Item 8. Financial Statements and Supplementary Data

Index to Financial Statements

• Management's Report to Shareholders**

• Report of Independent Registered Public Accounting Firm**

• Consolidated Statements of Net Income** for the years ended December 31, 2020, 2019 and 2018

• Consolidated Statements of Comprehensive Income** for the years ended December 31, 2020, 2019 and 2018

• Consolidated Balance Sheets** at December 31, 2020 and 2019

• Consolidated Statements of Cash Flows** for the years ended December 31, 2020, 2019 and 2018

• Consolidated Statements of Changes in Equity** for the years ended December 31, 2020, 2019 and 2018

• Notes to the Consolidated Financial Statements**

NOTE						1						SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NOTE						2						REVENUE FROM CONTRACTS WITH CUSTOMERS
NOTE						3						INVESTMENTS IN EQUITY INVESTEES
NOTE						4						INCOME TAXES
NOTE						5						MARKETABLE SECURITIES
NOTE						6						INVENTORIES
NOTE						7						PROPERTY, PLANT AND EQUIPMENT
NOTE						8						LEASES
NOTE						9						GOODWILL AND OTHER INTANGIBLE ASSETS
NOTE						10						SUPPLEMENTAL BALANCE SHEET DATA
NOTE						11						DEBT
NOTE						12						PRODUCT WARRANTY LIABILITY
NOTE						13						PENSIONS AND OTHER POSTRETIREMENT BENEFITS
NOTE						14						COMMITMENTS AND CONTINGENCIES
NOTE						15						CUMMINS INC. SHAREHOLDERS' EQUITY
NOTE						16						ACCUMULATED OTHER COMPREHENSIVE LOSS
NOTE						17						NONCONTROLLING INTERESTS
NOTE						18						STOCK INCENTIVE AND STOCK OPTION PLANS
NOTE						19						EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
NOTE						20						ACQUISITIONS
NOTE						21						RESTRUCTURING ACTIONS
NOTE						22						OPERATING SEGMENTS

• Selected Quarterly Financial Data (Unaudited)

MANAGEMENT'S REPORT TO SHAREHOLDERS

Management's Report on Financial Statements and Practices

The accompanying Consolidated Financial Statements of Cummins Inc. were prepared by management, which is responsible for their integrity and objectivity. The statements were prepared in accordance with generally accepted accounting principles and include amounts that are based on management's best judgments and estimates. The other financial information included in the annual report is consistent with that in the financial statements.

Management also recognizes its responsibility for conducting our affairs according to the highest standards of personal and corporate conduct. This responsibility is characterized and reflected in key policy statements issued from time to time regarding, among other things, conduct of its business activities within the laws of the host countries in which we operate, within the Foreign Corrupt Practices Act and potentially conflicting interests of its employees. We maintain a systematic program to assess compliance with these policies.

To comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, we designed and implemented a structured and comprehensive compliance process to evaluate our internal control over financial reporting across the enterprise.

Management's Report on Internal Control Over Financial Reporting

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

Management assessed the effectiveness of our internal control over financial reporting and concluded it was effective as of December 31, 2020. In making its assessment, management utilized the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (2013).

The effectiveness of our internal control over financial reporting as of December 31, 2020, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

Officer Certifications

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

/s/ N. THOMAS LINEBARGER						/s/ MARK A. SMITH
Chairman and Chief Executive Officer						Vice President and Chief Financial Officer

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Cummins Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Cummins Inc. and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of net income, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2020, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding

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

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Goodwill Impairment Assessment - Automated Transmission Reporting Unit

As described in Notes 1 and 9 to the consolidated financial statements, the Company’s consolidated goodwill balance was $1,293 million, and the goodwill associated with the Automated Transmission reporting unit was $544 million as of December 31, 2020. Management performs an impairment test as of the end of the fiscal third quarter each year, or more frequently if events or circumstances indicate the fair value of a reporting unit is less than its carrying amount. Management performs the annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying value. Management’s valuation method is an income approach using a discounted cash flow model. The discounted cash flow model requires projections of revenue, gross margin, operating expenses, working capital investment and fixed asset additions for the Automated Transmission reporting unit over a multi-year period, and a discount rate based upon a weighted-average cost of capital.

The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment for the Automated Transmission reporting unit is a critical audit matter are (i) the significant judgment by management when developing the fair value measurement of the reporting unit; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and in evaluating audit evidence relating to management’s cash flow projections and significant assumptions related to projected revenue, projected gross margin, and the discount rate; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the Automated Transmission reporting unit. These procedures also included, among others, testing management’s process for developing the fair value estimate. This included evaluating the appropriateness of the discounted cash flow model, testing the completeness, accuracy, and relevance of underlying data used in the model, and evaluating the reasonableness of significant assumptions used by management related to projected revenue, projected gross margin, and the discount rate. Evaluating management assumptions related to projected revenue and projected gross margin involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the Automated Transmission reporting unit, and (ii) the consistency with external market and industry data. Professionals with specialized skill and knowledge were used to assist in the evaluation of the appropriateness of the Company’s discounted cash flow model and reasonableness of the discount rate assumption.

Base Product Warranty

As described in Notes 1 and 12 to the consolidated financial statements, management estimates and records a liability for base product warranty programs at the time products are sold. As of December 31, 2020, the accrued liability for base product warranty programs was $1,346 million. As disclosed by management, the estimate for one of the base product warranty programs is based on historical experience and reflects management's best estimates of expected costs at the time products are sold and subsequent adjustment to those expected costs when actual costs differ. Management’s estimate of base product warranty liability is generally affected by component failure rates, repair costs, and the point of failure within the product life cycle.

The principal considerations for our determination that performing procedures relating to the base product warranty liability is a critical audit matter are (i) the significant judgment by management when determining the estimate for the base product warranty liability; and (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures to evaluate management’s

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

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s estimate for the base product warranty liability related to the determination of component failure rates, repair costs, and the point of failure within the product life cycle. These procedures also included, among others, testing management’s process for determining the base product warranty liability. Procedures related to management’s estimate included evaluating the appropriateness of the method used by management, the completeness, accuracy, and relevance of underlying data used in the warranty estimate, and the reasonableness of significant assumptions used by management in estimating the base product warranty liability related to the component failure rates, repair costs, and the point of failure within the product life cycle. Evaluating management’s assumptions relating to the component failure rates, repair costs, and the point of failure within the product life cycle involved evaluating whether the assumptions were reasonable considering historical product experience of the Company.

/s/PricewaterhouseCoopers LLP

Indianapolis, Indiana

February 10, 2021

We have served as the Company’s auditor since 2002.

CUMMINS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF NET INCOME

						Years ended December 31,
In millions, except per share amounts						2020						2019						2018
NET SALES (a) (Note 2)						$	19,811					$	23,571					$	23,771
Cost of sales						14,917						17,591						18,034
GROSS MARGIN						4,894						5,980						5,737
OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses						2,125						2,454						2,437
Research, development and engineering expenses						906						1,001						902
Equity, royalty and interest income from investees (Note 3)						452						330						394
Restructuring actions (Note 21)						—						119						—
Other operating expense, net						(46)						(36)						(6)
OPERATING INCOME						2,269						2,700						2,786
Interest expense (Note 11)						100						109						114
Other income, net						169						243						81
INCOME BEFORE INCOME TAXES						2,338						2,834						2,753
Income tax expense (Note 4)						527						566						566
CONSOLIDATED NET INCOME						1,811						2,268						2,187
Less: Net income attributable to noncontrolling interests						22						8						46
NET INCOME ATTRIBUTABLE TO CUMMINS INC.						$	1,789					$	2,260					$	2,141
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC. (Note 19)
Basic						$	12.07					$	14.54					$	13.20
Diluted						$	12.01					$	14.48					$	13.15
(a)Includes sales to nonconsolidated equity investees of $1,283 million, $1,191 million and $1,267 million for the years ended December 31, 2020, 2019 and 2018, respectively.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

						Years ended December 31,
In millions						2020						2019						2018
CONSOLIDATED NET INCOME						$	1,811					$	2,268					$	2,187
Other comprehensive income (loss), net of tax (Note 16)
Change in pension and other postretirement defined benefit plans						(1)						(63)						18
Foreign currency translation adjustments						71						(152)						(356)
Unrealized (loss) gain on derivatives						(34)						(11)						5
Total other comprehensive income (loss), net of tax						36						(226)						(333)
COMPREHENSIVE INCOME						1,847						2,042						1,854
Less: Comprehensive income attributable to noncontrolling interests						12						3						17
COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC.						$	1,835					$	2,039					$	1,837

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

CUMMINS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

						December 31,
In millions, except par value						2020						2019
ASSETS
Current assets
Cash and cash equivalents						$	3,401					$	1,129
Marketable securities (Note 5)						461						341
Total cash, cash equivalents and marketable securities						3,862						1,470
Accounts and notes receivable, net
Trade and other						3,440						3,387
Nonconsolidated equity investees						380						283
Inventories (Note 6)						3,425						3,486
Prepaid expenses and other current assets						790						761
Total current assets						11,897						9,387
Long-term assets
Property, plant and equipment, net (Note 7)						4,255						4,245
Investments and advances related to equity method investees (Note 3)						1,441						1,237
Goodwill (Note 9)						1,293						1,286
Other intangible assets, net (Note 9)						963						1,003
Pension assets (Note 13)						1,042						1,001
Other assets (Note 10)						1,733						1,578
Total assets						$	22,624					$	19,737
LIABILITIES
Current liabilities
Accounts payable (principally trade)						$	2,820					$	2,534
Loans payable (Note 11)						169						100
Commercial paper (Note 11)						323						660
Accrued compensation, benefits and retirement costs						484						560
Current portion of accrued product warranty (Note 12)						674						803
Current portion of deferred revenue (Note 2)						691						533
Other accrued expenses (Note 10)						1,112						1,039
Current maturities of long-term debt (Note 11)						62						31
Total current liabilities						6,335						6,260
Long-term liabilities
Long-term debt (Note 11)						3,610						1,576
Pensions and other postretirement benefits (Note 13)						630						591
Accrued product warranty (Note 12)						672						645
Deferred revenue (Note 2)						840						821
Other liabilities (Note 10)						1,548						1,379
Total liabilities						$	13,635					$	11,272
Commitments and contingencies (Note 14)
EQUITY
Cummins Inc. shareholders’ equity (Note 15)
Common stock, $2.50 par value, 500 shares authorized, 222.4 and 222.4 shares issued						$	2,404					$	2,346
Retained earnings						15,419						14,416
Treasury stock, at cost, 74.8 and 71.7 shares						(7,779)						(7,225)
Common stock held by employee benefits trust, at cost, — and 0.2 shares						—						(2)
Accumulated other comprehensive loss (Note 16)						(1,982)						(2,028)
Total Cummins Inc. shareholders’ equity						8,062						7,507
Noncontrolling interests (Note 17)						927						958
Total equity						$	8,989					$	8,465
Total liabilities and equity						$	22,624					$	19,737

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

CUMMINS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

						Years ended December 31,
In millions						2020						2019						2018
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income						$	1,811					$	2,268					$	2,187
Adjustments to reconcile consolidated net income to net cash provided by operating activities
Depreciation and amortization						673						672						611
Deferred income taxes (Note 4)						7						(4)						(238)
Equity in income of investees, net of dividends						(105)						(14)						(90)
Pension and OPEB expense (Note 13)						108						75						97
Pension contributions and OPEB payments (Note 13)						(121)						(150)						(67)
Share-based compensation expense (Note 18)						31						49						53
Restructuring actions, net of cash payments (Note 21)						(110)						115						—
(Gain) loss on corporate owned life insurance						(57)						(61)						26
Foreign currency remeasurement and transaction exposure						2						(105)						(46)
Changes in current assets and liabilities, net of acquisitions
Accounts and notes receivable						(51)						195						(363)
Inventories						46						291						(695)
Other current assets						(39)						(95)						(49)
Accounts payable						288						(310)						302
Accrued expenses						121						(112)						378
Changes in other liabilities						189						240						108
Other, net						(71)						127						164
Net cash provided by operating activities						2,722						3,181						2,378
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures						(528)						(700)						(709)
Investments in internal use software						(47)						(75)						(75)
Investments in and advances to equity investees						(51)						(20)						(37)
Acquisitions of businesses, net of cash acquired (Note 20)						—						(237)						(70)
Investments in marketable securities—acquisitions						(593)						(495)						(368)
Investments in marketable securities—liquidations (Note 5)						469						389						331
Cash flows from derivatives not designated as hedges						4						(44)						(102)
Other, net						27						32						56
Net cash used in investing activities						(719)						(1,150)						(974)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings (Note 11)						2,014						11						36
Net (payments) borrowings of commercial paper (Note 11)						(337)						(120)						482
Payments on borrowings and finance lease obligations						(73)						(96)						(62)
Net borrowings under short-term credit agreements						10						53						1
Distributions to noncontrolling interests						(26)						(33)						(30)
Dividend payments on common stock (Note 15)						(782)						(761)						(718)
Repurchases of common stock (Note 15)						(641)						(1,271)						(1,140)
Proceeds from issuing common stock						88						76						13
Other, net						27						46						18
Net cash provided by (used in) financing activities						280						(2,095)						(1,400)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS						(11)						(110)						(70)
Net increase (decrease) in cash and cash equivalents						2,272						(174)						(66)
Cash and cash equivalents at beginning of year						1,129						1,303						1,369
CASH AND CASH EQUIVALENTS AT END OF PERIOD						$	3,401					$	1,129					$	1,303

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

CUMMINS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

In millions						Common Stock						Additional Paid-in Capital						Retained Earnings						Treasury Stock						Common Stock Held in Trust						Accumulated Other Comprehensive Loss						Total Cummins Inc. Shareholders’ Equity						Noncontrolling Interests						Total Equity
BALANCE AT DECEMBER 31, 2017						$	556					$	1,654					$	11,464					$	(4,905)					$	(7)					$	(1,503)					$	7,259					$	905					$	8,164
Adoption of new accounting standards																		30																								30						—						30
Net income																		2,141																								2,141						46						2,187
Other comprehensive loss, net of tax (Note 16)																																				(304)						(304)						(29)						(333)
Issuance of common stock												12																														12						—						12
Employee benefits trust activity												15																		2												17						—						17
Repurchases of common stock (Note 15)																								(1,140)																		(1,140)						—						(1,140)
Cash dividends on common stock (Note 15)																		(718)																								(718)						—						(718)
Distributions to noncontrolling interests																																										—						(30)						(30)
Share-based awards												(4)												17																		13						—						13
Other shareholder transactions												38																														38						19						57
BALANCE AT DECEMBER 31, 2018						$	556					$	1,715					$	12,917					$	(6,028)					$	(5)					$	(1,807)					$	7,348					$	911					$	8,259
Net income																		2,260																								2,260						8						2,268
Other comprehensive loss, net of tax (Note 16)																																				(221)						(221)						(5)						(226)
Issuance of common stock												3																														3						—						3
Employee benefits trust activity												34																		3												37						—						37
Repurchases of common stock (Note 15)																								(1,271)																		(1,271)						—						(1,271)
Cash dividends on common stock (Note 15)																		(761)																								(761)						—						(761)
Distributions to noncontrolling interests																																										—						(33)						(33)
Share-based awards												2												74																		76						—						76
Other shareholder transactions												36																														36						77						113
BALANCE AT DECEMBER 31, 2019						$	556					$	1,790					$	14,416					$	(7,225)					$	(2)					$	(2,028)					$	7,507					$	958					$	8,465
Adoption of new accounting standards (Note 1)																		(4)																								(4)						—						(4)
Net income																		1,789																								1,789						22						1,811
Other comprehensive income (loss), net of tax (Note 16)																																				46						46						(10)						36
Issuance of common stock												10																														10						—						10
Employee benefits trust activity												32																		2												34						—						34
Repurchases of common stock (Note 15)																								(641)																		(641)						—						(641)
Cash dividends on common stock (Note 15)																		(782)																								(782)						—						(782)
Distributions to noncontrolling interests																																										—						(26)						(26)
Share-based awards												1												87																		88						—						88
Other shareholder transactions												15																														15						(17)						(2)
BALANCE AT DECEMBER 31, 2020						$	556					$	1,848					$	15,419					$	(7,779)					$	—					$	(1,982)					$	8,062					$	927					$	8,989

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

CUMMINS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

We were founded in 1919 as Cummins Engine Company, a corporation in Columbus, Indiana and one of the first diesel engine manufacturers. In 2001, we changed our name to Cummins Inc. We are a global power leader that designs, manufactures, distributes and services diesel, natural gas, electric and hybrid powertrains and powertrain-related components including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems, automated transmissions, electric power generation systems, batteries, electrified power systems, hydrogen production and fuel cell products. We sell our products to original equipment manufacturers (OEMs), distributors, dealers and other customers worldwide. We serve our customers through a 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.

