demand in North America, India and Asia Pacific.

Segment EBITDA

Power Systems segment EBITDA decreased $169 million, primarily due to lower gross margin and lower equity, royalty and interest income from investees, partially offset by lower selling, general and administrative expenses and decreased research, development and engineering expenses. Gross margin and gross margin as a percentage of sales decreased mainly due to lower volumes, partially offset by prior restructuring actions, temporary salary reductions and lower variable compensation resulting in decreased compensation expenses, lower warranty expenses and favorable pricing. Selling, general and administrative expenses decreased primarily due to prior restructuring actions, temporary salary reductions and lower variable compensation resulting in decreased compensation expenses, reduced travel expenses and lower consulting expenses. Research, development and engineering expenses decreased principally due to prior restructuring actions, temporary salary reductions and lower variable compensation resulting in decreased compensation expenses, reduced consulting expenses and lower travel expenses. Equity, royalty and interest income from investees decreased largely due to an $8 million loss on the sale of a joint venture and lower earnings at Chongqing Cummins Engine Co., Ltd.

New Power Segment Results

The New Power segment designs, manufactures, sells and supports hydrogen production solutions as well as electrified power systems ranging from fully electric to hybrid along with innovative components and subsystems, including battery and fuel cell technologies. The New Power segment is currently in the development phase with a primary focus on research and development activities for our power systems, components and subsystems. Financial data for the New Power segment was as follows:



							Favorable/(Unfavorable)				Favorable/(Unfavorable)
	Years ended December 31,						2020 vs. 2019				2019 vs. 2018
In millions	2020		2019		2018		Amount		Percent		Amount		Percent
External sales	$	71	$	38	$	6	$	33	87	%	$	32	NM
Intersegment sales	1		—		1		1		NM		(1)		(100)	%
Total sales	72		38		7		34		89	%	31		NM

Research, development and engineering expenses	109		106		69		(3)		(3)	%	(37)		(54)	%
Equity, royalty and interest loss from investees	(4)		—		—		(4)		NM		—		—	%

Segment EBITDA (excluding restructuring actions)	(172)		(148)		(90)		(24)		(16)	%	(58)		(64)	%
Restructuring actions	—		1		—		1		100	%	(1)		NM
Segment EBITDA	(172)		(149)		(90)		(23)		(15)	%	(59)		(66)	%




"NM" - not meaningful information

2021 OUTLOOK

COVID-19 Impacts

The COVID-19 pandemic negatively impacted our financial performance in 2020 and may continue to do so in the future. Because the magnitude and duration of the pandemic and its economic consequences are unclear, the pandemic’s impact on our performance is difficult to predict.

COVID-19 Positive Trends

COVID-19 vaccines are currently being administered around the world with the hope that the majority of the population will have access to the vaccine by the middle of 2021. If the distribution and the effectiveness of the vaccine are consistent with current government and health organization estimates we anticipate the vaccine will mitigate the spread of the virus by the end of 2021 and allow a return to more normal operations in the second half of the year.

COVID-19 Challenges

The ongoing spread of the virus and increase in infections prior to widespread vaccination presents several risks to our business, especially in the first half of 2021. The three principle areas where COVID-19 may negatively impact our financial performance are through its impact on customer demand, the impact on our ability to procure parts from suppliers and our ability to operate our manufacturing and distribution facilities.

Customer Demand – The majority of our major customers, including PACCAR, Navistar, Daimler and Chrysler experienced extended production shutdowns in response to the pandemic in the first half of 2020. Although many of these customers reopened their facilities and ramped up their production in the second half of 2020, levels of future production remain uncertain and will be determined by supply chain constraints, market demand and government decisions to keep economies open.

Supply Chain Impact – Supplier shutdowns may result in parts shortages and negatively impact our ability to manufacture products and meet aftermarket demand. In addition, industry parts shortages may impact the timing of when customer facilities reopen and the speed at which customers ramp up production, negatively impacting demand for our products. Lower demand increases the risk that certain suppliers will face financial issues, potentially impacting their ability to supply parts.

Operations Impact - Our manufacturing and distribution locations are generally considered critical services and the majority of our facilities remain open to meet customer demand. In an effort to contain the spread of COVID-19, maintain the well-being of our employees, ensure compliance with governmental requirements or respond to declines in demand from customers, we closed or partially shut down certain office, manufacturing and distribution facilities around the world at the end of the first quarter and into the third quarter of 2020. We have taken, and will continue to take, a variety of steps to reduce the risk of employees contracting COVID-19 at work. These steps include social distancing, expanded cleaning and sanitization, adjusting work hours and temperature checks. All manufacturing and distribution facilities are now open, but remain subject to future closure if deemed necessary for the safety of our employees or to comply with future government mandates.

