Item 8. Financial Statements and Supplementary Data

Index to Financial Statements

• Management's Report to Shareholders**

• Report of Independent Registered Public Accounting Firm (PCAOB ID 238)**

• Consolidated Statements of Net Income** for the years ended December 31, 2021, 2020 and 2019

• Consolidated Statements of Comprehensive Income** for the years ended December 31, 2021, 2020 and 2019

• Consolidated Balance Sheets** at December 31, 2021 and 2020

• Consolidated Statements of Cash Flows** for the years ended December 31, 2021, 2020 and 2019

• Consolidated Statements of Changes in Equity** for the years ended December 31, 2021, 2020 and 2019

• 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						PENSIONS AND OTHER POSTRETIREMENT BENEFITS
NOTE						11						SUPPLEMENTAL BALANCE SHEET DATA
NOTE						12						DEBT
NOTE						13						PRODUCT WARRANTY LIABILITY
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						ACQUISITION
NOTE						21						RESTRUCTURING ACTIONS
NOTE						22						OPERATING SEGMENTS

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, 2021. 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, 2021, 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, 2021 and 2020, 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, 2021, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 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, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

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 Test - Automated Transmission Reporting Unit

As described in Notes 1 and 9 to the consolidated financial statements, the Company’s consolidated goodwill balance was $1,287 million, and the goodwill associated with the Automated Transmission reporting unit was $544 million as of December 31, 2021. 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 amount. 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 test for the Automated Transmission reporting unit is a critical audit matter are (i) the significant judgment by management when developing the fair value of the Automated Transmission reporting unit; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating the significant assumptions related to projections of revenue and projections of gross margin; 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 test, 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 of the Automated Transmission reporting unit. This included evaluating the appropriateness of the discounted cash flow model, testing the completeness and accuracy of underlying data used in the discounted cash flow model, and evaluating the reasonableness of significant assumptions used by management related to projections of revenue and projections of gross margin. Evaluating management’s assumptions related to projections of revenue and projections of 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.

Base Product Warranty Liability

As described in Notes 1 and 13 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, 2021, the accrued liability for base product warranty programs was $1,439 million. 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 the 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 and evaluating the 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, including controls 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. This included evaluating the appropriateness of the method used by management,

testing the completeness and accuracy of underlying data used in the warranty estimate, and evaluating the reasonableness of significant assumptions used by management related to the component failure rates, repair costs, and the point of failure within the product life cycle. Evaluating management’s assumptions related to the component failure rates, repair costs, and the point of failure within the product life cycle involved evaluating whether the assumptions used by management were reasonable considering the historical product experience of the Company.

/s/PricewaterhouseCoopers LLP

Indianapolis, Indiana

February 8, 2022

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						2021						2020						2019
NET SALES (a) (Note 2)						$	24,021					$	19,811					$	23,571
Cost of sales						18,326						14,917						17,591
GROSS MARGIN						5,695						4,894						5,980
OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses						2,374						2,125						2,454
Research, development and engineering expenses						1,090						906						1,001
Equity, royalty and interest income from investees (Note 3)						506						452						330
Restructuring actions (Note 21)						—						—						119
Other operating expense, net						(31)						(46)						(36)
OPERATING INCOME						2,706						2,269						2,700
Interest expense (Note 12)						111						100						109
Other income, net						156						169						243
INCOME BEFORE INCOME TAXES						2,751						2,338						2,834
Income tax expense (Note 4)						587						527						566
CONSOLIDATED NET INCOME						2,164						1,811						2,268
Less: Net income attributable to noncontrolling interests						33						22						8
NET INCOME ATTRIBUTABLE TO CUMMINS INC.						$	2,131					$	1,789					$	2,260
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC. (Note 19)
Basic						$	14.74					$	12.07					$	14.54
Diluted						$	14.61					$	12.01					$	14.48
(a)Includes sales to nonconsolidated equity investees of $1,713 million, $1,283 million and $1,191 million for the years ended December 31, 2021, 2020 and 2019, respectively.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

						Years ended December 31,
In millions						2021						2020						2019
CONSOLIDATED NET INCOME						$	2,164					$	1,811					$	2,268
Other comprehensive income (loss), net of tax (Note 16)
Change in pension and other postretirement defined benefit plans						389						(1)						(63)
Foreign currency translation adjustments						(9)						71						(152)
Unrealized gain (loss) on derivatives						26						(34)						(11)
Total other comprehensive income (loss), net of tax						406						36						(226)
COMPREHENSIVE INCOME						2,570						1,847						2,042
Less: Comprehensive income attributable to noncontrolling interests						28						12						3
COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC.						$	2,542					$	1,835					$	2,039