COVID-19

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.

Principles of Consolidation

Our Consolidated Financial Statements are prepared in accordance with generally accepted accounting principles in the United States of America (GAAP). All intercompany balances and transactions are eliminated in consolidation.

We include the accounts of all wholly-owned and majority-owned domestic and foreign subsidiaries where our ownership is more than 50 percent of outstanding equity interests except for majority-owned subsidiaries that are considered variable interest entities (VIEs) where we are not deemed to have a controlling financial interest. In addition, we also consolidate, regardless of our ownership percentage, VIEs or joint ventures for which we are deemed to have a controlling financial interest. We have variable interests in several businesses accounted for under the equity method of accounting, however most of these VIEs are unconsolidated.

For consolidated entities where our ownership interest is less than 100 percent, the noncontrolling ownership interests are reported in our Consolidated Balance Sheets. The noncontrolling ownership interest in our income, net of tax, is classified as "Net income attributable to noncontrolling interests" in our Consolidated Statements of Net Income.

Reclassifications

Certain amounts for 2019 and 2018 have been reclassified to conform to the current year presentation.

Investments in Equity Investees

We use the equity method to account for our investments in joint ventures, affiliated companies and alliances in which we have the ability to exercise significant influence, generally represented by equity ownership or partnership equity of at least 20 percent but not more than 50 percent. Generally, under the equity method, original investments in these entities are recorded at cost and subsequently adjusted by our share of equity in income or losses after the date of acquisition. Investment amounts in excess of our share of an investee's net assets are amortized over the life of the related asset creating the excess, except goodwill which is not amortized. Equity in income or losses of each investee is recorded according to our level of ownership; if losses accumulate, we record our share of losses until our investment has been fully depleted. If our investment has been fully depleted, we recognize additional losses only when we are the primary funding source. We eliminate (to the extent of our ownership percentage) in our Consolidated Financial Statements the profit in inventory held by our equity method investees that has not yet been sold to a third-party. Dividends received from equity method investees reduce the amount of our investment when received and do not impact our earnings. Our investments are classified as "Investments and advances related to equity method investees" in our Consolidated Balance Sheets. Our share of the results from joint ventures, affiliated companies and alliances is reported in our Consolidated Statements of Net Income as "Equity, royalty and interest income from investees," and is reported net of all applicable income taxes.

Our foreign equity investees are presented net of applicable foreign income taxes in our Consolidated Statements of Net Income. Our remaining U.S. equity investees are partnerships (non-taxable), thus there is no difference between gross or net of tax presentation as the investees are not taxed. See Note 3, "INVESTMENTS IN EQUITY INVESTEES," for additional information.

Use of Estimates in the Preparation of the Financial Statements

Preparation of financial statements requires management to make estimates and assumptions that affect reported amounts presented and disclosed in our Consolidated Financial Statements. Significant estimates and assumptions in these Consolidated Financial Statements require the exercise of judgement and are used for, but not limited to, estimates of future cash flows and other assumptions associated with goodwill and long-lived asset impairment tests, useful lives for depreciation and amortization, warranty programs, determination of discount rate and other assumptions for pensions and other postretirement benefit costs, restructuring costs, income taxes, deferred tax valuation allowances and contingencies and allowances for doubtful accounts. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be different from these estimates.

The global market downturn, closures and limitations on movement related to COVID-19 are expected to be temporary, however, the duration of the production and supply chain disruptions, and related financial impacts, cannot be estimated at this time. This uncertainty could have an impact on certain estimates used in the preparation of our 2020 financial results.

Revenue From Contracts with Customers

Revenue Recognition Sales of Products

We sell to customers either through long-term arrangements or standalone purchase orders. Our long-term arrangements generally do not include committed volumes until underlying purchase orders are issued. Our performance obligations vary by contract, but may include diesel and natural gas engines and engine-related component products, including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems, automated transmissions, electric power generation systems and construction related projects, batteries, electrified power systems, hydrogen production and fuel cell products, parts, maintenance services and extended warranty coverage.

Typically, we recognize revenue on the products we sell at a point in time, generally in accordance with shipping terms, which reflects the transfer of control to the customer. Since control of construction projects transfer to the customer as the work is performed, revenue on these projects is recognized based on the percentage of inputs incurred to date compared to the total expected cost of inputs, which is reflective of the value transferred to the customer. Revenue is recognized under long-term maintenance and other service agreements over the term of the agreement as underlying services are performed based on the percentage of the cost of services provided to date compared to the total expected cost of services to be provided under the contract. Sales of extended coverage are recognized based on the pattern of expected costs over the extended coverage period or, if such a pattern is unknown, on a straight-line basis over the coverage period as the customer is considered to benefit from our stand ready obligation over the coverage period. In all cases, we believe cost incurred is the most representative depiction of the extent of service performed to date on a particular contract.

Our arrangements may include the act of shipping products to our customers after the performance obligation related to that product has been satisfied. We have elected to account for shipping and handling as activities to fulfill the promise to transfer goods and have not allocated revenue to the shipping activity. All related shipping and handling costs are accrued at the time the related performance obligation has been satisfied.

Our sales arrangements may include the collection of sales and other similar taxes that are then remitted to the related taxing authority. We have elected to present the amounts collected for these taxes net of the related tax expense rather than presenting them as additional revenue.

We grant credit limits and terms to customers based upon traditional practices and competitive conditions. Typical terms vary by market, but payments are generally due in 90 days or less from invoicing for most of our product and service sales, while payments on construction and other similar arrangements may be due on an installment basis.

For contracts where the time between cash collection and performance is less than one year, we have elected to use the practical expedient that allows us to ignore the possible existence of a significant financing component within the contract. For contracts where this time period exceeds one year, generally the timing difference is the result of business concerns other than financing. We do have a limited amount of customer financing for which we charge or impute interest, but such amounts are immaterial to our Consolidated Statements of Net Income.

Sales Incentives

We provide various sales incentives to both our distribution network and OEM customers. These programs are designed to promote the sale of our products in the channel or encourage the usage of our products by OEM customers. When there is uncertainty

surrounding these sales incentives, we may limit the amount of revenue we recognize under a contract until the uncertainty has been resolved. Sales incentives primarily fall into three categories:

• Volume rebates;

• Market share rebates; and

• Aftermarket rebates.

For volume rebates, we provide certain customers with rebate opportunities for attaining specified volumes during a particular quarter or year. We consider the expected amount of these rebates at the time of the original sale as we determine the overall transaction price. We update our assessment of the amount of rebates that will be earned quarterly based on our best estimate of the volume levels the customer will reach during the measurement period. For market share rebates, we provide certain customers with rebate opportunities based on the percentage of their production that utilizes our product. These rebates are typically measured either quarterly or annually and we assess them at least quarterly to determine our current estimates of amounts expected to be earned. These estimates are considered in the determination of transaction price at the time of the original sale based on the current market shares, with adjustments made as the level changes. For aftermarket rebates, we provide incentives to promote sales to certain dealers and end-markets. These rebates are typically paid on a quarterly, or more frequent basis. At the time of the sales, we consider the expected amount of these rebates when determining the overall transaction price. Estimates are adjusted at the end of each quarter based on the amounts yet to be paid. These estimates are based on historical experience with the particular program.

Sales Returns

The initial determination of the transaction price may also be impacted by expected product returns. Rights of return do not exist for the majority of our sales other than for quality issues. We do offer certain return rights in our aftermarket business, where some aftermarket customers are permitted to return small amounts of parts and filters each year, and in our power generation business, which sells portable generators to retail customers. An estimate of future returns is accounted for at the time of sale as a reduction in the overall contract transaction price based on historical return rates.

Multiple Performance Obligations

Our sales arrangements may include multiple performance obligations. We identify each of the material performance obligations in these arrangements and allocate the total transaction price to each performance obligation based on its relative selling price. In most cases, the individual performance obligations are also sold separately and we use that price as the basis for allocating revenue to the included performance obligations. When an arrangement includes multiple performance obligations and invoicing to the customer does not match the allocated portion of the transaction price, unbilled revenue or deferred revenue is recorded reflecting that difference. Unbilled and deferred revenue are discussed in more detail below.

Long-term Contracts

Our long-term maintenance agreements often include a variable component of the transaction price. We are generally compensated under such arrangements on a cost per hour of usage basis. We typically can estimate the expected usage over the life of the contract, but reassess the transaction price each quarter and adjust our recognized revenue accordingly. Certain maintenance agreements apply to generators used to provide standby power, which have limited expectations of usage. These agreements may include monthly minimum payments, providing some certainty to the total transaction price. For these particular contracts that relate to standby power, we limit revenue recognized to date to an amount representing the total minimums earned to date under the contract plus any cumulative billings earned in excess of the minimums. We reassess the estimates of progress and transaction price on a quarterly basis. For prime power arrangements, revenue is not subject to such a constraint and is generally equal to the current estimate on a percentage of completion basis times the total expected revenue under the contract.

Deferred Revenue

The timing of our billing does not always match the timing of our revenue recognition. We record deferred revenue when we are entitled to bill a customer in advance of when we are permitted to recognize revenue. Deferred revenue may arise in construction contracts, where billings may occur in advance of performance or in accordance with specific milestones. Deferred revenue may also occur in long-term maintenance contracts, where billings are often based on usage of the underlying equipment, which generally follows a predictable pattern that often will result in the accumulation of collections in advance of our performance of the related maintenance services. Finally, deferred revenue exists in our extended coverage contracts, where the cash is collected prior to the commencement of the coverage period. Deferred revenue is included in our Consolidated Balance Sheets as a component of current liabilities for the amount expected to be recognized in revenue in a period of less than one year and long-term liabilities for the amount expected to be recognized as revenue in a period beyond one year. Deferred revenue is recognized as revenue when control of the underlying product, project or service passes to the customer under the related contract.

Unbilled Revenue

We recognize unbilled revenue when the revenue has been earned, but not yet billed. Unbilled revenue is included in our Consolidated Balance Sheets as a component of current assets for those expected to be collected in a period of less than one year and long-term assets for those expected to be collected in a period beyond one year. Unbilled revenue relates to our right to consideration for our completed performance under a contract. Unbilled revenue generally arises from contractual provisions that delay a portion of the billings on genset deliveries until commissioning occurs. Unbilled revenue may also occur when billings trail the provision of service in construction and long-term maintenance contracts. Our unbilled revenue is assessed for collection risks at the time the amounts are initially recorded. This estimate of expected losses reflects those losses expected to occur over the contractual life of the unbilled amount through the time of collection. We did not record any impairment losses on our unbilled revenues during the years ended December 31, 2020, 2019 and 2018.

Contract Costs

We are required to record an asset for the incremental costs of obtaining a contract with a customer and other costs to fulfill a contract not otherwise required to be immediately expensed when we expect to recover those costs. The only material incremental cost we incur is commission expense, which is generally incurred in the same period as the underlying revenue. Costs to fulfill a contract are generally limited to customer-specific engineering expenses that do not meet the definition of research and development expenses. As a practical expedient, we have elected to recognize these costs of obtaining a contract as an expense when the related contract period is less than one year. When the period exceeds one year, this asset is amortized over the life of the contract. We did not have any material capitalized balances at December 31, 2020 or 2019.

Extended Warranty

We sell extended warranty coverage on most of our engines and on certain components. We consider a warranty to be extended coverage in any of the following situations:

• When a warranty is sold separately or is optional (extended coverage contracts, for example) or

• When a warranty provides additional services.

The consideration collected is initially deferred and is recognized as revenue in proportion to the costs expected to be incurred in performing services over the contract period. We compare the remaining deferred revenue balance quarterly to the estimated amount of future claims under extended warranty programs and provide an additional accrual when the deferred revenue balance is less than expected future costs.

Foreign Currency Transactions and Translation

We translate assets and liabilities of foreign entities to U.S. dollars, where the local currency is the functional currency, at month-end exchange rates. We translate income and expenses to U.S. dollars using weighted-average exchange rates. We record adjustments resulting from translation in a separate component of accumulated other comprehensive loss (AOCL) and include the adjustments in net income only upon sale, loss of controlling financial interest or liquidation of the underlying foreign investment.

Foreign currency transaction gains and losses are included in current net income. For foreign entities where the U.S. dollar is the functional currency, including those operating in highly inflationary economies when applicable, we remeasure non-monetary balances and the related income statement amounts using historical exchange rates. We include the resulting gains and losses in income, including the effect of derivatives in our Consolidated Statements of Net Income, which combined with transaction gains and losses amounted to a net gain of $4 million and $28 million and a net loss of $34 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Fair Value Measurements

A three-level valuation hierarchy, based upon the observable and unobservable inputs, is used for fair value measurements. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions based on the best evidence available. These two types of inputs create the following fair value hierarchy:

• Level 1 - Quoted prices for identical instruments in active markets;

• Level 2 - Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose significant inputs are observable; and

• Level 3 - Instruments whose significant inputs are unobservable.

Derivative Instruments

We make use of derivative instruments in foreign exchange, commodity price and interest rate hedging programs. Derivatives currently in use are foreign currency forward contracts, commodity swap and physical forward contracts, commodity zero-cost collars and interest rate swaps. These contracts are used strictly for hedging and not for speculative purposes.

We are exposed to market risk from fluctuations in interest rates. We manage our exposure to interest rate fluctuations through the use of interest rate swaps. The objective of the swaps is to more effectively balance our borrowing costs and interest rate risk. The gain or loss on these derivative instruments as well as the offsetting gain or loss on the hedged item are recognized in current income as "Interest expense." For more detail on our interest rate swaps, see Note 11, "DEBT."

Due to our international business presence, we are exposed to foreign currency exchange risk. We transact in foreign currencies and have assets and liabilities denominated in foreign currencies. Consequently, our income experiences some volatility related to movements in foreign currency exchange rates. In order to benefit from global diversification and after considering naturally offsetting currency positions, we enter into foreign currency forward contracts to minimize our existing exposures (recognized assets and liabilities) and hedge forecasted transactions. Foreign currency forward contracts are designated and qualify as foreign currency cash flow hedges. The unrealized gain or loss on the forward contract is deferred and reported as a component of AOCL. When the hedged forecasted transaction (sale or purchase) occurs, the unrealized gain or loss is reclassified into income in the same line item associated with the hedged transaction in the same period or periods during which the hedged transaction affects income. At December 31, 2020 and 2019, realized and unrealized gains and losses related to these hedges were not material to our financial statements.

To minimize the income volatility resulting from the remeasurement of net monetary assets and payables denominated in a currency other than the functional currency, we enter into foreign currency forward contracts, which are considered economic hedges. The objective is to offset the gain or loss from remeasurement with the gain or loss from the fair market valuation of the forward contract. These derivative instruments are not designated as hedges.

We are exposed to fluctuations in commodity prices due to contractual agreements with component suppliers. In order to protect ourselves against future price volatility and, consequently, fluctuations in gross margins, we periodically enter into commodity swap, forward and zero-cost collar contracts with designated banks and other counterparties to fix the cost of certain raw material purchases with the objective of minimizing changes in inventory cost due to market price fluctuations. Commencing in 2019, these commodity swaps are designated and qualify as cash flow hedges. At December 31, 2020, realized and unrealized gains and losses related to these hedges were not material to our financial statements. The physical forward contracts qualify for the normal purchases scope exceptions and are treated as purchase commitments. Additional information on the physical forwards is included in Note 14, "COMMITMENTS AND CONTINGENCIES." The commodity zero-cost collar contracts that represent an economic hedge, but are not designated for hedge accounting, are marked to market through earnings.

We record all derivatives at fair value in our financial statements. Cash flows related to derivatives that are designated as hedges are included in the Cash Flows From Operating Activities, while cash flows related to derivatives, that are not designated as hedges, are included in Cash Flows From Investing Activities in our Consolidated Statements of Cash Flows.

Substantially all of our derivative contracts are subject to master netting arrangements, which provide us with the option to settle certain contracts on a net basis when they settle on the same day with the same currency. In addition, these arrangements provide for a net settlement of all contracts with a given counterparty in the event that the arrangement is terminated due to the occurrence of default or a termination event. When material, we adjust the value of our derivative contracts for counter-party or our credit risk. None of our derivative instruments are subject to collateral requirements.