Business Outlook Considering Potential COVID-19 Impacts

Our outlook reflects the following positive trends and challenges to our business that could impact our revenue and earnings potential in 2021. Specific impacts of the COVID-19 pandemic are highlighted in the above section but are reflected in our market outlook.

Positive Trends

We expect demand for pick-up trucks in North America to remain strong and in line with the second half of 2020.
North American medium-duty and heavy-duty truck demand improved in the fourth quarter and could continue to strengthen above second half of 2020 levels.
Market demand for trucks in India is expected to improve from 2020 levels.
We anticipate our aftermarket business will strengthen from second half of 2020 levels, driven primarily by increased truck utilization in North America.
Our liquidity of $7.0 billion in cash, marketable securities and available credit facilities puts us in a strong position to deal with any uncertainties that may arise in 2021.

Challenges

Market demand in truck and construction markets in China is expected to decline from record levels in 2020.
We may close or restructure additional manufacturing and distribution facilities as we evaluate the appropriate size and structure of our manufacturing and distribution capacity, which could result in additional charges.
Uncertainty in the U.K. surrounding its ability to negotiate trade agreements as a sovereign country could have material negative impacts on our European operations in the long-term.

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	December 31, 2020			December 31, 2019
Working capital (1)	$	5,562		$	3,127
Current ratio	1.88			1.50
Accounts and notes receivable, net	$	3,820		$	3,670
Days' sales in receivables	69			58
Inventories	$	3,425		$	3,486
Inventory turnover	4.2			4.7
Accounts payable (principally trade)	$	2,820		$	2,534
Days' payable outstanding	68			58
Total debt	$	4,164		$	2,367
Total debt as a percent of total capital	31.7		%	21.9		%

(1) Working capital includes cash and cash equivalents.

Cash Flows

Cash and cash equivalents were impacted as follows:


	Years ended December 31,						Change
In millions	2020		2019		2018		2020 vs. 2019		2019 vs. 2018
Net cash provided by operating activities	$	2,722	$	3,181	$	2,378	$	(459)	$	803
Net cash used in investing activities	(719)		(1,150)		(974)		431		(176)
Net cash provided by (used in) financing activities	280		(2,095)		(1,400)		2,375		(695)
Effect of exchange rate changes on cash and cash equivalents	(11)		(110)		(70)		99		(40)
Net increase (decrease) in cash and cash equivalents	$	2,272	$	(174)	$	(66)	$	2,446	$	(108)

2020 vs. 2019

Net cash provided by operating activities decreased $459 million, primarily due to lower consolidated net income of $457 million, higher restructuring payments of $106 million, increased equity in income of investees, net of dividends of $91 million and lower other liabilities of $51 million, partially offset by lower working capital requirements of $396 million. During 2020, lower working capital requirements resulted in a cash inflow of $365 million compared to a cash outflow of $31 million in 2019, mainly due to higher accounts payable and accrued expenses, partially offset by a decrease in inventory and higher accounts and notes receivable.

Net cash used in investing activities decreased $431 million, primarily due to the prior year acquisition of Hydrogenics for $235 million, lower capital expenditures of $172 million and higher cash flows from derivatives not designated as hedges of $48 million, partially offset by higher investments in and advances to equity investees of $31 million.

Net cash provided by financing activities increased $2,375 million, principally due to the issuance of $2 billion of long-term debt and lower repurchases of common stock of $630 million, partially offset by higher net payments of commercial paper of $217 million.

The effect of exchange rate changes on cash and cash equivalents decreased $99 million, primarily due to favorable fluctuations in the British pound of $73 million.

2019 vs. 2018

For prior year liquidity comparisons see the Liquidity and Capital Resources section of our 2019 Form 10-K.