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						2021						2020
ASSETS
Current assets
Cash and cash equivalents						$	2,592					$	3,401
Marketable securities (Note 5)						595						461
Total cash, cash equivalents and marketable securities						3,187						3,862
Accounts and notes receivable, net
Trade and other						3,565						3,440
Nonconsolidated equity investees						425						380
Inventories (Note 6)						4,355						3,425
Prepaid expenses and other current assets						777						790
Total current assets						12,309						11,897
Long-term assets
Property, plant and equipment, net (Note 7)						4,422						4,255
Investments and advances related to equity method investees (Note 3)						1,538						1,441
Goodwill (Note 9)						1,287						1,293
Other intangible assets, net (Note 9)						900						963
Pension assets (Note 10)						1,488						1,042
Other assets (Note 11)						1,766						1,733
Total assets						$	23,710					$	22,624
LIABILITIES
Current liabilities
Accounts payable (principally trade)						$	3,021					$	2,820
Loans payable (Note 12)						208						169
Commercial paper (Note 12)						313						323
Accrued compensation, benefits and retirement costs						683						484
Current portion of accrued product warranty (Note 13)						755						674
Current portion of deferred revenue (Note 2)						855						691
Other accrued expenses (Note 11)						1,190						1,112
Current maturities of long-term debt (Note 12)						59						62
Total current liabilities						7,084						6,335
Long-term liabilities
Long-term debt (Note 12)						3,579						3,610
Pensions and other postretirement benefits (Note 10)						604						630
Accrued product warranty (Note 13)						684						672
Deferred revenue (Note 2)						850						840
Other liabilities (Note 11)						1,508						1,548
Total liabilities						$	14,309					$	13,635
Commitments and contingencies (Note 14)
EQUITY
Cummins Inc. shareholders’ equity (Note 15)
Common stock, $2.50 par value, 500 shares authorized, 222.5 and 222.4 shares issued						$	2,427					$	2,404
Retained earnings						16,741						15,419
Treasury stock, at cost, 80.0 and 74.8 shares						(9,123)						(7,779)
Accumulated other comprehensive loss (Note 16)						(1,571)						(1,982)
Total Cummins Inc. shareholders’ equity						8,474						8,062
Noncontrolling interests (Note 17)						927						927
Total equity						$	9,401					$	8,989
Total liabilities and equity						$	23,710					$	22,624

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						2021						2020						2019
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income						$	2,164					$	1,811					$	2,268
Adjustments to reconcile consolidated net income to net cash provided by operating activities
Depreciation and amortization						662						673						672
Deferred income taxes (Note 4)						7						7						(4)
Equity in income of investees, net of dividends						(83)						(105)						(14)
Pension and OPEB expense (Note 10)						83						108						75
Pension contributions and OPEB payments (Note 10)						(102)						(121)						(150)
Share-based compensation expense (Note 18)						37						31						49
Restructuring actions, net of cash payments						(1)						(110)						115
Gain on corporate owned life insurance						—						(57)						(61)
Foreign currency remeasurement and transaction exposure						37						2						(105)
Changes in current assets and liabilities, net of acquisitions
Accounts and notes receivable						(174)						(51)						195
Inventories						(945)						46						291
Other current assets						2						(39)						(95)
Accounts payable						217						288						(310)
Accrued expenses						541						121						(112)
Changes in other liabilities						(6)						189						240
Other, net						(183)						(71)						127
Net cash provided by operating activities						2,256						2,722						3,181
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures						(734)						(528)						(700)
Investments in internal use software						(52)						(47)						(75)
Proceeds from sale of land						20						—						—
Investments in and advances to equity investees						(48)						(51)						(20)
Acquisitions of businesses, net of cash acquired (Note 20)						—						—						(237)
Investments in marketable securities—acquisitions						(806)						(593)						(495)
Investments in marketable securities—liquidations (Note 5)						673						469						389
Cash flows from derivatives not designated as hedges						49						4						(44)
Other, net						25						27						32
Net cash used in investing activities						(873)						(719)						(1,150)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings (Note 12)						79						2,014						11
Net payments of commercial paper						(10)						(337)						(120)
Payments on borrowings and finance lease obligations						(73)						(73)						(96)
Net (payments) borrowings under short-term credit agreements						(28)						10						53
Distributions to noncontrolling interests						(28)						(26)						(33)
Dividend payments on common stock (Note 15)						(809)						(782)						(761)
Repurchases of common stock (Note 15)						(1,402)						(641)						(1,271)
Proceeds from issuing common stock						56						88						76
Other, net						(12)						27						46
Net cash (used in) provided by financing activities						(2,227)						280						(2,095)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS						35						(11)						(110)
Net (decrease) increase in cash and cash equivalents						(809)						2,272						(174)
Cash and cash equivalents at beginning of year						3,401						1,129						1,303
CASH AND CASH EQUIVALENTS AT END OF PERIOD						$	2,592					$	3,401					$	1,129

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, 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																		(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
Net income																		2,131																								2,131						33						2,164
Other comprehensive income (loss), net of tax (Note 16)																																				411						411						(5)						406
Issuance of common stock												1																														1						—						1
Repurchases of common stock (Note 15)																								(1,402)																		(1,402)						—						(1,402)
Cash dividends on common stock (Note 15)																		(809)																								(809)						—						(809)
Distributions to noncontrolling interests																																										—						(28)						(28)
Share-based awards												1												55																		56						—						56
Other shareholder transactions												21												3																		24						—						24
BALANCE AT DECEMBER 31, 2021						$	556					$	1,871					$	16,741					$	(9,123)					$	—					$	(1,571)					$	8,474					$	927					$	9,401

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 service network of approximately 500 wholly-owned, joint venture and independent distributor locations and more than 10,000 Cummins certified dealer locations in approximately 190 countries and territories.

COVID-19

The outbreak of COVID-19 in early 2020 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 negatively impacted our sales and results of operations during 2020. While the majority of the negative impacts to demand largely subsided in 2021, we are still experiencing supply chain disruptions and related financial impacts reflected as increased cost of sales. Our industry continues to be unfavorably impacted by supply chain constraints leading to shortages across multiple components categories and limiting our collective ability to meet end-user demand. Our customers are also experiencing other supply chain issues and slowing production.

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 2020 and 2019 were 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, 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.