Income Tax Accounting

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. A valuation allowance is recorded to reduce the tax assets to the net value management believes is 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."

Cash and Cash Equivalents

Cash equivalents are defined as short-term, highly liquid investments with an original maturity of 90 days or less at the time of purchase. The carrying amounts reflected in our Consolidated Balance Sheets for cash and cash equivalents approximate fair value due to the short-term maturity of these investments.

Cash payments for income taxes and interest were as follows:

						Years ended December 31,
In millions						2020						2019						2018
Cash payments for income taxes, net of refunds						$	432					$	691					$	699
Cash payments for interest, net of capitalized interest						88						109						114

Marketable Securities

Debt securities are classified as "held-to-maturity," "available-for-sale" or "trading." We determine the appropriate classification of debt securities at the time of purchase and re-evaluate such classifications at each balance sheet date. At December 31, 2020 and 2019, all of our debt securities were classified as available-for-sale. Debt and equity securities are carried at fair value with the unrealized gain or loss, net of tax, reported in other comprehensive income and other income, respectively. For debt securities, unrealized losses considered to be "other-than-temporary" are recognized currently in other income. The cost of securities sold is based on the specific identification method. The fair value of most investment securities is determined by currently available market prices. Where quoted market prices are not available, we use the market price of similar types of securities that are traded in the market to estimate fair value. See Note 5, "MARKETABLE SECURITIES," for a detailed description of our investments in marketable securities.

Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable represent amounts billed to customers and not yet collected or amounts that have been earned, but may not be billed until the passage of time, and are recorded when the right to consideration becomes unconditional. Trade accounts receivable are recorded at the invoiced amount, which approximates net realizable value, and generally do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of expected credit losses in our existing accounts receivable. We determine the allowance based on our historical collection experience and by performing an analysis of our accounts receivable in light of the current economic environment. This estimate of expected losses reflects those losses expected to occur over the contractual life of the receivable. We review our allowance for doubtful accounts on a regular basis. In addition, when necessary, we provide an allowance for the full amount of specific accounts deemed to be uncollectible. Account balances are charged off against the allowance in the period in which we determine that it is probable the receivable will not be recovered. The allowance for doubtful accounts balances were $39 million and $19 million at December 31, 2020, and 2019, respectively, and bad debt write-offs were not material.

Inventories

Our inventories are stated at the lower of cost or net realizable value. For the years ended December 31, 2020 and 2019, approximately 14 percent and 14 percent, respectively, of our consolidated inventories (primarily heavy-duty and high-horsepower engines and parts) were valued using the last-in, first-out (LIFO) cost method. The cost of other inventories is generally valued using the first-in, first-out (FIFO) cost method. Our inventories at interim and year-end reporting dates include estimates for adjustments related to annual physical inventory results and for inventory cost changes under the LIFO cost method. Due to significant movements of partially-manufactured components and parts between manufacturing plants, we do not internally measure, nor do our accounting systems provide, a meaningful segregation between raw materials and work-in-process. See Note 6, "INVENTORIES," for additional information.

Property, Plant and Equipment

We record property, plant and equipment at cost, inclusive of assets under capital leases in 2018 and finance lease assets starting in 2019, with the adoption of the new lease standard. We depreciate the cost of the majority of our property, plant and equipment using the straight-line method with depreciable lives ranging from 20 to 40 years for buildings and 3 to 15 years for machinery, equipment and fixtures. Finance lease (capital lease in 2018) asset amortization is recorded in depreciation expense. We expense normal maintenance and repair costs as incurred. Depreciation expense totaled $504 million, $494 million and $455 million for the years ended December 31, 2020, 2019 and 2018, respectively. See Note 7, "PROPERTY, PLANT AND EQUIPMENT" and Note 8, "LEASES," for additional information.

Impairment of Long-Lived Assets

We review our long-lived assets for possible impairment whenever events or circumstances indicate that the carrying value of an asset or asset group may not be recoverable. We assess the recoverability of the carrying value of the long-lived assets at the lowest level for

which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. An impairment of a long-lived asset or asset group exists when the expected future pre-tax cash flows (undiscounted and without interest charges) estimated to be generated by the asset or asset group is less than its carrying value. If these cash flows are less than the carrying value of such asset or asset group, an impairment loss is measured based on the difference between the estimated fair value and carrying value of the asset or asset group. Assumptions and estimates used to estimate cash flows in the evaluation of impairment and the fair values used to determine the impairment are subject to a degree of judgment and complexity. Any changes to the assumptions and estimates resulting from changes in actual results or market conditions from those anticipated may affect the carrying value of long-lived assets and could result in a future impairment charge.

Lease Policies

We adopted the new standard on January 1, 2019, using a modified retrospective approach and as a result did not adjust prior periods. Adoption of the standard resulted in the recording of $450 million of operating lease ROU assets and operating lease liabilities, but did not have a material impact on our net income or cash flows.

We determine if an arrangement contains a lease in whole or in part at the inception of the contract. Right-of-use (ROU) assets represent our right to use an underlying asset for the lease term while lease liabilities represent our obligation to make lease payments arising from the lease. All leases greater than 12 months result in the recognition of a ROU asset and a liability at the lease commencement date based on the present value of the lease payments over the lease term. As most of our leases do not provide the information required to determine the implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. This rate is determined considering factors such as the lease term, our credit standing and the economic environment of the location of the lease. We use the implicit rate when readily determinable.

Our lease terms include all non-cancelable periods and may include options to extend (or to not terminate) the lease when it is reasonably certain that we will exercise that option. Leases that have a term of 12 months or less at the commencement date are expensed on a straight-line basis over the lease term and do not result in the recognition of an asset or a liability.

Lease expense for operating leases is recognized on a straight-line basis over the lease term. Lease expense for finance leases are generally front-loaded as the finance lease ROU asset is depreciated on a straight-line basis, but interest expense on the liability is recognized utilizing the interest method that results in more expense during the early years of the lease. We have lease agreements with lease and non-lease components, primarily related to real estate, vehicle and information technology (IT) assets. For vehicle and real estate leases, we account for the lease and non-lease components as a single lease component. For IT leases, we allocate the payment between the lease and non-lease components based on the relative value of each component. See Note 8, "LEASES," for additional information.

Goodwill

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 quantitative impairment test is only required if an entity determines through this qualitative analysis that it is more likely than not that the fair value of the reporting unit is less than its carrying value. In addition, the carrying value of goodwill must be tested for impairment on an interim basis in certain circumstances where impairment may be indicated. We perform our annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value.

When we are required or opt to perform the quantitative impairment test, the fair value of each reporting unit is estimated with either the market approach or the income approach using a discounted cash flow model. 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 reporting units are generally defined as one level below an operating segment. However, there are three situations where we have aggregated two or more reporting units which share similar economic characteristics and thus are aggregated into a single reporting unit for testing purposes. These three situations are described further below:

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

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

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

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.

At December 31, 2020, our recorded goodwill was $1,293 million, approximately 42 percent of which resided in the automated transmissions reporting unit, 30 percent in the aggregated emission solutions and filtration reporting unit, 20 percent in the new power reporting unit and 6 percent in the distribution reporting unit. Changes in our projections or estimates, a deterioration of our operating results and the related cash flow effect or a significant increase in the discount rate could decrease the estimated fair value of our reporting units and result in a future impairment of goodwill. See Note 9, "GOODWILL AND OTHER INTANGIBLE ASSETS," for additional information.

Other Intangible Assets

We capitalize other intangible assets, such as trademarks, patents and customer relationships, that have been acquired either individually or with a group of other assets. These intangible assets are amortized on a straight-line basis over their estimated useful lives generally ranging from 3 to 25 years. Intangible assets are reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable over the remaining lives of the assets. See Note 9, "GOODWILL AND OTHER INTANGIBLE ASSETS," for additional information.

Software

We capitalize software that is developed or obtained for internal use. Software costs are amortized on a straight-line basis over their estimated useful lives generally ranging from 2 to 12 years. Software assets are reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable over the remaining lives of the assets. Upgrades and enhancements are capitalized if they result in significant modifications that enable the software to perform tasks it was previously incapable of performing. Software maintenance, training, data conversion and business process reengineering costs are expensed in the period in which they are incurred. See Note 9, "GOODWILL AND OTHER INTANGIBLE ASSETS," for additional information.

Warranty

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. Factors considered in developing these estimates included component failure rates, repair costs and the point of failure within the product life cycle. As a result of the uncertainty surrounding the nature and frequency of product campaigns, the liability for such campaigns is recorded when we commit to a recall action or when a recall becomes probable and estimable, which generally occurs when it is announced. The liability for these campaigns is reflected in the provision for warranties issued. We review and assess the liability for these programs on a quarterly basis. We also assess our ability to recover certain costs from our suppliers and record a receivable when we believe a recovery is probable. In addition to costs incurred on warranty and product campaigns, from time to time we also incur costs related to customer satisfaction programs for items not covered by warranty. We accrue for these costs when agreement is reached with a specific customer. These costs are not included in the provision for warranties, but are included in cost of sales. In addition, we sell extended warranty coverage on most of our engines. See Extended Warranty policy discussion above and Note 12, "PRODUCT WARRANTY LIABILITY," for additional information.

Research and Development

Our research and development programs are focused on product improvements, product extensions, innovations and cost reductions for our customers. Research and development expenditures include salaries, contractor fees, building costs, utilities, testing, technical IT, administrative expenses and allocation of corporate costs and are expensed, net of contract reimbursements, when incurred. From

time to time, we enter into agreements with customers and government agencies to fund a portion of the research and development costs of a particular project. When not associated with a sales contract, we generally account for these reimbursements as an offset to the related research and development expenditure. Research and development expenses, net of contract reimbursements, were $903 million, $998 million and $894 million for the years ended December 31, 2020, 2019 and 2018, respectively. Contract reimbursements were $86 million, $90 million and $120 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Related Party Transactions

In accordance with the provisions of various joint venture agreements, we may purchase products and components from our joint ventures, sell products and components to our joint ventures and our joint ventures may sell products and components to unrelated parties. Joint venture transfer prices may differ from normal selling prices. Certain joint venture agreements transfer product at cost, some transfer product on a cost-plus basis, and others transfer product at market value. Our related party sales are presented on the face of our Consolidated Statements of Net Income. Our related party purchases were not material to our financial position or results of operations.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

In August 2018, the Financial Accounting Standards Board (FASB) issued a new standard that aligns the accounting for implementation costs incurred in a cloud computing arrangement accounted for as a service contract with the model currently used for internal use software costs. Under the new standard, costs that meet certain criteria will be required to be capitalized on the balance sheet and subsequently amortized over the term of the hosting arrangement. We adopted the standard on January 1, 2020, on a prospective basis as allowed by the standard. The adoption did not have a material impact on our Consolidated Financial Statements.

On January 1, 2020, we adopted the new FASB standard related to accounting for credit losses on financial instruments. This standard introduced new guidance for accounting for credit losses on instruments including trade receivables and held-to-maturity debt securities. The standard required entities to record a cumulative effect adjustment to the statement of financial position. We recorded a net decrease to opening retained earnings of $4 million, net of tax, as of January 1, 2020, due to the cumulative impact of adopting the new standard. The impact to any individual financial statement line item as a result of applying the new standard, as compared to the old standard, was not material for the year ended December 31, 2020.

In March 2020, the FASB amended its standard to provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendment allows entities to elect not to apply certain modification accounting requirements to contracts affected by reference rate reform if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met. These expedients also apply to interest rate locks. The guidance was effective upon issuance and expires after December 31, 2022. The amendment did not have an effect on our Consolidated Financial Statements at December 31, 2020. We are still evaluating which contracts will be impacted by reference rate reform, but the expedients will allow us to make permitted changes prior to the expiration of the amendments without resulting in a material impact to our Consolidated Financial Statements.

NOTE 2. REVENUE FROM CONTRACTS WITH CUSTOMERS

Long-term Contracts

Most of our contracts are for a period of less than one year. We have certain long-term maintenance agreements, construction contracts and extended warranty coverage arrangements that span a period in excess of one year. The aggregate amount of the transaction price for long-term maintenance agreements and construction contracts allocated to performance obligations that had not been satisfied as of December 31, 2020, was $879 million. We expect to recognize the related revenue of $160 million over the next 12 months and $719 million over periods up to 10 years. See Note 12,"PRODUCT WARRANTY LIABILITY," for additional disclosures on extended warranty coverage arrangements. Our other contracts generally are for a duration of less than one year, include payment terms that correspond to the timing of costs incurred when providing goods and services to our customers or represent sales-based royalties.

Deferred and Unbilled Revenue

The following is a summary of our unbilled and deferred revenue and related activity:

						Years ended December 31,
In millions						2020						2019
Unbilled revenue						$	114					$	68
Deferred revenue, primarily extended warranty						1,531						1,354

We recognized revenue of $372 million and $365 million in 2020 and 2019, respectively, that was included in the deferred revenue balance at the beginning of each year. We did not record any impairment losses on our unbilled revenues during 2020 or 2019.

Disaggregation of Revenue

Consolidated Revenue

The table below presents our consolidated sales by geographic area. Net sales attributed to geographic areas were based on the location of the customer.

						Years ended December 31,
In millions						2020						2019						2018
United States						$	10,605					$	13,519					$	13,218
China						2,832						2,331						2,324
India						680						848						965
Other international						5,694						6,873						7,264
Total net sales						$	19,811					$	23,571					$	23,771

Segment Revenue

Engine segment external sales by market were as follows:

						Years ended December 31,
In millions						2020						2019						2018
Heavy-duty truck						$	1,800					$	2,626					$	2,885
Medium-duty truck and bus						1,629						2,244						2,536
Light-duty automotive						1,441						1,656						1,501
Total on-highway						4,870						6,526						6,922
Off-highway						1,055						1,044						1,080
Total sales						$	5,925					$	7,570					$	8,002

Distribution segment external sales by region were as follows:

						Years ended December 31,
In millions						2020						2019						2018
North America						$	4,688					$	5,513					$	5,331
Asia Pacific						799						875						851
Europe						597						528						536
China						340						356						317
Africa and Middle East						198						235						242
Russia						191						157						169
India						150						200						192
Latin America						147						176						169
Total sales						$	7,110					$	8,040					$	7,807

Distribution segment external sales by product line were as follows:

						Years ended December 31,
In millions						2020						2019						2018
Parts						$	2,921					$	3,278					$	3,222
Power generation						1,686						1,777						1,482
Service						1,258						1,474						1,471
Engines						1,245						1,511						1,632
Total sales						$	7,110					$	8,040					$	7,807

Components segment external sales by business were as follows:

						Years ended December 31,
In millions						2020						2019						2018
Emission solutions						$	2,352					$	2,763					$	2,780
Filtration						1,005						1,024						1,010
Turbo technologies						673						696						761
Electronics and fuel systems						317						236						237
Automated transmissions						303						534						543
Total sales						$	4,650					$	5,253					$	5,331

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

						Years ended December 31,
In millions						2020						2019						2018
Power generation						$	1,155					$	1,414					$	1,467
Industrial						638						908						801
Generator technologies						262						348						357
Total sales						$	2,055					$	2,670					$	2,625

NOTE 3. INVESTMENTS IN EQUITY INVESTEES

Investments and advances related to equity method investees and our ownership percentages were as follows:

												December 31,
Dollars in millions						Ownership %						2020						2019
Komatsu alliances						20-50%						$	309					$	267
Beijing Foton Cummins Engine Co., Ltd.						50%						255						193
Dongfeng Cummins Engine Company, Ltd.						50%						134						149
Chongqing Cummins Engine Company, Ltd.						50%						125						110
Cummins-Scania XPI Manufacturing, LLC						50%						99						96
Tata Cummins, Ltd.						50%						78						60
Other						Various						441						362
Investments and advances related to equity method investees												$	1,441					$	1,237

We have approximately $882 million in our investment account at December 31, 2020, that represents cumulative undistributed income in our equity investees. Dividends received from our unconsolidated equity investees were $271 million, $260 million and $242 million in 2020, 2019 and 2018, respectively.