Sources of Liquidity

We generate significant ongoing cash flow. Cash provided by operations is our principal source of liquidity with $2.7 billion provided in 2020. At December 31, 2020, our sources of liquidity included:


	December 31, 2020
In millions	Total		U.S.		International		Primary location of international balances
Cash and cash equivalents	$	3,401	$	1,914	$	1,487	China, Singapore, Mexico, Belgium, Australia, Canada

Marketable securities (1)	461		86		375		India
Total	$	3,862	$	2,000	$	1,862
Available credit capacity
Revolving credit facilities (2)	$	3,177
International and other uncommitted domestic credit facilities	$	256

(1) The majority of marketable securities could be liquidated into cash within a few days.
(2) The five-year credit facility for $2.0 billion and the 364-day credit facility for $1.5 billion, maturing August 2023 and August 2021, respectively, are maintained primarily to provide backup liquidity for our commercial paper borrowings and general corporate purposes. At December 31, 2020, we had $323 million of commercial paper outstanding, which effectively reduced the available capacity under our revolving credit facilities to $3.2 billion.

Cash, Cash Equivalents and Marketable Securities

A significant portion of our cash flows are 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 have asserted are permanently reinvested outside of the U.S. Foreign earnings for which we assert permanent reinvestment outside the U.S. consist primarily of earnings of our China, India and Netherlands domiciled subsidiaries. At present, we do not foresee a need to repatriate any earnings from these subsidiaries for which we have asserted permanent reinvestment. However, to help fund cash needs of the U.S. or other international subsidiaries as they arise, we repatriate available cash from certain foreign subsidiaries whose earnings are not permanently reinvested when it is cost effective to do so.

Debt Facilities and Other Sources of Liquidity

On April 14, 2020, we were approved for the Federal Reserve Bank of New York’s Commercial Paper Funding Facility (CPFF) program to assure access to the commercial paper funding markets during volatile credit market conditions. The CPFF was intended to provide a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle (SPV). The facility allows us, based on our current short-term credit rating, to issue three-month unsecured commercial paper at a rate equal to a + 110 basis point spread over the three-month overnight index swap rate on the date of issuance. The maximum amount of commercial paper that we may issue at any time through this program is $1.5 billion less the total principal amount of all other outstanding commercial paper that we have issued. We retain full access to our Board authorized $3.5 billion commercial paper program, as reduced by any amounts issued under this facility. The SPV is currently scheduled to cease purchasing commercial paper on March 17, 2021. At December 31, 2020, there were no outstanding borrowings under the CPFF program.

On August 19, 2020, we entered into an amended and restated 364-day credit agreement that allows us to borrow up to $1.5 billion of unsecured funds at any time prior to August 18, 2021. This credit agreement amended and restated the prior $1.5 billion 364-day credit facility that matured on August 19, 2020.

We have access to committed credit facilities that total $3.5 billion, including the new $1.5 billion 364-day facility that expires August 18, 2021 and our $2.0 billion five-year facility that expires on August 22, 2023. We maintain credit facilities at the current or higher aggregate amounts by renewing or replacing these facilities at or before expiration. These revolving credit facilities are maintained primarily to provide backup liquidity for our commercial paper borrowings and for general corporate purposes. Both credit agreements include a financial covenant requiring that the leverage ratio of net debt of the company and its subsidiaries to the consolidated total capital of the company and its subsidiaries may not exceed 0.65 to 1.0. At December 31, 2020, our leverage ratio was 0.07 to 1.0.

We can issue up to $3.5 billion of unsecured, short-term promissory notes (commercial paper) pursuant to the Board authorized commercial paper programs. The programs facilitate the private placement of unsecured short-term debt through third-party brokers. We intend to use the net proceeds from the commercial paper borrowings for general corporate purposes. At December 31, 2020, we had $323 million of commercial paper outstanding, which effectively reduced the available capacity under our revolving credit facilities to $3.2 billion. The total combined borrowing capacity under the revolving credit facilities and commercial paper programs should not exceed $3.5 billion. See Note 11, "DEBT," to our Consolidated Financial Statements for additional information.

As a well-known seasoned issuer, we filed an automatic shelf registration for an undetermined amount of debt and equity securities with the SEC on February 13, 2019. Under this shelf registration we may offer, from time to time, debt securities, common stock, preferred and preference stock, depositary shares, warrants, stock purchase contracts and stock purchase units.

In July 2017, the U.K.'s Financial Conduct Authority, which regulates the London Interbank Offered Rate (LIBOR), announced it intends to phase out LIBOR by the end of 2021. The cessation date for submission and publication of rates for certain tenors of LIBOR has since been extended until mid-2023. Various central bank committees and working groups continue to discuss replacement of benchmark rates, the process for amending existing LIBOR-based contracts and the potential economic impacts of different alternatives. The Alternative Reference Rates Committee has identified the Secured Overnight Financing Rate (SOFR) as its preferred alternative rate for USD 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 are evaluating 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 impact us significantly, we continue to evaluate contracts throughout the company. In anticipation of LIBOR's phase out, our revolving credit agreements include a transition mechanism for selecting a benchmark replacement rate for LIBOR, with such benchmark replacement rate to be subject to our agreement.