Current supply chain disruptions and related future financial impacts cannot be estimated at this time. This uncertainty could have an impact on certain estimates used in the preparation of our 2021 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 is 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 and other power generation system 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, 2021, 2020 and 2019.

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, 2021 or 2020.

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 $2 million, $4 million and $28 million for the years ended December 31, 2021, 2020 and 2019, 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 interest rate swaps and locks. 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 and locks. The objective is to more effectively balance our borrowing costs and interest rate risk for current and future exposure. The gain or loss on the swaps as well as the offsetting gain or loss on the hedged item are recognized in current income as "Interest expense." The gain or loss on the locks is deferred and reported as a component of AOCL. For more detail on our interest rate swaps, see Note 12, "DEBT."

Due to our international business presence, we are exposed to foreign currency exchange risk. We transact in foreign currencies and have assets, liabilities and investments in subsidiaries 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, 2021 and 2020, 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 and forward 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. These commodity swaps are designated and qualify as cash flow hedges. At December 31, 2021, realized and unrealized gains and losses related to these hedges were not material to our financial statements. We also enter into physical forward contracts, which 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."

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						2021						2020						2019
Cash payments for income taxes, net of refunds						$	521					$	432					$	691
Cash payments for interest, net of capitalized interest						111						88						109

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, 2021 and 2020, 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 were 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 $33 million and $39 million at December 31, 2021, and 2020, 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, 2021 and 2020, approximately 15 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 finance lease assets. 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 asset amortization is recorded in depreciation expense. We expense normal maintenance and repair costs as incurred. Depreciation expense totaled $514 million, $504 million and $494 million for the years ended December 31, 2021, 2020 and 2019, 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.

Leases

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 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 were aggregated into a single reporting unit,

• Within our New Power segment, our electrified power, fuel cell and hydrogen technologies businesses were 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.

At December 31, 2021, our recorded goodwill was $1,287 million, of which approximately 42 percent or $544 million 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 were 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 13, "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 information technology expenses, 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 $1.1 billion, $903 million and $998 million for the years ended December 31, 2021, 2020 and 2019, respectively. Contract reimbursements were $104 million, $86 million and $90 million for the years ended December 31, 2021, 2020 and 2019, 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.

NOTE 2. REVENUE FROM CONTRACTS WITH CUSTOMERS

Long-term Contracts

The majority of our contracts are for a period of less than one year. We have certain long-term maintenance agreements, construction contracts and extended warranty coverage arrangements that span a period in excess of one year. The aggregate amount of the transaction price for long-term maintenance agreements and construction contracts allocated to performance obligations that were not satisfied as of December 31, 2021, was $740 million. We expect to recognize the related revenue of $114 million over the next 12 months and $626 million over periods up to 10 years. See Note 13,"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						2021						2020
Unbilled revenue						$	100					$	114
Deferred revenue, primarily extended warranty						1,705						1,531

We recognized revenue of $509 million and $372 million in 2021 and 2020, 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 2021 or 2020.

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						2021						2020						2019
United States						$	12,489					$	10,605					$	13,519
China						3,169						2,832						2,331
India						1,133						680						848
Other international						7,230						5,694						6,873
Total net sales						$	24,021					$	19,811					$	23,571

Segment Revenue

Engine segment external sales by market were as follows:

						Years ended December 31,
In millions						2021						2020						2019
Heavy-duty truck						$	2,511					$	1,800					$	2,626
Medium-duty truck and bus						1,978						1,629						2,244
Light-duty automotive						1,845						1,441						1,656
Total on-highway						6,334						4,870						6,526
Off-highway						1,255						1,055						1,044
Total sales						$	7,589					$	5,925					$	7,570

Distribution segment external sales by region were as follows:

						Years ended December 31,
In millions						2021						2020						2019
North America						$	4,902					$	4,688					$	5,513
Asia Pacific						901						799						875
Europe						647						597						528
Russia						334						191						157
China						323						340						356
Africa and Middle East						259						198						235
India						194						150						200
Latin America						182						147						176
Total sales						$	7,742					$	7,110					$	8,040

Distribution segment external sales by product line were as follows:

						Years ended December 31,
In millions						2021						2020						2019
Parts						$	3,136					$	2,921					$	3,278
Power generation						1,754						1,686						1,777
Engines						1,493						1,245						1,511
Service						1,359						1,258						1,474
Total sales						$	7,742					$	7,110					$	8,040

Components segment external sales by business were as follows:

						Years ended December 31,
In millions						2021						2020						2019
Emission solutions						$	3,142					$	2,352					$	2,763
Filtration						1,171						1,005						1,024
Turbo technologies						787						673						696
Automated transmissions						481						303						534
Electronics and fuel systems						351						317						236
Total sales						$	5,932					$	4,650					$	5,253

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

						Years ended December 31,
In millions						2021						2020						2019
Power generation						$	1,481					$	1,155					$	1,414
Industrial						820						638						908
Generator technologies						349						262						348
Total sales						$	2,650					$	2,055					$	2,670

NOTE 3. INVESTMENTS IN EQUITY INVESTEES

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

						Ownership						December 31,
Dollars in millions						percentage						2021						2020
Komatsu alliances						20-50%						$	275					$	309
Beijing Foton Cummins Engine Co., Ltd.						50%						255						255
Dongfeng Cummins Engine Company, Ltd.						50%						148						134
Chongqing Cummins Engine Company, Ltd.						50%						144						125
Cummins-Scania XPI Manufacturing, LLC						50%						125						99
Tata Cummins, Ltd.						50%						88						78
Other						Various						503						441
Investments and advances related to equity method investees												$	1,538					$	1,441

We have approximately $965 million in our investment account at December 31, 2021, that represents cumulative undistributed income in our equity investees. Dividends received from our unconsolidated equity investees were $336 million, $271 million and $260 million in 2021, 2020 and 2019, respectively.