Equity, royalty and interest income from investees, net of applicable taxes, was as follows:

						Years ended December 31,
In millions						2020						2019						2018
Manufacturing entities
Beijing Foton Cummins Engine Co., Ltd.						$	113					$	60					$	72
Dongfeng Cummins Engine Company, Ltd.						63						52						58
Chongqing Cummins Engine Company, Ltd.						35						41						51
All other manufacturers						134			(1)(2)			88						129
Distribution entities
Komatsu Cummins Chile, Ltda.						31						28						26
All other distributors						2						2						—
Cummins share of net income						378						271						336
Royalty and interest income						74						59						58
Equity, royalty and interest income from investees						$	452					$	330					$	394
(1) Includes $37 million in favorable adjustments related to tax changes within India's 2020-2021 Union Budget of India (India Tax Law Change) passed in March 2020. See NOTE 4, "INCOME TAXES" for additional information on India Tax Law Change.
(2) Includes impairment charges of $13 million and loss on sale of business of $8 million for a joint venture in the Power Systems segment.

Manufacturing Entities

Our manufacturing joint ventures have generally been formed with customers and are primarily intended to allow us to increase our market penetration in geographic regions, reduce capital spending, streamline our supply chain management and develop technologies. Our largest manufacturing joint ventures are based in China and are included in the list below. Our engine manufacturing joint ventures are supplied by our Components segment in the same manner as it supplies our wholly-owned Engine segment and Power Systems segment manufacturing facilities. Our Components segment joint ventures and wholly-owned entities provide electronics, fuel systems, filtration, aftertreatment systems, turbocharger products and automated transmissions that are used with our engines as well as some competitors' products. The results and investments in our joint ventures in which we have 50 percent or less ownership interest (except for Eaton Cummins Automated Transmission Technologies joint venture which is consolidated due to our majority voting interest) are included in “Equity, royalty and interest income from investees” and “Investments and advances related to equity method investees” in our Consolidated Statements of Net Income and Consolidated Balance Sheets, respectively.

• Beijing Foton Cummins Engine Co., Ltd. -** Beijing Foton Cummins Engine Co., Ltd. is a joint venture in China with Beiqi Foton Motor Co., Ltd., a commercial vehicle manufacturer, which has two distinct lines of business - a light-duty business and a heavy-duty business. The light-duty business produces our families of ISF 2.8 liter to 4.5 liter high performance light-duty diesel engines in Beijing. These engines are used in light-duty and medium-duty commercial trucks, pick-up trucks, buses, multipurpose and sport utility vehicles with main markets in China, Brazil and Russia. Certain types of small construction equipment and industrial applications are also served by these engine families. The heavy-duty business produces the X11, X12 and X13, ranging from 10.5 liter to 12.9 liter, high performance heavy-duty diesel engines in Beijing. Certain types of construction equipment and industrial applications are also served by these engine families.

• Dongfeng Cummins Engine Company, Ltd. -** Dongfeng Cummins Engine Company, Ltd. (DCEC) is a joint venture in China with Dongfeng Automotive Co. Ltd., a subsidiary of Dongfeng Motor Corporation and one of the largest medium-duty and heavy-duty truck manufacturers in China. DCEC produces 3.9 liter to 14 liter diesel engines with a power range from 80 to 680 horsepower and natural gas engines. On-highway engines are used in multiple applications in light-duty and medium-duty trucks, special purpose vehicles, buses and heavy-duty trucks with a main market in China. Off-highway engines are used in a variety of construction, power generation, marine and agriculture markets in China.

• Chongqing Cummins Engine Company, Ltd. - Chongqing Cummins Engine Company, Ltd. is a joint venture in China with Chongqing Machinery and Electric Co. Ltd. This joint venture manufactures several models of our heavy-duty and high-horsepower diesel engines primarily serving the industrial and stationary power markets in China.

Distribution Entities

We have an extensive worldwide distributor and dealer network through which we sell and distribute our products and services. Generally, our distributors are divided by geographic region with some of our distributors being wholly-owned by Cummins, some partially-owned and some independently owned. We consolidate all wholly-owned distributors and partially-owned distributors where we are the primary beneficiary and account for other partially-owned distributors using the equity method of accounting.

Komatsu Cummins Chile, Ltda. - Komatsu Cummins Chile, Ltda. is a joint venture with Komatsu America Corporation. The joint venture is a distributor that offers the full range of our products and services to customers and end-users in Chile and Peru.

In certain cases where we own a partial interest in a distributor, we may be obligated to purchase the other equity holders' interests if certain events occur (such as the death or resignation of the distributor principal or a change in control of Cummins Inc.). The purchase consideration of the equity interests may be determined based on the fair value of the distributor's assets. Repurchase obligations and practices vary by geographic region.

All distributors that are partially-owned are considered to be related parties in our Consolidated Financial Statements.

Equity Investee Financial Summary

Summary financial information for our equity investees was as follows:

						For the years ended and at December 31,
In millions						2020						2019						2018
Net sales						$	7,794					$	7,068					$	7,352
Gross margin						1,418						1,274						1,373
Net income						696						566						647
Cummins share of net income						$	378					$	271					$	336
Royalty and interest income						74						59						58
Total equity, royalty and interest from investees						$	452					$	330					$	394
Current assets						$	4,264					$	3,282
Non-current assets						1,673						1,622
Current liabilities						(3,347)						(2,654)
Non-current liabilities						(251)						(326)
Net assets						$	2,339					$	1,924
Cummins share of net assets						$	1,361					$	1,159

NOTE 4. INCOME TAXES

The following table summarizes income before income taxes:

						Years ended December 31,
In millions						2020						2019						2018
U.S. income						$	1,134					$	1,677					$	1,239
Foreign income						1,204						1,157						1,514
Income before income taxes						$	2,338					$	2,834					$	2,753

Income tax expense (benefit) consists of the following:

						Years ended December 31,
In millions						2020						2019						2018
Current
U.S. federal and state						$	162					$	288					$	303
Foreign						358						282						348
Impact of tax law changes						—						—						153
Total current income tax expense						520						570						804
Deferred
U.S. federal and state						2						(32)						(71)
Foreign						22						28						(26)
Impact of tax law changes						(17)						—						(141)
Total deferred income tax expense (benefit)						7						(4)						(238)
Income tax expense						$	527					$	566					$	566

A reconciliation of the statutory U.S. federal income tax rate to the effective tax rate was as follows:

						Years ended December 31,
						2020						2019						2018
Statutory U.S. federal income tax rate						21.0		%				21.0		%				21.0		%
State income tax, net of federal effect						1.0						1.1						0.9
Differences in rates and taxability of foreign subsidiaries and joint ventures						3.6						1.5						(0.2)
Research tax credits						(1.3)						(1.5)						(1.2)
Foreign derived intangible income						(1.2)						(1.3)						(1.3)
Impact of tax law changes						(0.7)						—						0.5
Other, net						0.1						(0.8)						0.9
Effective tax rate						22.5		%				20.0		%				20.6		%

Our effective tax rate for 2020 was 22.5 percent compared to 20.0 percent for 2019 and 20.6 percent for 2018. 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.

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 year ended December 31, 2018, contained $14 million of favorable net discrete tax items, primarily due to $26 million of other favorable discrete tax items, partially offset by $12 million of unfavorable discrete tax items related to final adjustments for 2017 tax legislation.

The India Tax Law Change resulted in the following adjustments to the Consolidated Statements of Net Income for the year ended December 31, 2020:

In millions																		Favorable (Unfavorable)
Equity, royalty and interest income from investees																		$	37
Income tax expense (1)																		17
Less: Net income attributable to noncontrolling interests																		(19)
Net income statement impact																		$	35
(1) The adjustment to "Income tax expense" includes $15 million of favorable discrete items.

At December 31, 2020, $3.7 billion of non-U.S. earnings are considered indefinitely reinvested in operations outside the U.S. for which deferred taxes have not been provided. Determination of the related deferred tax liability, if any, is not practicable because of the complexities associated with the hypothetical calculation.

Carryforward tax benefits and the tax effect of temporary differences between financial and tax reporting that give rise to net deferred tax (liabilities) assets were as follows:

						December 31,
In millions						2020						2019
Deferred tax assets
U.S. and state carryforward benefits						$	223					$	207
Foreign carryforward benefits						159						157
Employee benefit plans						273						279
Warranty expenses						445						427
Lease liabilities						107						122
Accrued expenses						93						76
Other						52						44
Gross deferred tax assets						1,352						1,312
Valuation allowance						(346)						(317)
Total deferred tax assets						1,006						995
Deferred tax liabilities
Property, plant and equipment						(258)						(260)
Unremitted income of foreign subsidiaries and joint ventures						(185)						(181)
Employee benefit plans						(229)						(222)
Lease assets						(103)						(120)
Other						(77)						(77)
Total deferred tax liabilities						(852)						(860)
Net deferred tax assets						$	154					$	135

Our 2020 U.S. carryforward benefits include $223 million of state credit and net operating loss carryforward benefits that begin to expire in 2021. Our foreign carryforward benefits include $159 million of net operating loss carryforwards that begin to expire in 2021. A valuation allowance is recorded to reduce the gross deferred tax assets to an amount we believe is more likely than not to be realized. The valuation allowance is $346 million and increased in 2020 by a net $29 million. The valuation allowance is primarily attributable to the uncertainty regarding the realization of a portion of the U.S. state and foreign net operating loss and tax credit carryforward benefits.

Our Consolidated Balance Sheets contain the following tax related items:

						December 31,
In millions						2020						2019
Prepaid expenses and other current assets
Refundable income taxes						$	172					$	191
Other assets
Deferred income tax assets						479						441
Long-term refundable income taxes						23						23
Other accrued expenses
Income tax payable						82						52
Other liabilities
One-time transition tax						289						293
Deferred income tax liabilities						325						306

A reconciliation of unrecognized tax benefits for the years ended December 31, 2020, 2019 and 2018 was as follows:

						December 31,
In millions						2020						2019						2018
Balance at beginning of year						$	77					$	71					$	41
Additions to current year tax positions						9						23						10
Additions to prior years' tax positions						49						5						27
Reductions to prior years' tax positions						(13)						(11)						(2)
Reductions for tax positions due to settlements with taxing authorities						—						(11)						(5)
Balance at end of year						$	122					$	77					$	71

Included in the December 31, 2020, 2019 and 2018, balances are $114 million, $69 million and $62 million, respectively, related to tax positions that, if recognized, would favorably impact the effective tax rate in future periods. We have also accrued interest expense related to the unrecognized tax benefits of $17 million, $5 million and $4 million as of December 31, 2020, 2019 and 2018, respectively. We recognize potential accrued interest and penalties related to unrecognized tax benefits in income tax expense.

Audit outcomes and the timing of audit settlements are subject to significant uncertainty. Although we believe that adequate provision has been made for such issues, there is the possibility that the ultimate resolution of such issues could have an adverse effect on our earnings. Conversely, if these issues are resolved favorably in the future, the related provision would be reduced, thus having a positive impact on earnings.

As a result of our global operations, we file income tax returns in various jurisdictions including U.S. federal, state and foreign jurisdictions. We are routinely subject to examination by taxing authorities throughout the world, including Australia, Belgium, Brazil, Canada, China, France, India, Mexico, the U.K. and the U.S. With few exceptions, our U.S. federal, major state and foreign jurisdictions are no longer subject to income tax assessments for years before 2016.

NOTE 5. MARKETABLE SECURITIES

A summary of marketable securities, all of which are classified as current, was as follows:

						December 31,
						2020																		2019
In millions						Cost						Gross unrealized gains/(losses) (1)						Estimated fair value						Cost						Gross unrealized gains/(losses) (1)						Estimated fair value
Equity securities
Debt mutual funds						$	267					$	5					$	272					$	180					$	3					$	183
Certificates of deposit						164						—						164						133						—						133
Equity mutual funds						19						5						24						19						4						23
Bank debentures						—						—						—						1						—						1
Debt securities						1						—						1						1						—						1
Total marketable securities						$	451					$	10					$	461					$	334					$	7					$	341
(1) Unrealized gains and losses for debt securities are recorded in other comprehensive income while unrealized gains and losses for equity securities are recorded in "Other income, net" in our Consolidated Statements of Net Income.

All debt securities are classified as available-for-sale. All marketable securities presented use a Level 2 fair value measure. The fair value of Level 2 securities is estimated using actively quoted prices for similar instruments from brokers and observable inputs where available, including market transactions and third-party pricing services, or net asset values provided to investors. We do not currently have any Level 3 securities, and there were no transfers between Level 2 or 3 during 2020 or 2019.

A description of the valuation techniques and inputs used for our Level 2 fair value measures is as follows:

*•*Debt mutual funds— The fair value measures for the vast majority of these investments are the daily net asset values published on a regulated governmental website. Daily quoted prices are available from the issuing brokerage and are used on a test basis to corroborate this Level 2 input.

• Certificates of deposit and bank debentures— These investments provide us with a contractual rate of return and generally range in maturity from three months to five years. The counterparties to these investments are reputable financial institutions with investment grade credit ratings. Since these instruments are not tradable and must be settled directly by us with the respective financial institution, our fair value measure is the financial institution's month-end statement.

*•*Equity mutual funds— The fair value measures for these investments are the net asset values published by the issuing brokerage. Daily quoted prices are available from reputable third-party pricing services and are used on a test basis to corroborate this Level 2 input measure.

*•*Debt securities— The fair value measures for these securities are broker quotes received from reputable firms. These securities are infrequently traded on a national exchange and these values are used on a test basis to corroborate our Level 2 input measure.

The proceeds from sales and maturities of marketable securities were as follows:

						Years ended December 31,
In millions						2020						2019						2018
Proceeds from sales of marketable securities						$	343					$	258					$	253
Proceeds from maturities of marketable securities						126						131						78
Investments in marketable securities - liquidations						$	469					$	389					$	331

NOTE 6. INVENTORIES

Inventories are stated at the lower of cost or net realizable value. Inventories included the following:

						December 31,
In millions						2020						2019
Finished products						$	2,216					$	2,214
Work-in-process and raw materials						1,346						1,395
Inventories at FIFO cost						3,562						3,609
Excess of FIFO over LIFO						(137)						(123)
Total inventories						$	3,425					$	3,486

NOTE 7. PROPERTY, PLANT AND EQUIPMENT

Details of our property, plant and equipment balance were as follows:

						December 31,
In millions						2020						2019
Land and buildings						$	2,613					$	2,487
Machinery, equipment and fixtures						5,851						5,618
Construction in process						547						594
Property, plant and equipment, gross						9,011						8,699
Less: Accumulated depreciation						(4,756)						(4,454)
Property, plant and equipment, net						$	4,255					$	4,245

NOTE 8. LEASES

Our lease portfolio consists primarily of real estate and equipment leases. Our real estate leases primarily consist of land, office, distribution, warehousing and manufacturing facilities. These leases typically range in term from 2 to 50 years and may contain renewal options for periods up to 10 years at our discretion. Our equipment lease portfolio consists primarily of vehicles (including service vehicles), forktrucks and IT equipment. These leases typically range in term from two years to three years and may contain renewal options. Our leases generally do not contain variable lease payments other than (1) certain foreign real estate leases which have payments indexed to inflation and (2) certain real estate executory costs (such as taxes, insurance and maintenance), which are

paid based on actual expenses incurred by the lessor during the year. Our leases generally do not include residual value guarantees other than our service vehicle fleet, which has a residual guarantee based on a percentage of the original cost declining over the lease term.

The components of our lease cost were as follows:

						Years ended December 31,
In millions						2020						2019
Operating lease cost						$	172					$	180
Finance lease cost
Amortization of right-of-use asset						18						18
Interest expense						4						9
Short-term lease cost						19						33
Variable lease cost						12						7
Total lease cost						$	225					$	247

The total rental expense for the year ended December 31, 2018, prior to adoption of the new lease standard, was $217 million.

Supplemental balance sheet information related to leases:

						December 31,
In millions						2020						2019						Balance Sheet Location
Assets
Operating lease assets						$	438					$	496					Other assets
Finance lease assets(1)						99						90						Property, plant and equipment, net
Total lease assets						$	537					$	586
Liabilities
Current
Operating						$	128					$	131					Other accrued expenses
Finance						12						12						Current maturities of long-term debt
Long-term
Operating						325						370						Other liabilities
Finance						79						78						Long-term debt
Total lease liabilities						$	544					$	591
(1) Finance lease assets were recorded net of accumulated amortization of $58 million and $62 million at December 31, 2020 and 2019.