Supply Chain Financing

We currently have supply chain financing programs with financial intermediaries, which provide certain vendors the option to be paid by financial intermediaries earlier than the due date on the applicable invoice. When a vendor utilizes the program and receives an early payment from a financial intermediary, they take a discount on the invoice. We then pay the financial intermediary the face amount of the invoice on the regularly scheduled due date. We do not reimburse vendors for any costs they incur for participation in the program and their participation is completely voluntary. As a result, all amounts owed to the financial intermediaries are presented as "Accounts payable" in our Consolidated Balance Sheets.

Uses of Cash

Stock Repurchases

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 October 2018, the Board authorized the acquisition of up to $2.0 billion of additional common stock. For the year ended December 31, 2020, we made the following purchases under our stock repurchase programs:


In millions, except per share amounts	Shares Purchased		Average Cost Per Share		Total Cost of Repurchases		Remaining Authorized Capacity (1)

October 2018, $2 billion repurchase program
March 29	3.5		$	156.92	$	550	$	85
June 28	—		—		—		85
September 27	—		—		—		85
December 31	0.4		219.15		85		—
Subtotal	3.9		163.11		635		—

December 2019, $2 billion repurchase program



December 31	0.0	(2)	218.97		6		1,994

Total	3.9		163.50		$	641

(1) The remaining authorized capacity under these plans was calculated based on the cost to purchase the shares but excludes commission expenses in accordance with the authorized plan.
(2) The shares purchased under the 2019 repurchase program rounded to zero.

We temporarily suspended share repurchases after the purchases made in the first quarter of 2020 to conserve cash, but resumed repurchasing shares in the fourth quarter of 2020. We may repurchase outstanding shares from time to time during 2021 to enhance shareholder value and to offset the dilutive impact of employee stock-based compensation plans.

Dividends

Total dividends paid to common shareholders in 2020, 2019 and 2018 were $782 million, $761 million and $718 million, respectively. Declaration and payment of dividends in the future depends upon our income and liquidity position, among other factors, and is subject to declaration by the Board, who meets quarterly to consider our dividend payment. We expect to fund dividend payments with cash from operations.

In October 2020, the Board authorized an increase to our quarterly dividend of 3 percent from $1.311 per share to $1.35 per share. Cash dividends per share paid to common shareholders and the Board authorized increases for the last three years were as follows:


	Quarterly Dividends
	2020		2019		2018
First quarter	$	1.311	$	1.14	$	1.08
Second quarter	1.311		1.14		1.08
Third quarter	1.311		1.311		1.14
Fourth quarter	1.35		1.311		1.14
Total	$	5.28	$	4.90	$	4.44

Capital Expenditures

Capital expenditures, including spending on internal use software, were $575 million, $775 million and $784 million in 2020, 2019 and 2018, respectively. We continue to invest in new product lines and targeted capacity expansions. We plan to spend an estimated $725 million to $775 million in 2021 on capital expenditures, excluding internal use software, with over 50 percent of these expenditures expected to be invested in North America. In addition, we plan to spend an estimated $60 million to $70 million on internal use software in 2021.

Pensions

Our global pension plans, including our unfunded and non-qualified plans, were 112 percent funded at December 31, 2020. Our U.S. defined benefit plan, which represents approximately 52 percent of the worldwide pension obligation, was 128 percent funded, and our U.K. defined benefit plan was 114 percent funded. 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 2020, the investment gain on our U.S. pension trust was 8.9 percent while our U.K. pension trust gain was 13.7 percent. Approximately 72 percent of our pension plan assets are held in highly liquid investments such as fixed income and equity securities. The remaining 28 percent of our plan assets are held in less liquid, but market valued investments, including real estate, private equity, venture capital, opportunistic credit and insurance contracts.

We sponsor funded and unfunded domestic and foreign defined benefit pension plans. Contributions to the U.S. and U.K. plans were as follows:


	Years ended December 31,
In millions		2020		2019		2018



Defined benefit pension contributions		$	92	$	121	$	37



Defined contribution pension plans		85		102		104

We anticipate making total contributions of approximately $75 million to our global defined benefit pension plans in 2021. Expected contributions to our defined benefit pension plans in 2021 will meet or exceed the current funding requirements.