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

						Years ended December 31,
In millions						2021						2020						2019
Manufacturing entities
Beijing Foton Cummins Engine Co., Ltd.						$	112					$	113					$	60
Dongfeng Cummins Engine Company, Ltd.						82						63						52
Chongqing Cummins Engine Company, Ltd.						39						35						41
All other manufacturers						149						134			(1)(2)			88
Distribution entities
Komatsu Cummins Chile, Ltda.						32						31						28
All other distributors						10						2						2
Cummins share of net income						424						378						271
Royalty and interest income						82						74						59
Equity, royalty and interest income from investees						$	506					$	452					$	330
(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 were generally 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 2.5 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, X13 and X15, ranging from 10.5 liter to 14.5 liter, high performance heavy-duty diesel engines and natural gas 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 14.5 liter diesel engines with a power range from 80 to 760 horsepower, natural gas engines and automated transmissions. 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.

Our joint venture agreement for Cummins Westport, Inc. expired on December 31, 2021, and will not be renewed. Beginning in January 2022, engines previously sold through the joint venture will now be included in our consolidated results.

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:

						Years ended and at December 31,
In millions						2021						2020						2019
Net sales						$	8,934					$	7,794					$	7,068
Gross margin						1,574						1,418						1,274
Net income						802						696						566
Cummins share of net income						$	424					$	378					$	271
Royalty and interest income						82						74						59
Total equity, royalty and interest from investees						$	506					$	452					$	330
Current assets						$	4,587					$	4,264
Long-term assets						1,850						1,673
Current liabilities						(3,573)						(3,347)
Long-term liabilities						(288)						(251)
Net assets						$	2,576					$	2,339
Cummins share of net assets						$	1,490					$	1,361

NOTE 4. INCOME TAXES

The following table summarizes income before income taxes:

						Years ended December 31,
In millions						2021						2020						2019
U.S. income						$	1,251					$	1,134					$	1,677
Foreign income						1,500						1,204						1,157
Income before income taxes						$	2,751					$	2,338					$	2,834

Income tax expense (benefit) consisted of the following:

						Years ended December 31,
In millions						2021						2020						2019
Current
U.S. federal and state						$	261					$	162					$	288
Foreign						319						358						282
Total current income tax expense						580						520						570
Deferred
U.S. federal and state						(12)						2						(32)
Foreign						19						22						28
Impact of India tax law changes						—						(17)						—
Total deferred income tax expense (benefit)						7						7						(4)
Income tax expense						$	587					$	527					$	566

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

						Years ended December 31,
						2021						2020						2019
Statutory U.S. federal income tax rate						21.0		%				21.0		%				21.0		%
State income tax, net of federal effect						1.1						1.0						1.1
Differences in rates and taxability of foreign subsidiaries and joint ventures						0.1						3.6						1.5
Research tax credits						(0.6)						(1.3)						(1.5)
Foreign derived intangible income						(1.0)						(1.2)						(1.3)
Impact of India tax law changes						—						(0.7)						—
Other, net						0.7						0.1						(0.8)
Effective tax rate						21.3		%				22.5		%				20.0		%

Our effective tax rate for 2021 was 21.3 percent compared to 22.5 percent for 2020 and 20.0 percent for 2019. The year ended December 31, 2021, contained unfavorable net discrete tax items of $9 million, primarily due to $12 million of unfavorable provision to return adjustments related to the 2020 filed tax returns, partially offset by $3 million of favorable other discrete tax items.

The year ended December 31, 2020, contained $26 million 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 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.

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.

At December 31, 2021, $4.1 billion of non-U.S. earnings are considered indefinitely reinvested in operations outside the U.S. for which deferred taxes were not 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 assets (liabilities) were as follows:

						December 31,
In millions						2021						2020
Deferred tax assets
U.S. and state carryforward benefits						$	218					$	223
Foreign carryforward benefits						177						159
Employee benefit plans						254						273
Warranty expenses						445						445
Lease liabilities						108						107
Accrued expenses						111						93
Other						78						52
Gross deferred tax assets						1,391						1,352
Valuation allowance						(360)						(346)
Total deferred tax assets						1,031						1,006
Deferred tax liabilities
Property, plant and equipment						(272)						(258)
Unremitted income of foreign subsidiaries and joint ventures						(197)						(185)
Employee benefit plans						(355)						(229)
Lease assets						(105)						(103)
Other						(77)						(77)
Total deferred tax liabilities						(1,006)						(852)
Net deferred tax assets						$	25					$	154

Our 2021 U.S. carryforward benefits include $218 million of state credit and net operating loss carryforward benefits that begin to expire in 2022. Our foreign carryforward benefits include $177 million of net operating loss carryforwards that begin to expire in 2022. 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 $360 million and increased in 2021 by a net $14 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						2021						2020
Prepaid expenses and other current assets
Refundable income taxes						$	101					$	172
Other assets
Deferred income tax assets						428						479
Long-term refundable income taxes						—						23
Other accrued expenses
Income tax payable						107						82
Other liabilities
Long-term income tax						263						289
Deferred income tax liabilities						403						325