Supplemental cash flow and other information related to leases:

						Years ended December 31,
In millions						2020						2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases						$	149					$	163
Operating cash flows from finance leases						14						47
Financing cash flows from finance leases						4						9
Right-of-use assets obtained in exchange for lease obligations
Operating leases						$	97					$	214
Finance leases						19						5

Additional information related to leases:

						December 31,
						2020						2019
Weighted-average remaining lease term (in years)
Operating leases						4.9						5.3
Finance leases						10.8						12.1
Weighted-average discount rate
Operating leases						3.4		%				3.3		%
Finance leases						4.0		%				4.4		%

Following is a summary of the future minimum lease payments due to finance and operating leases with terms of more than one year at December 31, 2020, together with the net present value of the minimum payments:

In millions						Finance Leases						Operating Leases
2021						$	15					$	143
2022						14						109
2023						13						74
2024						9						56
2025						8						43
After 2025						55						67
Total minimum lease payments						114						492
Interest						(23)						(39)
Present value of net minimum lease payments						$	91					$	453

NOTE 9. GOODWILL AND OTHER INTANGIBLE ASSETS

The following table summarizes the changes in the carrying amount of goodwill for the years ended December 31, 2020 and 2019:

In millions						Components						New Power						Distribution						Power Systems						Engine																		Total
Balance at December 31, 2018						$	935					$	96					$	79					$	10					$	6																	$	1,126
Acquisitions						—						161			(1)			—						—						—																		161
Translation and other						(1)						—						—						—						—																		(1)
Balance at December 31, 2019						934						257						79						10						6																		1,286
Translation and other						7						—						—						—						—																		7
Balance at December 31, 2020						$	941					$	257					$	79					$	10					$	6																	$	1,293
(1)See Note 20, "ACQUISITIONS," for additional information on acquisition goodwill.

Intangible assets that have finite useful lives are amortized over their estimated useful lives. The following table summarizes our other intangible assets with finite useful lives that are subject to amortization:

						December 31,
In millions						2020						2019
Software						$	661					$	708
Less: Accumulated amortization						(372)						(425)
Software, net						289						283
Trademarks, patents, customer relationships and other						959						956
Less: Accumulated amortization						(285)						(236)
Trademarks, patents, customer relationships and other, net						674						720
Total other intangible assets, net						$	963					$	1,003

Amortization expense for software and other intangibles totaled $165 million, $175 million and $153 million for the years ended December 31, 2020, 2019 and 2018, respectively. The projected amortization expense of our intangible assets, assuming no further acquisitions or dispositions, is as follows:

In millions						2021						2022						2023						2024						2025
Projected amortization expense						$	141					$	126					$	111					$	93					$	65

NOTE 10. SUPPLEMENTAL BALANCE SHEET DATA

Other assets included the following:

									December 31,
			In millions						2020						2019
			Corporate owned life insurance						$	508					$	464
			Deferred income taxes						479						441
			Operating lease assets						438						496
			Other						308						177
			Other assets						$	1,733					$	1,578

Other accrued expenses included the following:

						December 31,
In millions						2020						2019
Other taxes payable						$	256					$	228
Marketing accruals						242						176
Current portion of operating lease liabilities						128						131
Income taxes payable						82						52
Other						404						452
Other accrued expenses						$	1,112					$	1,039

Other liabilities included the following:

						December 31,
In millions						2020						2019
Operating lease liabilities						$	325					$	370
Deferred income taxes						325						306
One-time transition tax						289						293
Accrued compensation						203						206
Mark-to-market valuation on interest rate locks						41						12
Other long-term liabilities						365						192
Other liabilities						$	1,548					$	1,379

NOTE 11. DEBT

Loans Payable and Commercial Paper

Loans payable at December 31, 2020 and 2019 were $169 million and $100 million, respectively, and consisted primarily of notes payable to financial institutions. The weighted-average interest rate for notes payable, bank overdrafts and current maturities of long-term debt at December 31 was as follows:

						2020						2019						2018
Weighted-average interest rate						2.53		%				3.20		%				4.66		%

We can issue up to $3.5 billion of unsecured, short-term promissory notes (commercial paper) pursuant to the Board of Directors (the Board) authorized commercial paper programs. The programs facilitate the private placement of unsecured short-term debt through third-party brokers. We intend to use the net proceeds from the commercial paper borrowings for general corporate purposes. We had $323 million and $660 million in outstanding borrowings under our commercial paper programs at December 31, 2020 and 2019, respectively. The weighted-average interest rate for commercial paper at December 31 was as follows:

						2020						2019						2018
Weighted-average interest rate						(0.01)		%	(1)			1.82		%				2.59		%
(1) The weighted-average interest rate, inclusive of all brokerage fees, was negative 0.01 percent at December 31, 2020. This includes $123 million of borrowings under the EUR program that were at a negative weighted-average interest rate of 0.34 percent and $200 million of borrowings under the U.S. program at a weighted-average interest rate of 0.19 percent.

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.

Revolving Credit Facilities

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.

On August 22, 2018, we entered into a new 5-year revolving credit agreement with a syndicate of lenders and we amended the agreement on August 21, 2019. The amended credit agreement provides us with a $2 billion senior unsecured revolving credit facility until August 22, 2023. Amounts payable under our revolving credit facility will rank pro rata with all of our unsecured, unsubordinated indebtedness. Advances under the facility bear interest at (i) an alternate base rate or (ii) a rate equal to the adjusted LIBOR plus an applicable margin based on the credit ratings of our outstanding senior unsecured long-term debt. Based on our current

long-term debt ratings, the applicable margin on adjusted LIBOR rate loans was 0.75 percent per annum as of December 31, 2020. Advances under the facility may be prepaid without premium or penalty, subject to customary breakage costs.

Both credit agreements include various covenants, including, among others, maintaining a net debt to total capital leverage ratio of no more than 0.65 to 1.0. At December 31, 2020, we were in compliance with the covenants. 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. There were no outstanding borrowings under these facilities at December 31, 2020.

At December 31, 2020, our $323 million of commercial paper outstanding effectively reduced the $3.5 billion available capacity under our revolving credit facilities to $3.2 billion.

At December 31, 2020, we also had $256 million available for borrowings under our international and other domestic credit facilities.

Long-term Debt

A summary of long-term debt was as follows:

												December 31,
In millions						Interest Rate						2020						2019
Long-term debt
Senior notes, due 2023 (1)						3.65%						$	500					$	500
Senior notes, due 2025						0.75%						500						—
Debentures, due 2027						6.75%						58						58
Debentures, due 2028						7.125%						250						250
Senior notes, due 2030						1.50%						850						—
Senior notes, due 2043						4.875%						500						500
Senior notes, due 2050						2.60%						650						—
Debentures, due 2098 (2)						5.65%						165						165
Other debt												132						59
Unamortized discount and deferred issuance costs												(72)						(50)
Fair value adjustments due to hedge on indebtedness												48						35
Finance leases												91						90
Total long-term debt												3,672						1,607
Less: Current maturities of long-term debt												62						31
Long-term debt												$	3,610					$	1,576
(1) In June and July 2020, we settled our February 2014 interest rate swaps. See "Interest Rate Risk" below for additional information.
(2) The effective interest rate is 7.48%.

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

In millions						2021						2022						2023						2024						2025
Principal payments						$	62					$	49					$	526					$	23					$	506

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. The senior unsecured notes pay interest semi-annually on March 1 and September 1, commencing on March 1, 2021. The indenture governing the senior unsecured notes contains covenants that, among other matters, limit (i) our ability to consolidate or merge into, or sell, assign, convey, lease, transfer or otherwise dispose of all or substantially all of our and our subsidiaries' assets to another person, (ii) our and certain of our subsidiaries' ability to create or assume liens and (iii) our and certain of our subsidiaries' ability to engage in sale and leaseback transactions.

The $250 million 7.125% debentures and $165 million 5.65% debentures are unsecured and are not subject to any sinking fund requirements. We can redeem these debentures at any time prior to maturity at the greater of par plus accrued interest or an amount designed to ensure that the debenture holders are not penalized by the early redemption.

Our debt agreements contain several restrictive covenants. The most restrictive of these covenants applies to our revolving credit facility which will upon default, among other things, limit our ability to incur additional debt or issue preferred stock, enter into sale-leaseback transactions, sell or create liens on our assets, make investments and merge or consolidate with any other entity. At December 31, 2020, we were in compliance with all of the covenants under our borrowing agreements.

Shelf Registration

As a well-known seasoned issuer, we filed an automatic shelf registration for an undetermined amount of debt and equity securities with the Securities and Exchange Commission 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. Our current shelf is scheduled to expire in February 2022.

Interest Expense

For the years ended December 31, 2020, 2019 and 2018, total interest incurred was $102 million, $112 million and $116 million, respectively, and interest capitalized was $2 million, $3 million and $2 million, respectively.

Interest Rate Risk

In 2019 we entered into $350 million of interest rate lock agreements, and in the first half of 2020 we entered into an additional $150 million of lock agreements to reduce the variability of the cash flows of the interest payments on a total of $500 million of fixed rate debt forecast to be issued in 2023 to replace our senior notes at maturity. The terms of the rate locks mirror the time period of the expected fixed rate debt issuance and the expected timing of interest payments on that debt. The gains and losses on these derivative instruments will be initially recorded in "Other comprehensive income" and will be released to earnings in "Interest expense" in future periods to reflect the difference in (1) the fixed rates economically locked in at the inception of the hedge and (2) the actual fixed rates established in the debt instrument at issuance.

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

						Year ended December 31,
In millions						2020												2019
Type of Swap						Gain (Loss) Recognized in AOCL												Gain (Loss) Reclassified from AOCL into Interest Expense						Gain (Loss) Recognized in AOCL												Gain (Loss) Reclassified from AOCL into Interest Expense
Interest rate locks						$	(22)											$	—					(10)												—

We had a series of interest rate swaps to effectively convert our September 2013, $500 million debt issue, due in 2023, from a fixed rate of 3.65 percent to a floating rate equal to the one-month LIBOR plus a spread. The debt is included in the Consolidated Balance Sheets as "Long-term debt." The terms of the swaps mirrored those of the debt, with interest paid semi-annually. The swaps were designated, and were accounted for, as fair value hedges. The gain or loss on these derivative instruments, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, were recognized in current income as “Interest expense.” The net swap settlements that accrued each period were also reported in the Consolidated Financial Statements as "Interest expense." A basis adjustment related to credit risk, excluded from the assessment of effectiveness, was being amortized over the life of the hedge using a straight-line method and was considered de minimis.

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

The following table summarizes the gains and losses:

						Years ended December 31,
In millions						2020												2019												2018
Type of Swap						Gain (Loss) on Swaps						Gain (Loss) on Borrowings						Gain (Loss) on Swaps						Gain (Loss) on Borrowings						Gain (Loss) on Swaps						Gain (Loss) on Borrowings
Interest rate swaps(1)						$	7					$	(5)					$	16					$	(14)					$	(8)					$	7
(1) The difference between the gain/(loss) on swaps and borrowings represented hedge ineffectiveness.

Fair Value of Debt

Based on borrowing rates currently available to us for bank loans with similar terms and average maturities, considering our risk premium, the fair values and carrying values of total debt, including current maturities, were as follows:

						December 31,
In millions						2020						2019
Fair values of total debt (1)						$	4,665					$	2,706
Carrying value of total debt						4,164						2,367
(1) The fair value of debt is derived from Level 2 inputs.

NOTE 12. PRODUCT WARRANTY LIABILITY

A tabular reconciliation of the product warranty liability, including the deferred revenue related to our extended warranty coverage and accrued product campaigns, was as follows:

						December 31,
In millions						2020						2019						2018
Balance, beginning of year						$	2,389					$	2,208					$	1,687
Provision for base warranties issued						443						458						437
Deferred revenue on extended warranty contracts sold						248						356						293
Provision for product campaigns issued						90						210						481
Payments made during period						(589)						(590)						(443)
Amortization of deferred revenue on extended warranty contracts						(227)						(230)						(244)
Changes in estimates for pre-existing product warranties						(52)						(24)						3
Foreign currency translation and other						5						1						(6)
Balance, end of year						$	2,307					$	2,389					$	2,208

We recognized supplier recoveries of $20 million, $67 million and $26 million for the for the years ended December 31, 2020, 2019 and 2018, respectively.

Warranty related deferred revenues and warranty liabilities on our Consolidated Balance Sheets were as follows:

						December 31,
In millions						2020						2019						Balance Sheet Location
Deferred revenue related to extended coverage programs
Current portion						$	261					$	227					Current portion of deferred revenue
Long-term portion						700						714						Deferred revenue
Total						$	961					$	941
Product warranty
Current portion						$	674					$	803					Current portion of accrued product warranty
Long-term portion						672						645						Accrued product warranty
Total						$	1,346					$	1,448
Total warranty accrual						$	2,307					$	2,389

Engine System Campaign Accrual

During 2017, the California Air Resources Board (CARB) and the U.S. Environmental Protection Agency (EPA) selected certain of our pre-2013 model year engine systems for additional emissions testing. Some of these engine systems failed CARB and EPA tests as a result of degradation of an aftertreatment component. In the second quarter of 2018, we reached agreement with the CARB and EPA regarding our plans to address the affected populations. From the fourth quarter of 2017 through the second quarter of 2018, we recorded charges for the expected costs of field campaigns to repair these engine systems.

The campaigns launched in the third quarter of 2018 are being completed in phases across the affected population. The total engine system campaign charge, excluding supplier recoveries, was $410 million. In the fourth quarter of 2020, we recorded an additional $20 million charge related to this campaign, as a change in estimate, to bring the total campaign, excluding supplier recoveries, to $430 million. At December 31, 2020, the remaining accrual balance was $151 million.

NOTE 13. PENSIONS AND OTHER POSTRETIREMENT BENEFITS

Pension Plans

We sponsor several pension plans covering substantially all employees. Generally, pension benefits for salaried employees are determined as a function of employee’s compensation. Pension benefits for most hourly employees are determined similarly and as a function of employee’s compensation, with the exception of a small group of hourly employees whose pension benefits were grandfathered in accordance with agreements with their union representation and are based on their years of service and compensation during active employment. The level of benefits and terms of vesting may vary among plans and are offered in accordance with applicable laws. Pension plans assets are administered by trustees and are principally invested in fixed income securities and equity securities. It is our policy to make contributions to our various qualified plans in accordance with statutory and contractual funding requirements, and any additional contributions we determine are appropriate.

Obligations, Assets and Funded Status

Benefit obligation balances presented below reflect the projected benefit obligation (PBO) for our pension plans. The changes in the benefit obligations, the various plan assets, the funded status of the plans and the amounts recognized in our Consolidated Balance Sheets for our significant pension plans at December 31 were as follows:

						Qualified and Non-Qualified Pension Plans
						U.S. Plans												U.K. Plans
In millions						2020						2019						2020						2019
Change in benefit obligation
Benefit obligation at the beginning of the year						$	2,916					$	2,562					$	1,851					$	1,550
Service cost						133						116						29						26
Interest cost						95						108						36						43
Actuarial loss						224						296						136						232
Benefits paid from fund						(224)						(150)						(72)						(62)
Benefits paid directly by employer						(22)						(16)						—						—
Exchange rate changes						—						—						70						62
Benefit obligation at end of year						$	3,122					$	2,916					$	2,050					$	1,851
Change in plan assets
Fair value of plan assets at beginning of year						$	3,357					$	2,937					$	2,010					$	1,782
Actual return on plan assets						274						493						268						193
Employer contributions						22						77						48						28
Benefits paid from fund						(224)						(150)						(72)						(62)
Exchange rate changes						—						—						83						69
Fair value of plan assets at end of year						$	3,429					$	3,357					$	2,337					$	2,010
Funded status (including unfunded plans) at end of year						$	307					$	441					$	287					$	159
Amounts recognized in consolidated balance sheets
Pension assets						$	755					$	842					$	287					$	159
Accrued compensation, benefits and retirement costs						(17)						(16)						—						—
Pension and OPEB benefits						(431)						(385)						—						—
Net amount recognized						$	307					$	441					$	287					$	159
Amounts recognized in accumulated other comprehensive loss
Net actuarial loss						$	714					$	611					$	250					$	323
Prior service cost						6						7						19						22
Net amount recognized						$	720					$	618					$	269					$	345

In addition to the pension plans in the above table, we also maintain less significant defined benefit pension plans in 14 other countries outside of the U.S. and the U.K. that comprise approximately 3 percent and 5 percent of our pension plan assets and obligations, respectively, at December 31, 2020. These plans are reflected in "Other liabilities" on our Consolidated Balance Sheets. In 2020 and 2019, we made $16 million and $15 million of contributions to these plans, respectively.