Current Maturities of Short and Long-Term Debt

We had $323 million of commercial paper outstanding at December 31, 2020, that matures in less than one year. The maturity schedule of our existing long-term debt does not require significant cash outflows until 2023 when our 3.65% senior notes are due. Required annual long-term debt principal payments range from $23 million to $526 million over the next five years. See Note 11, "DEBT," to the Consolidated Financial Statements for additional information.

Restructuring Actions

In the fourth quarter of 2019, we began executing restructuring actions, primarily in the form of voluntary and involuntary employee separation programs. We incurred a charge of $119 million ($90 million after-tax) in the fourth quarter of 2019 for these actions which impacted approximately 2,300 employees. Restructuring payments were substantially complete at September 27, 2020. See Note 21, "RESTRUCTURING ACTIONS," to the Consolidated Financial Statements, for additional information.

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.



	Long-Term	Short-Term
Credit Rating Agency (1)	Senior Debt Rating	Debt Rating	Outlook
Standard & Poor’s Rating Services	A+	A1	Stable

Moody’s Investors Service, Inc.	A2	P1	Stable

(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.

Management's Assessment of Liquidity

Despite the global recession and volatility in the capital markets due to the pandemic, our financial condition and liquidity remain strong. Our solid balance sheet and credit ratings enable us to have ready access to credit and the capital markets. We assess our liquidity in terms of our ability to generate adequate cash to fund our operating, investing and financing activities. We believe our existing cash and marketable securities, operating cash flow and revolving credit facilities provide us with the financial flexibility needed to fund working capital, common stock repurchases, acquisitions, targeted capital expenditures, dividend payments, projected pension obligations and debt service obligations through 2021 and beyond. We continue to generate significant cash from operations and maintain access to our expanded revolving credit facilities and commercial paper programs as noted above.

CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS

A summary of our contractual obligations and other commercial commitments at December 31, 2020, are as follows:


Contractual Cash Obligations	Payments Due by Period
In millions	2021		2022-2023		2024-2025		After 2025		Total

Long-term debt and finance lease obligations (1)	$	175	$	798	$	716	$	4,079	$	5,768
Operating leases	143		183		99		67		492

Capital expenditures	238		—		—		—		238
Purchase commitments for inventory	799		1		—		—		800
Other purchase commitments	298		14		6		10		328
Transitional tax liability	4		98		191		—		293

Other postretirement benefits	21		39		35		71		166
International and other domestic letters of credit	116		16		4		3		139
Performance and excise bonds	36		10		54		—		100
Guarantees, indemnifications and other commitments	26		3		5		10		44
Total	$	1,856	$	1,162	$	1,110	$	4,240	$	8,368

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

The contractual obligations reported above exclude our unrecognized tax benefits of $122 million as of December 31, 2020. We are not able to reasonably estimate the period in which cash outflows relating to uncertain tax contingencies could occur. See Note 4, "INCOME TAXES," to the Consolidated Financial Statements for additional information.

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

A summary of our significant accounting policies is included in Note 1, "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES," of our Consolidated Financial Statements which discusses accounting policies that we have selected from acceptable alternatives.

Our Consolidated Financial Statements are prepared in accordance with generally accepted accounting principles in the U.S. which often requires management to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts presented and disclosed in the financial statements. Management reviews these estimates and assumptions based on historical experience, changes in business conditions, including the impacts of COVID-19, and other relevant factors they believe to be reasonable under the circumstances. In any given reporting period, our actual results may differ from the estimates and assumptions used in preparing our 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. We believe our critical accounting estimates include estimating liabilities for warranty programs, assessing goodwill impairments, accounting for income taxes and pension benefits.