A reconciliation of unrecognized tax benefits for the years ended December 31, 2021, 2020 and 2019 was as follows:

						December 31,
In millions						2021						2020						2019
Balance at beginning of year						$	122					$	77					$	71
Additions to current year tax positions						11						9						23
Additions to prior years' tax positions						16						49						5
Reductions to prior years' tax positions						(28)						(13)						(11)
Reductions for tax positions due to settlements with taxing authorities						(32)						—						(11)
Balance at end of year						$	89					$	122					$	77

Included in the December 31, 2021, 2020 and 2019, balances are $85 million, $114 million and $69 million, respectively, related to tax positions that, if recognized, would favorably impact the effective tax rate in future periods. We also accrued interest expense related to the unrecognized tax benefits of $15 million, $17 million and $5 million as of December 31, 2021, 2020 and 2019, 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 2017.

NOTE 5. MARKETABLE SECURITIES

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

						December 31,
						2021																		2020
In millions						Cost						Gross unrealized gains/(losses) (1)						Estimated fair value						Cost						Gross unrealized gains/(losses) (1)						Estimated fair value
Equity securities
Certificates of deposit						$	299					$	—					$	299					$	164					$	—					$	164
Debt mutual funds						254						2						256						267						5						272
Equity mutual funds						29						10						39						19						5						24
Debt securities						1						—						1						1						—						1
Total marketable securities						$	583					$	12					$	595					$	451					$	10					$	461
(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 2021 or 2020.

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

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

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

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

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

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

						Years ended December 31,
In millions						2021						2020						2019
Proceeds from sales of marketable securities						$	494					$	343					$	258
Proceeds from maturities of marketable securities						179						126						131
Investments in marketable securities - liquidations						$	673					$	469					$	389

NOTE 6. INVENTORIES

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

						December 31,
In millions						2021						2020
Finished products						$	2,538					$	2,216
Work-in-process and raw materials						2,009						1,346
Inventories at FIFO cost						4,547						3,562
Excess of FIFO over LIFO						(192)						(137)
Total inventories						$	4,355					$	3,425

NOTE 7. PROPERTY, PLANT AND EQUIPMENT

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

						December 31,
In millions						2021						2020
Land and buildings						$	2,632					$	2,613
Machinery, equipment and fixtures						5,910						5,851
Construction in process						816						547
Property, plant and equipment, gross						9,358						9,011
Less: Accumulated depreciation						(4,936)						(4,756)
Property, plant and equipment, net						$	4,422					$	4,255

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), fork trucks and IT equipment. These leases typically range in term from two 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						2021						2020						2019
Operating lease cost						$	172					$	172					$	180
Finance lease cost
Amortization of right-of-use asset						16						18						18
Interest expense						4						4						9
Short-term lease cost						18						19						33
Variable lease cost						11						12						7
Total lease cost						$	221					$	225					$	247

Supplemental balance sheet information related to leases:

						December 31,
In millions						2021						2020						Balance Sheet Location
Assets
Operating lease assets						$	444					$	438					Other assets
Finance lease assets(1)						95						99						Property, plant and equipment, net
Total lease assets						$	539					$	537
Liabilities
Current
Operating lease liabilities						$	128					$	128					Other accrued expenses
Finance lease liabilities						14						12						Current maturities of long-term debt
Long-term
Operating lease liabilities						326						325						Other liabilities
Finance lease liabilities						75						79						Long-term debt
Total lease liabilities						$	543					$	544
(1) Finance lease assets were recorded net of accumulated amortization of $66 million and $58 million at December 31, 2021 and 2020.

Supplemental cash flow and other information related to leases:

						Years ended December 31,
In millions						2021						2020						2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases						$	159					$	149					$	163
Operating cash flows from finance leases						14						14						47
Financing cash flows from finance leases						4						4						9
Right-of-use assets obtained in exchange for lease obligations
Operating leases						$	160					$	97					$	214
Finance leases						13						19						5

Additional information related to leases:

						December 31,
						2021						2020
Weighted-average remaining lease term (in years)
Operating leases						5.1						4.9
Finance leases						9.8						10.8
Weighted-average discount rate
Operating leases						2.8		%				3.4		%
Finance leases						3.9		%				4.0		%

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, 2021, together with the net present value of the minimum payments:

In millions						Finance Leases						Operating Leases
2022						$	17					$	138
2023						15						102
2024						12						76
2025						9						58
2026						8						39
After 2026						48						73
Total minimum lease payments						109						486
Interest						(20)						(32)
Present value of net minimum lease payments						$	89					$	454

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, 2021 and 2020:

In millions						Components						New Power						Distribution						Power Systems						Engine																		Total
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
Acquisitions						—						—						—						2						—																		2
Translation and other						(7)						—						—						(1)						—																		(8)
Balance at December 31, 2021						$	934					$	257					$	79					$	11					$	6																	$	1,287

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						2021						2020
Software						$	586					$	661
Less: Accumulated amortization						(314)						(372)
Software, net						272						289
Trademarks, patents, customer relationships and other						957						959
Less: Accumulated amortization						(329)						(285)
Trademarks, patents, customer relationships and other, net						628						674
Total other intangible assets, net						$	900					$	963

Amortization expense for software and other intangibles totaled $144 million, $165 million and $175 million for the years ended December 31, 2021, 2020 and 2019, respectively. The projected amortization expense of our intangible assets, assuming no further acquisitions or dispositions, is as follows:

In millions						2022						2023						2024						2025						2026
Projected amortization expense						$	139					$	128					$	109					$	76					$	53