The following table summarizes the total accumulated benefit obligation (ABO), the ABO for defined benefit pension plans with ABO in excess of plan assets and the PBO for defined benefit pension plans with PBO in excess of plan assets:

						Qualified and Non-Qualified Pension Plans
						U.S. Plans												U.K. Plans
In millions						2020						2019						2020						2019
Total ABO						$	3,091					$	2,894					$	1,954					$	1,756
Plans with ABO in excess of plan assets
ABO						417						379						—						—
Plans with PBO in excess of plan assets
PBO						448						401						—						—

Components of Net Periodic Pension Cost

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

						Qualified and Non-Qualified Pension Plans
						U.S. Plans																		U.K. Plans
In millions						2020						2019						2018						2020						2019						2018
Service cost						$	133					$	116					$	120					$	29					$	26					$	29
Interest cost						95						108						98						36						43						41
Expected return on plan assets						(195)						(189)						(196)						(74)						(70)						(69)
Amortization of prior service cost						1						1						1						2						2						—
Recognized net actuarial loss						41						17						33						34						11						29
Net periodic pension cost						$	75					$	53					$	56					$	27					$	12					$	30

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

In millions						2020						2019						2018
Amortization of prior service cost						$	(3)					$	(3)					$	—
Recognized net actuarial loss						(75)						(28)						(62)
Incurred actuarial loss						85						101						91
Foreign exchange translation adjustments						19						4						(5)
Total recognized in other comprehensive loss						$	26					$	74					$	24
Total recognized in net periodic pension cost and other comprehensive loss						$	128					$	139					$	110

Assumptions

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

						Qualified and Non-Qualified Pension Plans
						U.S. Plans												U.K. Plans
						2020						2019						2020						2019
Discount rate						2.62		%				3.36		%				1.50		%				2.00		%
Cash balance crediting rate						3.74		%				4.11		%				—						—
Compensation increase rate						2.73		%				2.73		%				3.75		%				3.75		%

The table below presents various assumptions used in determining the net periodic pension cost and reflects weighted-average percentages for the various plans as follows:

						Qualified and Non-Qualified Pension Plans
						U.S. Plans																		U.K. Plans
						2020						2019						2018						2020						2019						2018
Discount rate						3.36		%				4.36		%				3.66		%				2.00		%				2.80		%				2.55		%
Expected return on plan assets						6.25		%				6.25		%				6.50		%				4.00		%				4.00		%				4.00		%
Compensation increase rate						2.73		%				2.73		%				3.00		%				3.75		%				3.75		%				3.75		%

Plan Assets

Our investment policies in the U.S. and U.K. provide for the rebalancing of assets to maintain our long-term strategic asset allocation. We are committed to this long-term strategy and do not attempt to time the market. Given empirical evidence that asset allocation is critical, rebalancing of the assets has and continues to occur, maintaining the proper weighting of assets to achieve the expected total portfolio returns. We believe that our portfolio is highly diversified and does not have any significant exposure to concentration risk. The plan assets for our defined benefit pension plans do not include any of our common stock.

U.S. Plan Assets

For the U.S. qualified pension plans, our assumption for the expected return on assets was 6.25 percent in 2020. Projected returns are based primarily on broad, publicly traded equity and fixed income indices and forward-looking estimates of active portfolio and investment management. We expect additional positive returns from this active investment management. Based on the historical returns and forward-looking return expectations, we have elected to maintain our assumption of 6.25 percent in 2021.

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

Asset Class						Target						Range
U.S. equities						7.0		%				+5.0/ -5.0%
Non-U.S. equities						2.0		%				+3.0/ -2.0%
Global equities						6.0		%				+3.0/ -3.0%
Total equities						15.0		%
Real assets						6.5		%				+3.5/ -6.5%
Private equity/venture capital						6.5		%				+3.5/ -6.5%
Opportunistic credit						4.0		%				+6.0/ -4.0%
Fixed income						68.0		%				+5.0/ -5.0%
Total						100.0		%

The fixed income component is structured to represent a custom bond benchmark that will closely hedge the change in the value of our liabilities. This component is structured in such a way that its benchmark covers approximately 100 percent of the plan's exposure to changes in its discount rate (AA corporate bond yields). In order to achieve a hedge on more than the targeted 68 percent of plan assets invested in fixed income securities, our Benefits Policy Committee (BPC) permits the fixed income managers, other managers or the custodian/trustee to utilize derivative securities, as part of a liability driven investment strategy to further reduce the plan's risk of declining interest rates. However, all managers hired to manage assets for the trust are prohibited from using leverage unless approved by the BPC.

U.K. Plan Assets

For the U.K. qualified pension plans, our assumption for the expected return on assets was 4.0 percent in 2020. 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. Our strategy with respect to our investments in these assets is to be invested in a suitable mixture of return-seeking assets such as equities, real estate and liability matching assets such as group annuity insurance contracts and duration matched bonds. Therefore, the risk and return balance of our U.K. asset portfolio should reflect a long-term horizon. To achieve these objectives we have established the following targets:

Asset Class						Target
Equities						10.0		%
Private markets/secure income assets						18.0		%
Credit						7.5		%
Diversifying strategies						8.0		%
Fixed income/insurance annuity						55.5		%
Cash						1.0		%
Total						100.0		%

As part of our strategy in the U.K. we have not prohibited the use of any financial instrument, including derivatives. As in the U.S. plan, derivatives may be used to better match liability duration and are not used in a speculative way. The 55.5 percent fixed income component is structured in a way that covers approximately 80 percent of the plan's exposure to changes in its discount rate. Based on the above discussion, we have elected an assumption of 4.0 percent in 2021.

Fair Value of U.S. Plan Assets

The fair values of U.S. pension plan assets by asset category were as follows:

						Fair Value Measurements at December 31, 2020
In millions						Quoted prices in active markets for identical assets (Level 1)						Significant other observable inputs (Level 2)						Significant unobservable inputs (Level 3)						Total
Equities
U.S.						$	194					$	—					$	—					$	194
Non-U.S.						58						—						—						58
Fixed income
Government debt						78						5						—						83
Corporate debt
U.S.						—						512						—						512
Non-U.S.						—						26						—						26
Asset/mortgaged backed securities						—						3						—						3
Net cash equivalents (1)						319						37						—						356
Private markets and real assets (2)						—						—						431						431
Net plan assets subject to leveling						$	649					$	583					$	431					$	1,663
Accruals (3)																								5
Investments measured at net asset value																								1,761
Net plan assets																								$	3,429

						Fair Value Measurements at December 31, 2019
In millions						Quoted prices in active markets for identical assets (Level 1)						Significant other observable inputs (Level 2)						Significant unobservable inputs (Level 3)						Total
Equities
U.S.						$	96					$	—					$	—					$	96
Non-U.S.						47						—						—						47
Fixed income
Government debt						—						72						—						72
Corporate debt
U.S.						—						357						—						357
Non-U.S.						—						11						—						11
Asset/mortgaged backed securities						—						1						—						1
Net cash equivalents (1)						338						33						—						371
Private markets and real assets (2)						—						—						371						371
Net plan assets subject to leveling						$	481					$	474					$	371					$	1,326
Accruals (3)																								5
Investments measured at net asset value																								2,026
Net plan assets																								$	3,357
(1) Cash equivalents include commercial paper, short-term government/agency, mortgage and credit instruments.
(2) The instruments in private markets and real assets, for which quoted market prices are not available, are valued at their estimated fair value as determined by applicable investment managers or by audited financial statements of the funds. Private markets include equity, venture capital and private credit instruments and funds. Real assets include real estate and infrastructure.
(3) Accruals include interest or dividends that were not settled at December 31.

Certain of our assets are valued based on their respective net asset value (NAV) (or its equivalent), as an alternative to estimated fair value due to the absence of readily available market prices. The fair value of each such investment category was as follows:

• U.S. and Non-U.S. Corporate Debt ($1,068 million and $939 million at December 31, 2020 and 2019, respectively) - These commingled funds have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days.

• U.S. and Non-U.S. Equities ($245 million and $367 million at December 31, 2020 and 2019, respectively) - These commingled funds have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days.

*•*Government Debt ($199 million and $503 million at December 31, 2020 and 2019, respectively) - These commingled funds have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days.

• Real Estate ($153 million and $140 million at December 31, 2020 and 2019, respectively) - This asset type represents different types of real estate including development property, industrial property, individual mortgages, office property, property investment companies and retail property. These funds are valued using NAVs and allow quarterly or more frequent redemptions.

*•*Asset/Mortgage Backed Securities ($96 million and $77 million at December 31, 2020 and 2019, respectively) - This asset type represents investments in fixed- and floating-rate loans. These funds are valued using NAVs and allow quarterly or more frequent redemptions.

The reconciliation of Level 3 assets was as follows:

						Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
In millions						Private Markets						Real Assets						Total
Balance at December 31, 2018						$	247					$	69					$	316
Actual return on plan assets
Unrealized gains on assets still held at the reporting date						24						5						29
Purchases, sales and settlements, net						28						(2)						26
Balance at December 31, 2019						299						72						371
Actual return on plan assets
Unrealized gains on assets still held at the reporting date						21						2						23
Purchases, sales and settlements, net						39						(2)						37
Balance at December 31, 2020						$	359					$	72					$	431

Fair Value of U.K. Plan Assets

The fair values of U.K. pension plan assets by asset category were as follows:

						Fair Value Measurements at December 31, 2020
In millions						Quoted prices in active markets for identical assets (Level 1)						Significant other observable inputs (Level 2)						Significant unobservable inputs (Level 3)						Total
Equities
U.S.						$	—					$	56					$	—					$	56
Non-U.S.						—						69						—						69
Fixed income
Net cash equivalents (1)						26						—						—						26
Insurance annuity (2)						—						—						556						556
Private markets and real assets (3)						—						—						282						282
Net plan assets subject to leveling						$	26					$	125					$	838					$	989
Investments measured at net asset value																								1,348
Net plan assets																								$	2,337

						Fair Value Measurements at December 31, 2019
In millions						Quoted prices in active markets for identical assets (Level 1)						Significant other observable inputs (Level 2)						Significant unobservable inputs (Level 3)						Total
Equities
U.S.						$	—					$	45					$	—					$	45
Non-U.S.						—						58						—						58
Fixed income
Net cash equivalents (1)						35						—						—						35
Insurance annuity (2)						—						—						476						476
Private markets and real assets (3)						—						—						259						259
Net plan assets subject to leveling						$	35					$	103					$	735					$	873
Investments measured at net asset value																								1,137
Net plan assets																								$	2,010
(1) Cash equivalents include commercial paper, short-term government/agency, mortgage and credit instruments.
(2) In July 2012, the U.K. pension plan purchased an insurance contract that will guarantee payment of specified pension liabilities. The contract defers payment for 10 years.
(3) The instruments in private markets and real assets, for which quoted market prices are not available, are valued at their estimated fair value as determined by applicable investment managers or by audited financial statements of the funds. Private markets include equity, venture capital and private credit instruments and funds. Real assets include real estate and infrastructure.

Certain of our assets are valued based on their respective NAV (or its equivalent), as an alternative to estimated fair value due to the absence of readily available market prices. The fair value of each such investment category was as follows:

• U.S. and Non-U.S. Corporate Debt ($970 million and $791 million at December 31, 2020 and 2019, respectively) - These commingled funds have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days.

• U.S. and Non-U.S. Equities ($168 million and $160 million at December 31, 2020 and 2019, respectively) - These commingled funds have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days.

• Asset/Mortgage Backed Securities ($100 million and $96 million at December 31, 2020 and 2019, respectively) - This asset type represents investments in fixed- and floating-rate loans. These funds are valued using NAVs and allow quarterly or more frequent redemptions.

• Re-insurance ($60 million and $30 million at December 31, 2020 and 2019, respectively) - This commingled fund has a NAV that is determined on a monthly basis and the investment may be sold at that value.

*•*Diversified Strategies ($50 million and $60 million at December 31, 2020 and 2019, respectively) - These commingled funds invest in commodities, fixed income and equity securities. They have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days.

The reconciliation of Level 3 assets was as follows:

						Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
In millions						Insurance Annuity						Real Assets						Private Markets						Total
Balance at December 31, 2018						$	442					$	57					$	187					$	686
Actual return on plan assets
Unrealized gains on assets still held at the reporting date						34						5						14						53
Purchases, sales and settlements, net						—						(27)						23						(4)
Balance at December 31, 2019						476						35						224						735
Actual return on plan assets
Unrealized gains (losses) on assets still held at the reporting date						80						(2)						22						100
Purchases, sales and settlements, net						—						(2)						5						3
Balance at December 31, 2020						$	556					$	31					$	251					$	838

Level 3 Assets

The investments in an insurance annuity contract, venture capital, private equity and real estate, for which quoted market prices are not available, are valued at their estimated fair value as determined by applicable investment managers or by quarterly financial statements of the funds. These financial statements are audited at least annually. In conjunction with our investment consultant, we monitor the fair value of the insurance contract as periodically reported by our insurer and their counterparty risk. The fair value of all real estate properties, held in the partnerships, are valued at least once per year by an independent professional real estate valuation firm. Fair value generally represents the fund's proportionate share of the net assets of the investment partnerships as reported by the general partners of the underlying partnerships. Some securities with no readily available market are initially valued at cost, utilizing independent professional valuation firms as well as market comparisons with subsequent adjustments to values which reflect either the basis of meaningful third-party transactions in the private market or the fair value deemed appropriate by the general partners of the underlying investment partnerships. In such instances, consideration is also given to the financial condition and operating results of the issuer, the amount that the investment partnerships can reasonably expect to realize upon the sale of the securities and any other factors deemed relevant. The estimated fair values are subject to uncertainty and therefore may differ from the values that would have been used had a ready market for such investments existed and such differences could be material.

Estimated Future Contributions and Benefit Payments

We plan to contribute approximately $75 million to our defined benefit pension plans in 2021. The table below presents expected future benefit payments under our pension plans:

						Qualified and Non-Qualified Pension Plans
In millions						2021						2022						2023						2024						2025						2026 - 2030
Expected benefit payments						$	282					$	268					$	271					$	276					$	278					$	1,417

Other Pension Plans

We also sponsor defined contribution plans for certain hourly and salaried employees. Our contributions to these plans were $85 million, $102 million and $104 million for the years ended December 31, 2020, 2019 and 2018.

Other Postretirement Benefits

Our other postretirement benefit (OPEB) plans provide various health care and life insurance benefits to eligible employees, who retire and satisfy certain age and service requirements, and their dependents. The plans are contributory and contain cost-sharing features such as caps, deductibles, coinsurance and spousal contributions. Employer contributions are limited by formulas in each plan. Retiree contributions for health care benefits are adjusted annually, and we reserve the right to change benefits covered under these plans. There were no plan assets for OPEB plans as our policy is to fund benefits and expenses for these plans as claims and premiums are incurred.

Obligations and Funded Status

Benefit obligation balances presented below reflect the accumulated postretirement benefit obligations (APBO) for our OPEB plans. The changes in the benefit obligations, the funded status of the plans and the amounts recognized in our Consolidated Balance Sheets for our significant OPEB plans were as follows:

						December 31,
In millions						2020						2019
Change in benefit obligation
Benefit obligation at the beginning of the year						$	227					$	246
Interest cost						7						10
Plan participants' contributions						9						14
Actuarial loss						14						—
Benefits paid directly by employer						(38)						(43)
Benefit obligation at end of year						$	219					$	227
Funded status at end of year						$	(219)					$	(227)
Amounts recognized in consolidated balance sheets
Accrued compensation, benefits and retirement costs						$	(20)					$	(21)
Pension and OPEB						(199)						(206)
Net amount recognized						$	(219)					$	(227)
Amounts recognized in accumulated other comprehensive loss
Net actuarial gain						$	(10)					$	(25)
Prior service credit						(4)						(4)
Net amount recognized						$	(14)					$	(29)

In addition to the OPEB plans in the above table, we also maintain less significant OPEB plans in four other countries outside the U.S. that comprise approximately 9 percent and 11 percent of our OPEB obligations at December 31, 2020 and 2019, respectively. These plans are reflected in "Other liabilities" in our Consolidated Balance Sheets.