Warranty Programs

We estimate and record a liability for base warranty programs at the time our products are sold. Our estimates are based on historical experience and reflect management's best estimates of expected costs at the time products are sold and subsequent adjustment to those expected costs when actual costs differ. As a result of the uncertainty surrounding the nature and frequency of product recall programs, the liability for such programs is recorded when we commit to a recall action or when a recall becomes probable and estimable, which generally occurs when management internally approves or commits to the action. Our warranty liability is generally affected by component failure rates, repair costs and the point of failure within the product life cycle. Future events and circumstances related to these factors could materially change our estimates and require adjustments to our liability. New product launches require a greater use of judgment in developing estimates until historical experience becomes available. Product specific experience is typically available four or five quarters after product launch, with a clear experience trend evident eight quarters after launch. We generally record warranty expense for new products upon shipment using a preceding product's warranty history and a multiplicative factor based upon preceding similar product experience and new product assessment until sufficient new product data is available for warranty estimation. We then use a blend of actual new product experience and preceding product historical experience for several subsequent

quarters, and new product specific experience thereafter. Note 12, "PRODUCT WARRANTY LIABILITY," to our Consolidated Financial Statements contains a summary of the activity in our warranty liability account for 2020, 2019 and 2018 including adjustments to pre-existing warranties.

Goodwill Impairment

We are required to make certain subjective and complex judgments in assessing whether a goodwill impairment event has occurred, including assumptions and estimates used to determine the fair value of our reporting units. We test for goodwill impairment at the reporting unit level and our reporting units are the operating segments or the components of operating segments that constitute businesses for which discrete financial information is available and is regularly reviewed by management.

We have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value as a basis for determining whether it is necessary to perform an annual quantitative goodwill impairment test. We have elected this option on certain reporting units. The following events and circumstances are considered when evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount:

Macroeconomic conditions, such as a deterioration in general economic conditions, including COVID-19 impacts, fluctuations in foreign exchange rates and/or other developments in equity and credit markets;
Industry and market considerations, such as a deterioration in the environment in which an entity operates, material loss in market share and significant declines in product pricing;
Cost factors, such as an increase in raw materials, labor or other costs;
Overall financial performance, such as negative or declining cash flows or a decline in actual or forecasted revenue;
Other relevant entity-specific events, such as material changes in management or key personnel and
Events affecting a reporting unit, such as a change in the composition or carrying amount of its net assets including acquisitions and dispositions.

The examples noted above are not all-inclusive, and we consider other relevant events and circumstances that affect the fair value of a reporting unit in determining whether to perform the quantitative goodwill impairment test.

Our goodwill recoverability assessment is based on our annual strategic planning process. This process includes an extensive review of expectations for the long-term growth of our businesses and forecasted future cash flows. In order to determine the valuation of our reporting units, we use either the market approach or the income approach using a discounted cash flow model. Our income approach method uses a discounted cash flow model in which cash flows anticipated over several periods, plus a terminal value at the end of that time horizon, are discounted to their present value using an appropriate rate of return. Our estimates are based upon our historical experience, our current knowledge from our commercial relationships and available external information about future trends.

The discounted cash flow model requires us to make projections of revenue, gross margin, operating expenses, working capital investment and fixed asset additions for the reporting units over a multi-year period. Additionally, management must estimate a weighted-average cost of capital, which reflects a market rate, for each reporting unit for use as a discount rate. The discounted cash flows are compared to the carrying value of the reporting unit and, if less than the carrying value, the difference is recorded as a goodwill impairment loss. In addition, we also perform a sensitivity analysis to determine how much our forecasts can fluctuate before the fair value of a reporting unit would be lower than its carrying amount. We perform the required procedures as of the end of our fiscal third quarter.

While none of our reporting units recorded a goodwill impairment in 2020, we determined the automated transmission business is our only reporting unit with material goodwill where the estimated fair value does not substantially exceed the carrying value. The estimated fair value of the reporting unit exceeds its carrying amount of $1.1 billion by approximately 18 percent. Total goodwill in this reporting unit is $544 million. Since this reporting unit is made up of only one business, our joint venture with Eaton Corporation plc (Eaton Cummins Automated Transmission Technologies), acquired in 2017, we did not expect the estimated fair value would exceed the carrying value by a significant amount. We valued this reporting unit primarily using an income approach based on its expected future cash flows. The critical assumptions that factored into the valuation are the projected future revenues and EBITDA margins of the business as well as the discount rate used to present value these future cash flows. A 100 basis point increase in the discount rate would result in a 16 percent decline in the fair value of the reporting unit.

Accounting for Income Taxes

We determine our income tax expense using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax effects of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Future tax benefits of net operating loss and credit carryforwards are also recognized as deferred tax assets. We evaluate the recoverability of our deferred tax assets each quarter by assessing the likelihood of future profitability and available tax planning strategies that could be implemented to realize our net deferred tax assets. At December 31, 2020, we recorded net deferred tax assets of $154 million. The assets included $382 million for the value of net operating loss and credit carryforwards. A valuation allowance of $346 million was recorded to reduce the tax assets to the net value management believed was more likely than not to be realized. In the event our operating performance deteriorates, future assessments could conclude that a larger valuation allowance will be needed to further reduce the deferred tax assets.