NOTE 10. 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						2021						2020						2021						2020
Change in benefit obligation
Benefit obligation at the beginning of the year						$	3,122					$	2,916					$	2,050					$	1,851
Service cost						139						133						33						29
Interest cost						79						95						30						36
Actuarial (gain) loss						(132)						224						(136)						136
Benefits paid from fund						(178)						(224)						(63)						(72)
Benefits paid directly by employer						(18)						(22)						—						—
Foreign currency translation adjustments						—						—						(27)						70
Benefit obligation at end of year						$	3,012					$	3,122					$	1,887					$	2,050
Change in plan assets
Fair value of plan assets at beginning of year						$	3,429					$	3,357					$	2,337					$	2,010
Actual return on plan assets						267						274						118						268
Employer contributions						30						22						30						48
Benefits paid from fund						(178)						(224)						(63)						(72)
Foreign currency translation adjustments						—						—						(32)						83
Fair value of plan assets at end of year						$	3,548					$	3,429					$	2,390					$	2,337
Funded status (including unfunded plans) at end of year						$	536					$	307					$	503					$	287
Amounts recognized in consolidated balance sheets
Pension assets						$	985					$	755					$	503					$	287
Accrued compensation, benefits and retirement costs						(18)						(17)						—						—
Pension and OPEB						(431)						(431)						—						—
Net amount recognized						$	536					$	307					$	503					$	287
Amounts recognized in accumulated other comprehensive loss
Net actuarial loss						$	467					$	714					$	61					$	250
Prior service cost						6						6						11						19
Net amount recognized						$	473					$	720					$	72					$	269

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 4 percent and 5 percent of our pension plan assets and obligations, respectively, at December 31, 2021. These plans are reflected in "Other liabilities" on our Consolidated Balance Sheets. In 2021 and 2020, we made $13 million and $16 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						2021						2020						2021						2020
Total ABO						$	2,986					$	3,091					$	1,844					$	1,954
Plans with ABO in excess of plan assets
ABO						424						417						—						—
Plans with PBO in excess of plan assets
PBO						449						448						—						—

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						2021						2020						2019						2021						2020						2019
Service cost						$	139					$	133					$	116					$	33					$	29					$	26
Interest cost						79						95						108						30						36						43
Expected return on plan assets						(199)						(195)						(189)						(85)						(74)						(70)
Amortization of prior service cost						1						1						1						2						2						2
Recognized net actuarial loss						47						41						17						31						34						11
Net periodic pension cost						$	67					$	75					$	53					$	11					$	27					$	12

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

In millions						2021						2020						2019
Amortization of prior service cost						$	(3)					$	(3)					$	(3)
Recognized net actuarial loss						(78)						(75)						(28)
Incurred actuarial (gain) loss						(368)						85						101
Foreign currency translation adjustments						5						19						4
Total recognized in other comprehensive (income) loss						$	(444)					$	26					$	74
Total recognized in net periodic pension cost and other comprehensive (income) loss						$	(366)					$	128					$	139

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
						2021						2020						2021						2020
Discount rate						3.01		%				2.62		%				1.95		%				1.50		%
Cash balance crediting rate						3.79		%				3.74		%				—						—
Compensation increase rate						2.71		%				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
						2021						2020						2019						2021						2020						2019
Discount rate						2.62		%				3.36		%				4.36		%				1.50		%				2.00		%				2.80		%
Expected return on plan assets						6.25		%				6.25		%				6.25		%				4.00		%				4.00		%				4.00		%
Compensation increase rate						2.72		%				2.73		%				2.73		%				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 2021. 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 elected to maintain our assumption of 6.25 percent in 2022.

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:

												Range
Asset Class						Target						Minimum						Maximum
U.S. equities						5.0		%				—		%				10		%
Non-U.S. equities						1.0		%				—		%				4		%
Global equities						6.0		%				3		%				9		%
Total equities						12.0		%
Real assets						6.0		%				—		%				10		%
Private equity/venture capital						6.0		%				—		%				10		%
Opportunistic credit						4.0		%				—		%				10		%
Fixed income						72.0		%				67		%				77		%
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 72 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 2021. 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 established the following targets:

Asset Class						Target
Equities						10.0		%
Private markets/secure income assets						12.0		%
Credit						16.0		%
Diversifying strategies						5.0		%
Fixed income/insurance annuity						56.0		%
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 56 percent fixed income component is structured in a way that covers approximately 90 percent of the plan's exposure to changes in its discount rate. Based on the above discussion, we elected an assumption of 3.75 percent in 2022.

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, 2021
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.						$	115					$	—					$	—					$	115
Non-U.S.						38						—						—						38
Fixed income
Government debt						37						30						—						67
Corporate debt
U.S.						—						489						—						489
Non-U.S.						—						19						—						19
Net cash equivalents (1)						270						57						—						327
Private markets and real assets (2)						—						—						551						551
Net plan assets subject to leveling						$	460					$	595					$	551					$	1,606
Pending trade/purchases/sales																								2
Accruals (3)																								6
Investments measured at net asset value																								1,934
Net plan assets																								$	3,548

						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
(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 ($995 million and $1,068 million at December 31, 2021 and 2020, 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 ($145 million and $245 million at December 31, 2021 and 2020, respectively) - These commingled funds have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days.

*•*Government Debt ($361 million and $199 million at December 31, 2021 and 2020, respectively) - These commingled funds have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days.