Components of Net Periodic OPEB Cost

The following table presents the net periodic OPEB cost under our plans:

						Years ended December 31,
In millions						2020						2019						2018
Interest cost						$	7					$	10					$	11
Recognized net actuarial gain						(1)						—						—
Net periodic OPEB cost						$	6					$	10					$	11

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

						Years ended December 31,
In millions						2020						2019						2018
Recognized net actuarial gain						$	1					$	—					$	—
Incurred actuarial loss (gain)						14						(1)						(51)
Total recognized in other comprehensive loss (income)						$	15					$	(1)					$	(51)
Total recognized in net periodic OPEB cost and other comprehensive loss (income)						$	21					$	9					$	(40)

Assumptions

The table below presents assumptions used in determining the OPEB obligation for each year and reflects weighted-average percentages for our other OPEB plans as follows:

						2020						2019
Discount rate						2.30		%				3.15		%

The table below presents assumptions used in determining the net periodic OPEB cost and reflects weighted-average percentages for the various plans as follows:

						2020						2019						2018
Discount rate						3.15		%				4.25		%				3.55		%

Our consolidated OPEB obligation is determined by application of the terms of health care and life insurance plans, together with relevant actuarial assumptions and health care cost trend rates. For measurement purposes, a 6.88 percent annual rate of increase in the per capita cost of covered health care benefits was assumed in 2020. The rate is assumed to decrease on a linear basis to 5.0 percent through 2029 and remain at that level thereafter.

Estimated Benefit Payments

The table below presents expected benefit payments under our OPEB plans:

In millions						2021						2022						2023						2024						2025						2026 - 2030
Expected benefit payments						$	21					$	20					$	19					$	18					$	17					$	71

NOTE 14. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

We are subject to numerous lawsuits and claims arising out of the ordinary course of our business, including actions related to product liability; personal injury; the use and performance of our products; warranty matters; product recalls; patent, trademark or other intellectual property infringement; contractual liability; the conduct of our business; tax reporting in foreign jurisdictions; distributor termination; workplace safety; and environmental matters. We also have been identified as a potentially responsible party at multiple waste disposal sites under U.S. federal and related state environmental statutes and regulations and may have joint and several liability for any investigation and remediation costs incurred with respect to such sites. We have denied liability with respect to many of these lawsuits, claims and proceedings and are vigorously defending such lawsuits, claims and proceedings. We carry various forms of commercial, property and casualty, product liability and other forms of insurance; however, such insurance may not be applicable or adequate to cover the costs associated with a judgment against us with respect to these lawsuits, claims and proceedings. We do not believe that these lawsuits are material individually or in the aggregate. While we believe we have also established adequate accruals for our expected future liability with respect to pending lawsuits, claims and proceedings, where the nature and extent of any such liability can be reasonably estimated based upon then presently available information, there can be no assurance that the final resolution of any existing or future lawsuits, claims or proceedings will not have a material adverse effect on our business, results of operations, financial condition or cash flows.

We conduct significant business operations in Brazil that are subject to the Brazilian federal, state and local labor, social security, tax and customs laws. While we believe we comply with such laws, they are complex, subject to varying interpretations and we are often engaged in litigation regarding the application of these laws to particular circumstances.

On April 29, 2019, we announced that we were conducting a formal internal review of our emissions certification process and compliance with emission standards for our pick-up truck applications, following conversations with the EPA and CARB regarding certification of our engines in model year 2019 RAM 2500 and 3500 trucks. This review is being conducted with external advisors to ensure the certification and compliance processes for all of our pick-up truck applications are consistent with our internal policies, engineering standards and applicable laws. In addition, we voluntarily disclosed our formal internal review to the regulators and to other government agencies, the Department of Justice (DOJ) and the SEC, and worked cooperatively with them to ensure a complete and thorough review. We fully cooperated with the DOJ's and the SEC's information requests and inquiries and, based on recent communications with these agencies, we do not expect further inquiries. During conversations with the EPA and CARB about the effectiveness of our pick-up truck applications, the regulators raised concerns that certain aspects of our emissions systems may reduce the effectiveness of our emissions control systems and thereby act as defeat devices. As a result, our internal review focuses, in part,

on the regulators’ concerns. We are working closely with the regulators to enhance our emissions systems to improve the effectiveness of all of our pick-up truck applications and to fully address the regulators’ requirements. Based on discussions with the regulators, we have developed a new calibration for the engines in model year 2019 RAM 2500 and 3500 trucks that has been included in all engines shipped since September 2019. During our discussions, the regulators have asked us to look at other model years and other engines. 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.

Guarantees and Commitments

Periodically, we enter into guarantee arrangements, including guarantees of non-U.S. distributor financings, residual value guarantees on equipment under operating leases and other miscellaneous guarantees of joint ventures or third-party obligations. At December 31, 2020, the maximum potential loss related to these guarantees was $44 million.

We have arrangements with certain suppliers that require us to purchase minimum volumes or be subject to monetary penalties. At December 31, 2020, if we were to stop purchasing from each of these suppliers, the aggregate amount of the penalty would be approximately $32 million. Most of these arrangements enable us to secure supplies of critical components. We do not currently anticipate paying any penalties under these contracts.

We enter into physical forward contracts with suppliers of platinum and palladium to purchase certain volumes of the commodities at contractually stated prices for various periods, which generally fall within two years. At December 31, 2020, the total commitments under these contracts were $79 million. These arrangements enable us to guarantee the prices of these commodities, which otherwise are subject to market volatility.

We have guarantees with certain customers that require us to satisfactorily honor contractual or regulatory obligations, or compensate for monetary losses related to nonperformance. These performance bonds and other performance-related guarantees were $100 million at December 31, 2020.

Indemnifications

Periodically, we enter into various contractual arrangements where we agree to indemnify a third-party against certain types of losses. Common types of indemnities include:

• product liability and license, patent or trademark indemnifications;

• asset sale agreements where we agree to indemnify the purchaser against future environmental exposures related to the asset sold; and

• any contractual agreement where we agree to indemnify the counterparty for losses suffered as a result of a misrepresentation in the contract.

We regularly evaluate the probability of having to incur costs associated with these indemnities and accrue for expected losses that are probable. Because the indemnifications are not related to specified known liabilities and due to their uncertain nature, we are unable to estimate the maximum amount of the potential loss associated with these indemnifications.

NOTE 15. CUMMINS INC. SHAREHOLDERS' EQUITY

Preferred and Preference Stock

We are authorized to issue one million shares of zero par value preferred and one million shares of preference stock with preferred shares being senior to preference shares. We can determine the number of shares of each series, and the rights, preferences and limitations of each series. At December 31, 2020, there was no preferred or preference stock outstanding.

Common Stock

Changes in shares of common stock, treasury stock and common stock held in trust for employee benefit plans were as follows:

In millions						Common Stock						Treasury Stock						Common Stock Held in Trust
Balance at December 31, 2017						222.4						56.7						0.5
Shares acquired						—						7.9						—
Shares issued						—						(0.2)						(0.1)
Balance at December 31, 2018						222.4						64.4						0.4
Shares acquired						—						8.1						—
Shares issued						—						(0.8)						(0.2)
Balance at December 31, 2019						222.4						71.7						0.2
Shares acquired						—						3.9						—
Shares issued						—						(0.8)						(0.2)
Balance at December 31, 2020						222.4						74.8						—

Treasury Stock

Shares of common stock repurchased by us are recorded at cost as treasury stock and result in a reduction of shareholders' equity in our Consolidated Balance Sheets. Treasury shares may be reissued as part of our stock-based compensation programs. When shares are reissued, we use the weighted-average cost method for determining cost. The gains between the cost of the shares and the issuance price are added to additional paid-in-capital. The losses are deducted from additional paid-in capital to the extent of the gains. Thereafter, the losses are deducted from retained earnings. Treasury stock activity for the three-year period ended December 31, 2020, consisting of shares issued and repurchased is presented in our Consolidated Statements of Changes in Equity.

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 upon completion of the 2016 repurchase plan. For the year ended December 31, 2020, we made the following purchases under the stock repurchase programs:

In millions (except per share amounts) For each quarter ended						2020 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.

In 2018, we entered into an accelerated share repurchase agreement with Goldman, Sachs & Co. LLC to repurchase $500 million of our common stock under our previously announced share repurchase plans and received 3.5 million shares at an average price of $144.02 per share.

We repurchased $641 million, $1,271 million and $1,140 million of our common stock in the years ended December 31, 2020, 2019 and 2018, respectively.

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 meet 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 3.0 percent from $1.311 per share to $1.35 per share. In July 2019, the Board authorized a 15.0 percent increase to our quarterly cash dividend on our common stock from $1.14 per share to $1.311 per share. In July 2018, the Board approved a 5.6 percent increase to our quarterly dividend on our common stock from $1.08 per share to $1.14 per share. Cash dividends per share paid to common shareholders 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

Employee Benefits Trust

In 1997, we established the Employee Benefits Trust (EBT) funded with common stock for use in meeting our future obligations under employee benefit and compensation plans. The primary sources of cash for the EBT were dividends received on unallocated shares of our common stock held by the EBT. Shares of Cummins stock and cash in the EBT were used to fund the accounts of participants in the Cummins Retirement and Savings Plan who elected to receive company matching funds in Cummins stock. In addition, at times we directed the trustee to sell shares in the EBT on the open market and swept cash from the EBT to fund other employee benefit plans. Matching contributions charged to income for the years ended December 31, 2020, 2019 and 2018 were $2 million, $10 million and $12 million, respectively. At December 31, 2020, the EBT was fully depleted.

NOTE 16. ACCUMULATED OTHER COMPREHENSIVE LOSS

Following are the changes in accumulated other comprehensive income (loss) by component:

In millions						Change in pensions and other postretirement defined benefit plans						Foreign currency translation adjustment						Unrealized gain (loss) on debt securities						Unrealized gain (loss) on derivatives									Total attributable to Cummins Inc.						Noncontrolling interests						Total
Balance at December 31, 2017						$	(689)					$	(812)					$	1					$	(3)								$	(1,503)
Other comprehensive income before reclassifications
Before-tax amount						(42)						(333)						2						21									(352)						$	(30)					$	(382)
Tax benefit (expense)						7						7						—						(7)									7						—						7
After-tax amount						(35)						(326)						2						14									(345)						(30)						(375)
Amounts reclassified from accumulated other comprehensive income(1)						53						—						(3)						(9)									41						1						42
Net current period other comprehensive income (loss)						18						(326)						(1)						5									(304)						$	(29)					$	(333)
Balance at December 31, 2018						$	(671)					$	(1,138)					$	—					$	2								$	(1,807)
Other comprehensive income before reclassifications
Before-tax amount						(106)						(153)						—						(12)									(271)						$	(5)					$	(276)
Tax benefit (expense)						16						6						—						5									27						—						27
After-tax amount						(90)						(147)						—						(7)									(244)						(5)						(249)
Amounts reclassified from accumulated other comprehensive income(1)						27						—						—						(4)									23						—						23
Net current period other comprehensive loss						(63)						(147)						—						(11)									(221)						$	(5)					$	(226)
Balance at December 31, 2019						$	(734)					$	(1,285)					$	—					$	(9)								$	(2,028)
Other comprehensive income before reclassifications
Before-tax amount						(92)						73						—						(41)									(60)						$	(10)					$	(70)
Tax benefit (expense)						26						8						—						9									43						—						43
After-tax amount						(66)						81						—						(32)									(17)						(10)						(27)
Amounts reclassified from accumulated other comprehensive income(1)						65						—						—						(2)									63						—						63
Net current period other comprehensive (loss) income						(1)						81						—						(34)									46						$	(10)					$	36
Balance at December 31, 2020						$	(735)					$	(1,204)					$	—					$	(43)								$	(1,982)
(1) Amounts are net of tax. Reclassifications out of accumulated other comprehensive income (loss) and the related tax effects are immaterial for separate disclosure.

NOTE 17. NONCONTROLLING INTERESTS

Noncontrolling interests in the equity of consolidated subsidiaries were as follows:

						December 31,
In millions						2020						2019
Eaton Cummins Automated Transmission Technologies						$	538					$	581
Cummins India Ltd.						319						302
Hydrogenics Corporation (1)						50						58
Other						20						17
Total						$	927					$	958
(1) See Note 20, "ACQUISITIONS," for additional information.

NOTE 18. STOCK INCENTIVE AND STOCK OPTION PLANS

Our stock incentive plan (the Plan) allows for granting of up to 8.5 million total shares of equity awards to executives, employees and non-employee directors. Awards available for grant under the Plan include, but are not limited to, stock options, stock appreciation rights, performance shares and other stock awards. Shares issued under the Plan may be newly issued shares or reissued treasury shares.

Stock options are generally granted with a strike price equal to the fair market value of the stock on the date of grant and a life of 10 years. Stock options granted have a three-year vesting period. The strike price may be higher than the fair value of the stock on the date of the grant, but cannot be lower. Compensation expense is recorded on a straight-line basis over the vesting period beginning on the grant date. The compensation expense is based on the fair value of each option grant using the Black-Scholes option pricing model. Options granted to employees eligible for retirement under our retirement plan are fully expensed at the grant date.

Stock options are also awarded through the Key Employee Stock Investment Plan (KESIP) which allows certain employees, other than officers, to purchase shares of common stock on an installment basis up to an established credit limit. For every block of 100 KESIP shares purchased by the employee 50 stock options are granted. The options granted through the KESIP program are considered awards under the Plan and are vested immediately. Compensation expense for stock options granted through the KESIP program is recorded based on the fair value of each option grant using the Black-Scholes option pricing model.

Performance shares are granted as target awards and are earned based on certain measures of our operating performance. A payout factor has been established ranging from 0 to 200 percent of the target award based on our actual performance during the three-year performance period. The fair value of the award is equal to the average market price, adjusted for the present value of dividends over the vesting period, of our stock on the grant date. Compensation expense is recorded ratably over the period beginning on the grant date until the shares become unrestricted and is based on the amount of the award that is expected to be earned under the plan formula, adjusted each reporting period based on current information.

Restricted common stock is awarded from time to time at no cost to certain employees. Participants are entitled to cash dividends and voting rights. Restrictions limit the sale or transfer of the shares during a defined period. Generally, one-third of the shares become vested and free from restrictions after two years and one-third of the shares issued become vested and free from restrictions each year thereafter on the anniversary of the grant date, provided the participant remains an employee. The fair value of the award is equal to the average market price of our stock on the grant date. Compensation expense is determined at the grant date and is recognized over the restriction period on a straight-line basis.

Employee compensation expense (net of estimated forfeitures) related to our share-based plans for the years ended December 31, 2020, 2019 and 2018, was approximately $30 million, $48 million and $52 million, respectively. In addition, non-employee director share-based compensation expense for the years ended December 31, 2020, 2019 and 2018, was approximately $1 million, $1 million and $1 million, respectively. Shares granted to non-employee directors vest immediately and have no restrictions or performance conditions. The excess tax benefit associated with our employee share-based plans for the years ended December 31, 2020, 2019 and 2018, was $4 million, $4 million and $2 million, respectively. The total unrecognized compensation expense (net of estimated forfeitures) related to nonvested awards for our employee share-based plans was approximately $27 million at December 31, 2020 and is expected to be recognized over a weighted-average period of less than two years.

The table below summarizes the employee share-based activity in the Plan:

						Options						Weighted-average Exercise Price						Weighted-average Remaining Contractual Life (in years)						Aggregate Intrinsic Value (in millions)
Balance at December 31, 2017						2,901,369						$	123.49
Granted						515,320						159.06
Exercised						(140,133)						88.74
Forfeited						(32,894)						133.00
Balance at December 31, 2018						3,243,662						130.55
Granted						710,120						163.42
Exercised						(652,980)						116.76
Forfeited						(63,232)						139.86
Balance at December 31, 2019						3,237,570						140.36
Granted						632,080						142.81
Exercised						(660,786)						131.25
Forfeited						(33,334)						150.83
Balance at December 31, 2020						3,175,530						$	142.63					6.6						$	263
Exercisable, December 31, 2018						1,366,722						$	124.97					4.7						$	18
Exercisable, December 31, 2019						1,665,710						$	123.55					4.8						$	92
Exercisable, December 31, 2020						1,589,015						$	130.28					4.6						$	151

The weighted-average grant date fair value of options granted during the years ended December 31, 2020, 2019 and 2018, was $25.40, $31.04 and $34.21, respectively. The total intrinsic value of options exercised during the years ended December 31, 2020, 2019 and 2018, was approximately $40 million, $35 million and $9 million, respectively.