In addition, we operate within multiple taxing jurisdictions and are subject to tax audits in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. We accrue for the estimated additional tax and interest that may result from tax authorities disputing uncertain tax positions. We believe we made adequate provisions for income taxes for all years that are subject to audit based upon the latest information available. A more complete description of our income taxes and the future benefits of our net operating loss and credit carryforwards is disclosed in Note 4, "INCOME TAXES," to our Consolidated Financial Statements.

Pension Benefits

We sponsor a number of pension plans globally, with the majority of assets in the U.S. and the U.K. In the U.S. and the U.K., we have several major defined benefit plans that are separately funded. We account for our pension programs in accordance with employers' accounting for defined benefit pension plans, which requires that amounts recognized in financial statements be determined using an actuarial basis. As a result, our pension benefit programs are based on a number of statistical and judgmental assumptions that attempt to anticipate future events and are used in calculating the expense and liability related to our plans each year at December 31. These assumptions include discount rates used to value liabilities, assumed rates of return on plan assets, future compensation increases, employee turnover rates, actuarial assumptions relating to retirement age, mortality rates and participant withdrawals. The actuarial assumptions we use may differ significantly from actual results due to changing economic conditions, participant life span and withdrawal rates. These differences may result in a material impact to the amount of net periodic pension cost to be recorded in our Consolidated Financial Statements in the future.

The expected long-term return on plan assets is used in calculating the net periodic pension cost. We considered several factors in developing our expected rate of return on plan assets. The long-term rate of return considers historical returns and expected returns on current and projected asset allocations. Projected returns are based primarily on broad, publicly traded passive fixed income and equity indices and forward-looking estimates of the value added by active investment management. At December 31, 2020, based upon our target asset allocations, it is anticipated that our U.S. investment policy will generate an average annual return over the 30-year projection period equal to or in excess of 6.25 percent, including the additional positive returns expected from active investment management.

The one-year return for our U.S. plans was 8.9 percent for 2020. Our U.S. plan assets averaged annualized returns of 9.12 percent over the prior ten years and resulted in approximately $443 million of actuarial gains in accumulated other comprehensive loss (AOCL) in the same period. Based on the historical returns and forward-looking return expectations as plan assets continue to be de-risked, consistent with our investment policy, we believe continuing our investment return assumption of 6.25 percent per year in 2021 for U.S. pension assets is reasonable.

The methodology used to determine the rate of return on pension plan assets in the U.K. was based on establishing an equity-risk premium over current long-term bond yields adjusted based on target asset allocations. At December 31, 2020, based upon our target asset allocations, it is anticipated that our U.K. investment policy will generate an average annual return over the 20-year projection period equal to or in excess of 4 percent. The one-year return for our U.K. plans was 13.7 percent for 2020. We generated average annualized returns of 9.20 percent over ten years, resulting in approximately $724 million of actuarial gains in AOCL. Our strategy with respect to our investments in pension plan assets is to be invested with a long-term outlook. Based on the historical returns and forward-looking return expectations as the plan assets continue to be de-risked, we believe continuing our investment return

assumption of 4.0 percent in 2021 for U.K. pension assets is reasonable. Our pension plan asset allocations at December 31, 2020 and 2019 and target allocation for 2021 are as follows:


	U.S. Plans						U.K. Plans
	Target Allocation		Percentage of Plan Assets at December 31,				Target Allocation			Percentage of Plan Assets at December 31,
Investment description	2021		2020		2019		2021		2020			2019
Liability matching	68.0	%	66.0	%	69.2	%	56.5	%		57.0	%		53.4	%
Risk seeking	32.0	%	34.0	%	30.8	%	43.5	%		43.0	%		46.6	%
Total	100.0	%	100.0	%	100.0	%	100.0	%		100.0	%		100.0	%

The differences between the actual return on plan assets and expected long-term return on plan assets are recognized in the asset value used to calculate net periodic cost over five years. The table below sets forth the expected return assumptions used to develop our pension cost for the period 2018-2020 and our expected rate of return for 2021.