• Real Estate ($171 million and $153 million at December 31, 2021 and 2020, 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 ($262 million and $96 million at December 31, 2021 and 2020, 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, 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
Actual return on plan assets
Unrealized gains on assets still held at the reporting date						144						11						155
Purchases, sales and settlements, net						(32)						(3)						(35)
Balance at December 31, 2021						$	471					$	80					$	551

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, 2021
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.						$	—					$	79					$	—					$	79
Non-U.S.						—						74						—						74
Fixed income
Net cash equivalents (1)						35						—						—						35
Insurance annuity (2)						—						—						514						514
Private markets and real assets (3)						—						—						389						389
Net plan assets subject to leveling						$	35					$	153					$	903					$	1,091
Investments measured at net asset value																								1,299
Net plan assets																								$	2,390

						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
(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 ($894 million and $970 million at December 31, 2021 and 2020, 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 ($194 million and $168 million at December 31, 2021 and 2020, 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 ($99 million and $100 million at December 31, 2021 and 2020, 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 ($61 million and $60 million at December 31, 2021 and 2020, 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 ($51 million and $50 million at December 31, 2021 and 2020, 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, 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
Actual return on plan assets
Unrealized (losses) gains on assets still held at the reporting date						(42)						2						114						74
Purchases, sales and settlements, net						—						—						(9)						(9)
Balance at December 31, 2021						$	514					$	33					$	356					$	903

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 and actuary, 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 $47 million to our defined benefit pension plans in 2022. The table below presents expected future benefit payments under our pension plans:

						Qualified and Non-Qualified Pension Plans
In millions						2022						2023						2024						2025						2026						2027 - 2031
Expected benefit payments						$	274					$	261					$	268					$	271					$	277					$	1,411

Other Pension Plans

We also sponsor defined contribution plans for certain hourly and salaried employees. Our contributions to these plans were $92 million, $85 million and $102 million for the years ended December 31, 2021, 2020 and 2019.

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 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						2021						2020
Change in benefit obligation
Benefit obligation at the beginning of the year						$	219					$	227
Interest cost						5						7
Plan participants' contributions						14						9
Actuarial (gain) loss						(8)						14
Benefits paid directly by employer						(38)						(38)
Benefit obligation at end of year						$	192					$	219
Funded status at end of year						$	(192)					$	(219)
Amounts recognized in consolidated balance sheets
Accrued compensation, benefits and retirement costs						$	(19)					$	(20)
Pension and OPEB						(173)						(199)
Net amount recognized						$	(192)					$	(219)
Amounts recognized in accumulated other comprehensive loss
Net actuarial gain						$	(18)					$	(10)
Prior service credit						(4)						(4)
Net amount recognized						$	(22)					$	(14)

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 8 percent and 9 percent of our OPEB obligations at December 31, 2021 and 2020, 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						2021						2020						2019
Interest cost						$	5					$	7					$	10
Recognized net actuarial gain						—						(1)						—
Net periodic OPEB cost						$	5					$	6					$	10

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

						Years ended December 31,
In millions						2021						2020						2019
Recognized net actuarial gain						$	—					$	1					$	—
Incurred actuarial (gain) loss						(8)						14						(1)
Total recognized in other comprehensive (income) loss						$	(8)					$	15					$	(1)
Total recognized in net periodic OPEB cost and other comprehensive (income) loss						$	(3)					$	21					$	9

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:

						2021						2020
Discount rate						2.75		%				2.30		%

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

						2021						2020						2019
Discount rate						2.30		%				3.15		%				4.25		%

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 6.75 percent annual rate of increase in the per capita cost of covered health care benefits was assumed in 2021. 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						2022						2023						2024						2025						2026						2027 - 2031
Expected benefit payments						$	19					$	18					$	18					$	17					$	16					$	65

NOTE 11. SUPPLEMENTAL BALANCE SHEET DATA

Other assets included the following:

									December 31,
			In millions						2021						2020
			Corporate owned life insurance						$	492					$	508
			Operating lease assets						444						438
			Deferred income taxes						428						479
			Other						402						308
			Other assets						$	1,766					$	1,733

Other accrued expenses included the following:

						December 31,
In millions						2021						2020
Marketing accruals						$	303					$	242
Other taxes payable						234						256
Current portion of operating lease liabilities						128						128
Income taxes payable						107						82
Other						418						404
Other accrued expenses						$	1,190					$	1,112

Other liabilities included the following:

						December 31,
In millions						2021						2020
Deferred income taxes						$	403					$	325
Operating lease liabilities						326						325
Long-term income taxes						263						289
Accrued compensation						177						203
Mark-to-market valuation on interest rate swaps and locks						19						41
Other long-term liabilities						320						365
Other liabilities						$	1,508					$	1,548

NOTE 12. DEBT

Loans Payable and Commercial Paper

Loans payable at December 31, 2021 and 2020 were $208 million and $169 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:

						2021						2020
Weighted-average interest rate						2.71		%				2.53		%

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 $313 million and $323 million in outstanding borrowings under our commercial paper programs at December 31, 2021 and 2020, respectively. The weighted-average interest rate for commercial paper at December 31 was as follows:

						2021						2020
Weighted-average interest rate						(0.01)		%	(1)			(0.01)		%	(2)
(1) The weighted-average interest rate, inclusive of all brokerage fees, was negative 0.01 percent at December 31, 2021. This included $113 million of borrowings under the Europe program that were at a negative weighted-average interest rate of 0.39 percent and $200 million of borrowings under the U.S. program at a weighted-average interest rate of 0.21 percent.
(2) The weighted-average interest rate, inclusive of all brokerage fees, was negative 0.01 percent at December 31, 2020. This included $123 million of borrowings under the Europe 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.