The weighted-average grant date fair value of performance and restricted shares was as follows:

						Performance Shares												Restricted Shares
Nonvested						Shares						Weighted-average Fair Value						Shares						Weighted-average Fair Value
Balance at December 31, 2017						411,239						$	120.84					8,089						$	117.68
Granted						124,700						146.50						—						—
Vested						(80,996)						128.47						(2,696)						117.68
Forfeited						(44,593)						127.90						—						—
Balance at December 31, 2018						410,350						126.36						5,393						117.68
Granted						185,377						141.01						—						—
Vested						(176,613)						98.28						(2,696)						117.68
Forfeited						(23,183)						145.26						—						—
Balance at December 31, 2019						395,931						144.64						2,697						117.68
Granted						260,480						132.57						3,704						165.04
Vested						(268,773)						138.27						(2,697)						117.68
Forfeited						(10,684)						144.22						—						—
Balance at December 31, 2020						376,954						$	140.85					3,704						$	165.04

The total vesting date fair value of performance shares vested during the years ended December 31, 2020, 2019 and 2018, was $41 million, $27 million and $13 million, respectively. The total fair value of restricted shares vested was less than $1 million, less than $1 million and $1 million for the years ended December 31, 2020, 2019 and 2018, respectively.

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

						2020						2019						2018
Expected life (years)						6						6						6
Risk-free interest rate						0.62		%				2.41		%				2.72		%
Expected volatility						27.05		%				23.79		%				25.40		%
Dividend yield						2.88		%				2.68		%				2.48		%

Expected life—The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding based upon our historical data.

Risk-free interest rate—The risk-free interest rate assumption is based upon the observed U.S. treasury security rate appropriate for the expected life of our employee stock options.

Expected volatility—The expected volatility assumption is based upon the weighted-average historical daily price changes of our common stock over the most recent period equal to the expected option life of the grant, adjusted for activity which is not expected to occur in the future.

Dividend yield—The dividend yield assumption is based on our history and expectation of dividend payouts.

NOTE 19. EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.

We calculate basic earnings per share (EPS) of common stock by dividing net income attributable to Cummins Inc. by the weighted-average number of common shares outstanding for the period. The calculation of diluted EPS assumes the issuance of common stock for all potentially dilutive share equivalents outstanding. We exclude shares of common stock held in the EBT (see Note 15, "CUMMINS INC. SHAREHOLDERS' EQUITY") from the calculation of the weighted-average common shares outstanding until those shares are distributed from the EBT to the Retirement Savings Plan. Following are the computations for basic and diluted earnings per share:

						Years ended December 31,
In millions, except per share amounts						2020						2019						2018
Net income attributable to Cummins Inc.						$	1,789					$	2,260					$	2,141
Weighted-average common shares outstanding
Basic						148.2						155.4						162.2
Dilutive effect of stock compensation awards						0.8						0.7						0.6
Diluted						149.0						156.1						162.8
Earnings per common share attributable to Cummins Inc.
Basic						$	12.07					$	14.54					$	13.20
Diluted						12.01						14.48						13.15

The weighted-average diluted common shares outstanding exclude the anti-dilutive effect of certain stock options. The options excluded from diluted earnings per share were as follows:

						Years ended December 31,
						2020						2019						2018
Options excluded						645,334						473,845						969,385

NOTE 20. ACQUISITIONS

Acquisitions for the years ended December 31, 2019 and 2018, were as follows:

Entity Acquired (Dollars in millions)						Date of Acquisition						Percent Interest Acquired						Payments to Former Owners						Acquisition Related Debt Retirements						Total Purchase Consideration**(1)**																		Goodwill Recognized						Intangibles Recognized**(2)**						Net Sales Previous Fiscal Year Ended
2019
Hydrogenics Corporation						9/09/19						81%						$	235					$	—					$	235																	$	161					$	161					$	34
2018
Efficient Drivetrains, Inc.						8/15/18						100%						$	62					$	2					$	64																	$	49					$	15					$	3
(1) All results from acquired entities were included in segment results subsequent to the acquisition date. Newly consolidated entities were accounted for as business combinations and were included in the New Power segment on the date of acquisition.
(2) Intangible assets acquired in business combinations were mostly customer and technology related, the majority of which will be amortized over a period of up to 20 years from the date of the acquisition.

Hydrogenics Corporation

On September 9, 2019, we acquired an 81 percent interest in Hydrogenics Corporation for total consideration of $235 million. The Hydrogen Company, a wholly-owned subsidiary of L’Air Liquide, S.A., maintains a 19 percent noncontrolling interest in Hydrogenics Corporation of $56 million, based on the publicly traded share price of Hydrogenics at the acquisition date, which was representative of its fair value. We accounted for the transaction as a business combination and included it in the New Power segment in the third quarter of 2019. We assigned this business to our New Power reporting unit, which included our electrified power, fuel cell and hydrogen technologies businesses, for goodwill impairment purposes. As of December 31, 2019, our purchase accounting was complete. The intangible assets will be amortized over periods ranging from 3 to 20 years. The purchase price allocation was as follows:

In millions
Inventory						$	21
Other current assets						25
Intangible assets
Technology assets						96
Customer relationships						29
In-process research and development						35
Other intangible assets						1
Goodwill						161
Other assets						18
Current liabilities						(53)
Other liabilities						(42)
Total business valuation						291
Less: Noncontrolling interest						56
Total purchase consideration						$	235

Technology assets represent the value of both the existing fuel cells and generation equipment. These assets were valued using the relief-from-royalty method, which is a combination of the income approach and market approach that values a subject asset based on an estimate of the relief from the royalty expense that would be incurred if the subject asset were licensed from a third-party. Key assumptions are expected revenue, the royalty rate, the estimated remaining useful life and the discount rate. This value is considered a level 3 measurement under the fair value hierarchy.

Customer relationship assets represent the value of the long-term strategic relationship the business has with its significant customers. The assets were valued using an income approach, specifically the multi-period excess earnings method, which identifies an estimated stream of revenues and expenses for a particular group of assets from which deductions of portions of the projected economic benefits, attributable to assets other than the subject asset (contributory assets), are deducted in order to isolate the prospective earnings of the subject asset. Key assumptions are expected revenue, related expenses, the estimated remaining useful life and the discount rate. These assets are each being amortized over 15 to 20 years. As of December 31, 2019, annual amortization of the intangible assets for the next five years was expected to approximate $8 million.

In-process research and development assets represent acquired research and development assets that have been initiated, achieved material progress, but have not yet resulted in a technologically feasible or commercially viable project. These assets were valued using the relief-from-royalty method, as described above. These assets will not be amortized until they have been completed, but will be tested annually for impairment until that time. Approximately $10 million of this amount began to be amortized in 2020, and the remainder will begin amortization once the related projects are completed.

Goodwill was determined based on the residual difference between the fair value of consideration transferred and the value assigned to tangible and intangible assets and liabilities. The goodwill amount will not be deductible for tax purposes. Among the factors contributing to a purchase price resulting in the recognition of goodwill are the acquisition of engineering talent in the fuel cell space, the ability to be one of the forerunners in the development of clean fuel cell energy and the continued opportunity to expand our position as a global power leader.

NOTE 21. RESTRUCTURING ACTIONS

In November 2019, we announced our intentions to reduce our global workforce in response to the continued deterioration in our global markets in the second half of 2019, as well as expected reductions in orders in most U.S. and international markets in 2020. 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.

Restructuring actions were included in our segment and non-segment operating results as follows:

In millions						Year ended December 31, 2019
Engine						$	18
Distribution						37
Components						20
Power Systems						12
New Power						1
Non-segment						31
Restructuring actions						$	119

The table below summarizes the activity and balance of accrued restructuring, which is included in "Other accrued expenses" in our Consolidated Balance Sheets:

			In millions						Restructuring Accrual
			Workforce reductions						$	119
			Cash payments						(4)
			Foreign currency loss						1
			Balance at December 31, 2019						116
			Cash payments						(110)
			Change in estimate						(4)
			Foreign currency gain						(1)
			Balance at December 31, 2020						$	1

NOTE 22. OPERATING SEGMENTS

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

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

We use segment earnings or losses before interest expense, income taxes, depreciation and amortization and noncontrolling interests (EBITDA) as the primary basis for the CODM to evaluate the performance of each of our reportable operating segments. We believe EBITDA is a useful measure of our operating performance as it assists investors and debt holders in comparing our performance on a consistent basis without regard to financing methods, capital structure, income taxes or depreciation and amortization methods, which can vary significantly depending upon many factors. Segment amounts exclude certain expenses not specifically identifiable to segments.

The accounting policies of our operating segments are the same as those applied in our Consolidated Financial Statements. We prepared the financial results of our operating segments on a basis that is consistent with the manner in which we internally disaggregate financial information to assist in making internal operating decisions. We allocate certain common costs and expenses, primarily corporate functions, among segments differently than we would for stand-alone financial information prepared in accordance with GAAP. These include certain costs and expenses of shared services, such as information technology, human resources, legal, finance and supply chain management. We do not allocate gains or losses of corporate owned life insurance to individual segments. EBITDA may not be consistent with measures used by other companies.

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

In millions						Engine						Distribution						Components						Power Systems						New Power						Total Segments						Intersegment Eliminations**(1)**						Total
2020
External sales						$	5,925					$	7,110					$	4,650					$	2,055					$	71					$	19,811					$	—					$	19,811
Intersegment sales						2,097						26						1,374						1,576						1						5,074						(5,074)						—
Total sales						8,022						7,136						6,024						3,631						72						24,885						(5,074)						19,811
Research, development and engineering expenses						290						31						264						212						109						906						—						906
Equity, royalty and interest income (loss) from investees						312						62						61						21						(4)						452						—						452
Interest income						9						4						4						4						—						21						—						21
EBITDA						1,235						665						961						343						(172)						3,032						76						3,108
Depreciation and amortization (2)						208						122						192						130						18						670						—						670
Net assets						1,306						2,444						2,878						2,134						504						9,266						—						9,266
Investments and advances to equity investees						681						313						215						200						32						1,441						—						1,441
Capital expenditures						202						89						140						79						18						528						—						528
2019
External sales						$	7,570					$	8,040					$	5,253					$	2,670					$	38					$	23,571					$	—					$	23,571
Intersegment sales						2,486						31						1,661						1,790						—						5,968						(5,968)						—
Total sales						10,056						8,071						6,914						4,460						38						29,539						(5,968)						23,571
Research, development and engineering expenses						337						28						300						230						106						1,001						—						1,001
Equity, royalty and interest income from investees						200						52						40						38						—						330						—						330
Interest income						15						15						8						8						—						46						—						46
EBITDA (excluding restructuring actions)						1,472						693						1,117						524						(148)						3,658						73						3,731
Restructuring actions (3)						18						37						20						12						1						88						31						119
EBITDA						1,454						656						1,097						512						(149)						3,570						42						3,612
Depreciation and amortization (2)						202						115						222						118						12						669						—						669
Net assets						1,094						2,536						2,911						2,245						472						9,258						—						9,258
Investments and advances to equity investees						575						296						193						171						2						1,237						—						1,237
Capital expenditures						240						136						191						107						26						700						—						700

(Table continued on next page)

In millions						Engine						Distribution						Components						Power Systems						New Power						Total Segments						Intersegment Eliminations**(1)**						Total
2018
External sales						$	8,002					$	7,807					$	5,331					$	2,625					$	6					$	23,771					$	—					$	23,771
Intersegment sales						2,564						21						1,835						2,001						1						6,422						(6,422)						—
Total sales						10,566						7,828						7,166						4,626						7						30,193						(6,422)						23,771
Research, development and engineering expenses						311						20						272						230						69						902						—						902
Equity, royalty and interest income from investees						238						46						54						56						—						394						—						394
Interest income						11						13						5						6						—						35						—						35
EBITDA						1,446						563						1,030						614						(90)						3,563						(87)						3,476
Depreciation and amortization (2)						190						109						185						119						6						609						—						609
Net assets						1,265						2,677						2,878						2,262						138						9,220						—						9,220
Investments and advances to equity investees						561						278						206						177						—						1,222						—						1,222
Capital expenditures						254						133						182						129						11						709						—						709
(1) Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. The year ended December 31, 2019, includes a $31 million restructuring charge related to corporate functions. There were no significant unallocated corporate expenses for the years ended December 31, 2020 and 2018.
(2) Depreciation and amortization, as shown on a segment basis, excludes the amortization of debt discount and deferred costs included in the Consolidated Statements of Net Income as "Interest expense." The amortization of debt discount and deferred costs were $3 million, $3 million and $2 million for the years ended 2020, 2019 and 2018, respectively. A portion of depreciation expense is included in "Research, development and engineering expense."
(3) See Note 21 "RESTRUCTURING ACTIONS," for additional information.

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

						Years ended December 31,
In millions						2020						2019						2018
TOTAL SEGMENT EBITDA						$	3,032					$	3,570					$	3,563
Intersegment elimination						76						42						(87)
TOTAL EBITDA						3,108						3,612						3,476
Less:
Interest expense						100						109						114
Depreciation and amortization						670						669						609
INCOME BEFORE INCOME TAXES						2,338						2,834						2,753
Less: Income tax expense						527						566						566
CONSOLIDATED NET INCOME						1,811						2,268						2,187
Less: Net income attributable to noncontrolling interests						22						8						46
NET INCOME ATTRIBUTABLE TO CUMMINS INC.						$	1,789					$	2,260					$	2,141

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

						December 31,
In millions						2020						2019						2018
Net assets for operating segments						$	9,266					$	9,258					$	9,220
Cash, cash equivalents and marketable securities						3,862						1,470						1,525
Net liabilities deducted in arriving at net assets (1)						8,947						8,498						7,836
Pension and OPEB adjustments excluded from net assets						67						67						68
Deferred tax assets not allocated to segments						479						441						410
Deferred debt costs not allocated to segments						3						3						3
Total assets						$	22,624					$	19,737					$	19,062
(1) Liabilities deducted in arriving at net assets include certain accounts payable, accrued expenses, long-term liabilities and other items.

See Note 2, "REVENUE FROM CONTRACTS WITH CUSTOMERS," for segment net sales by geographic area.

Long-lived assets include property, plant and equipment, net of depreciation, investments and advances to equity investees and other assets, excluding deferred tax assets, refundable taxes and deferred debt expenses. Long-lived segment assets by geographic area were as follows:

						December 31,
In millions						2020						2019						2018
United States						$	3,776					$	3,555					$	3,174
China						1,010						893						823
India						595						616						577
United Kingdom						370						370						337
Netherlands						295						253						234
Mexico						187						175						171
Canada						149						139						114
Brazil						79						106						104
Other international countries						466						489						329
Total long-lived assets						$	6,927					$	6,596					$	5,863

Our largest customer is PACCAR Inc. Worldwide sales to this customer were $2,900 million, $3,937 million and $3,643 million for the years ended December 31, 2020, 2019 and 2018, representing 15 percent, 17 percent and 15 percent, respectively, of our consolidated net sales. No other customer accounted for more than 10 percent of consolidated net sales.

SELECTED QUARTERLY FINANCIAL DATA

UNAUDITED

						First Quarter						Second Quarter						Third Quarter						Fourth Quarter
In millions, except per share amounts						2020
Net sales						$	5,011					$	3,852					$	5,118					$	5,830
Gross margin						1,294						890						1,349						1,361
Net income attributable to Cummins Inc.						511						276						501						501
Earnings per common share attributable to Cummins Inc.—basic						$	3.42					$	1.87					$	3.39					$	3.39
Earnings per common share attributable to Cummins Inc.—diluted (1)						3.41						1.86						3.36						3.36
Cash dividends per share						1.311						1.311						1.311						1.35
Stock price per share
High						$	180.88					$	184.94					$	215.43					$	244.67
Low						101.03						127.30						170.19						203.51

						2019
Net sales						$	6,004					$	6,221					$	5,768					$	5,578
Gross margin						1,532						1,641						1,494						1,313
Net income attributable to Cummins Inc.						663						675						622						300			(2)
Earnings per common share attributable to Cummins Inc.—basic (1)						$	4.22					$	4.29					$	3.99					$	1.98		(2)
Earnings per common share attributable to Cummins Inc.—diluted (1)						4.20						4.27						3.97						1.97			(2)
Cash dividends per share						1.14						1.14						1.311						1.311
Stock price per share
High						$	162.34					$	171.84					$	175.91					$	186.73
Low						130.03						150.48						141.14						151.15
(1)Earnings per share in each quarter is computed using the weighted-average number of shares outstanding during that quarter while earnings per share for the full year is computed using the weighted-average number of shares outstanding during the year. Thus, the sum of the four quarters earnings per share may not equal the full year earnings per share.
(2) Net income attributable to Cummins Inc. and earnings per share were negatively impacted by $119 million ($90 million after-tax) of restructuring actions in the fourth quarter of 2019 ($0.59 per basic share and $0.59 per diluted share).

At December 31, 2020, there were approximately 2,637 holders of record of Cummins Inc.'s $2.50 par value common stock.