	Long-term Expected Return Assumptions
	2021		2020		2019		2018
U.S. plans	6.25	%	6.25	%	6.25	%	6.50	%
U.K. plans	4.00	%	4.00	%	4.00	%	4.00	%

Pension accounting offers various acceptable alternatives to account for the differences that eventually arise between the estimates used in the actuarial valuations and the actual results. It is acceptable to delay or immediately recognize these differences. Under the delayed recognition alternative, changes in pension obligations (including those resulting from plan amendments) and changes in the value of assets set aside to meet those obligations are not recognized in net periodic pension cost as they occur but are recognized initially in AOCL and subsequently amortized as components of net periodic pension cost systematically and gradually over future periods. In addition to this approach, we may also adopt immediate recognition of actuarial gains or losses. Immediate recognition introduces volatility in financial results. We have chosen to delay recognition and amortize actuarial differences over future periods. If we adopted the immediate recognition approach, we would record a loss of $989 million ($772 million after-tax) from cumulative actuarial net losses for our U.S. and U.K. pension plans.

The difference between the expected return and the actual return on plan assets is deferred from recognition in our results of operations and under certain circumstances, such as when the difference exceeds 10 percent of the greater of the market value of plan assets or the projected benefit obligation, the difference is amortized over future years of service. This is also true of changes to actuarial assumptions. Under the delayed recognition alternative, the actuarial gains and losses are recognized and recorded in AOCL. At December 31, 2020, we had net pension actuarial losses of $714 million and $250 million for the U.S. and U.K. pension plans, respectively. As these amounts exceed 10 percent of their respective plan assets, the excess is amortized over the average remaining service lives of participating employees. Net actuarial losses decreased our shareholders' equity by $63 million after-tax in 2020. The loss is primarily due to lower discount rates in the U.S. and U.K, partially offset by strong asset returns in the U.S. and U.K.

The table below sets forth the net periodic pension cost for the years ended December 31 and our expected cost for 2021.


In millions	2021		2020		2019		2018
Net periodic pension cost	$	78	$	102	$	65	$	86

We expect 2021 net periodic pension cost to decrease compared to 2020, primarily due to favorable actuarial experience and investment returns, partially offset by lower discount rates in the U.S. and U.K. The increase in net periodic pension cost in 2020 compared to 2019 was primarily due to lower discount rates in the U.S. and U.K. The decrease in net periodic pension cost in 2019 compared to 2018 was due to higher discount rates and favorable actuarial experience in the U.S. and U.K., partially offset by a lower expected rate of return in the U.S.

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


	Discount Rates
	2021		2020		2019		2018
U.S. plans	2.62	%	3.36	%	4.36	%	3.66	%
U.K. plans	1.50	%	2.00	%	2.80	%	2.55	%

The discount rate enables us to state expected future cash payments for benefits as a present value on the measurement date. The guidelines for setting this rate suggest the use of a high-quality corporate bond rate. We used bond information provided by Moody's Investor Services, Inc. and Standard & Poor's Rating Services. All bonds used to develop our hypothetical portfolio in the U.S. and U.K. were deemed high-quality, non-callable bonds (Aa or better) at December 31, 2020, by at least one of the bond rating agencies.

Our model called for projected payments until near extinction for the U.S. and the U.K. For both countries, our model matches the present value of the plan's projected benefit payments to the market value of the theoretical settlement bond portfolio. A single equivalent discount rate is determined to align the present value of the required cash flow with the value of the bond portfolio. The resulting discount rate is reflective of both the current interest rate environment and the plan's distinct liability characteristics.

The table below sets forth the estimated impact on our 2021 net periodic pension cost relative to a change in the discount rate and a change in the expected rate of return on plan assets.


In millions	Impact on Pension Cost Increase/(Decrease)
Discount rate used to value liabilities
0.25 percent increase	$	(19)
0.25 percent decrease	19
Expected rate of return on assets
1 percent increase	(53)
1 percent decrease	53

The above sensitivities reflect the impact of changing one assumption at a time. A higher discount rate decreases the plan obligations and decreases our net periodic pension cost. A lower discount rate increases the plan obligations and increases our net periodic pension cost. It should be noted that economic factors and conditions often affect multiple assumptions simultaneously and the effects of changes in key assumptions are not necessarily linear. Note 13, "PENSIONS AND OTHER POSTRETIREMENT BENEFITS," to our Consolidated Financial Statements provides a summary of our pension benefit plan activity, the funded status of our plans and the amounts recognized in our Consolidated Financial Statements.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

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

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