Revolving Credit Facilities

On August 18, 2021, we entered into an amended and restated 5-year revolving credit agreement, which allows us to borrow up to $2 billion of unsecured funds at any time prior to August 18, 2026. This credit agreement replaces the prior $2 billion 5-year credit agreement that would have matured on August 22, 2023. Amounts payable under our revolving credit facility will rank pro rata with all of our unsecured, unsubordinated indebtedness. Up to $300 million under this credit facility is available for swingline loans. Based on our current long-term debt ratings, the applicable margin on LIBOR rate loans was 0.75 percent per annum as of December 31, 2021. Advances under the facility may be prepaid without premium or penalty, subject to customary breakage costs.

On August 18, 2021, we also entered into an amended and restated 364-day credit agreement, which allows us to borrow up to $1.5 billion of unsecured funds at any time prior to August 17, 2022. This credit agreement amended and restated the prior $1.5 billion 364-day credit facility that matured on August 18, 2021.

Both credit agreements include various covenants, including, among others, maintaining a net debt to total capital ratio of no more than 0.65 to 1.0. At December 31, 2021, we were in compliance with the financial debt covenants. We intend to maintain credit facilities at the current or higher aggregate amounts by renewing or replacing these facilities at or before expiration. These revolving credit facilities are maintained primarily to provide backup liquidity for our commercial paper borrowings and for general corporate purposes. There were no outstanding borrowings under these facilities at December 31, 2021.

At December 31, 2021, our $313 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, 2021, we also had $234 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						2021						2020
Long-term debt
Senior notes, due 2023						3.65%						$	500					$	500
Senior notes, due 2025 (1)						0.75%						500						500
Debentures, due 2027						6.75%						58						58
Debentures, due 2028						7.125%						250						250
Senior notes, due 2030 (1)						1.50%						850						850
Senior notes, due 2043						4.875%						500						500
Senior notes, due 2050						2.60%						650						650
Debentures, due 2098 (2)						5.65%						165						165
Other debt												110						132
Unamortized discount and deferred issuance costs												(68)						(72)
Fair value adjustments due to hedge on indebtedness												34						48
Finance leases												89						91
Total long-term debt												3,638						3,672
Less: Current maturities of long-term debt												59						62
Long-term debt												$	3,579					$	3,610
(1) In 2021 we entered into a series of interest rate swaps to effectively convert from a fixed rate to floating rate. See "Interest Rate Risk" below for additional information.
(2) The effective interest rate is 7.48%.

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

In millions						2022						2023						2024						2025						2026
Principal payments						$	59					$	536					$	31					$	507					$	24

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 percent senior unsecured notes due in 2025, $850 million aggregate principal amount of 1.50 percent senior unsecured notes due in 2030 and $650 million aggregate principal amount of 2.60 percent 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 percent debentures and $165 million 5.65 percent 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, 2021, we were in compliance with all of the financial debt 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 (SEC) on February 13, 2019. Under this shelf registration we may offer, from time to time, debt securities, common stock, preferred and preference stock, depositary shares, warrants, stock purchase contracts and stock purchase units. Our current shelf is scheduled to expire in February 2022. We have begun the renewal process and plan to file a new automatic shelf registration statement in the first quarter of 2022.

Interest Expense

For the years ended December 31, 2021, 2020 and 2019, total interest incurred was $113 million, $102 million and $112 million, respectively, and interest capitalized was $2 million, $2 million and $3 million, respectively.

Interest Rate Risk

In the second half of 2021, we entered into a series of interest rate swaps to effectively convert our $500 million senior notes, due in 2025, from a fixed rate of 0.75 percent to a floating rate equal to the three-month LIBOR plus a spread. We also entered into a series of interest rate swaps to effectively convert $765 million of our $850 million senior notes, due in 2030, from a fixed rate of 1.50 percent to a floating rate equal to the three-month LIBOR plus a spread. The swaps were designated, and will be accounted for, as fair value hedges. The gain or loss on these derivative instruments, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, are recognized in current income as "Interest expense." The net swap settlements that accrue each period are also reported in the Consolidated Financial Statements as "Interest expense."

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. The $24 million gain realized upon settlement is being amortized over the remaining three-year term of the related debt.

The following table summarizes the gains and losses:

						Years ended December 31,
In millions						2021												2020												2019
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)						$	(3)					$	2					$	7					$	(5)					$	16					$	(14)
(1) The difference between the gain (loss) on swaps and borrowings represented hedge ineffectiveness.

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						2021												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						Gain (Loss) Recognized in AOCL												Gain (Loss) Reclassified from AOCL into Interest Expense
Interest rate locks						$	19											$	—					(22)												—						(10)												—

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						2021						2020
Fair values of total debt (1)						$	4,461					$	4,665
Carrying value of total debt						4,159						4,164
(1) The fair value of debt is derived from Level 2 input measures.

NOTE 13. 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						2021						2020						2019
Balance, beginning of year						$	2,307					$	2,389					$	2,208
Provision for base warranties issued						503						443						458
Deferred revenue on extended warranty contracts sold						288						248						356
Provision for product campaigns issued						346						90						210
Payments made during period						(530)						(589)						(590)
Amortization of deferred revenue on extended warranty contracts						(260)						(227)						(230)
Changes in estimates for pre-existing product warranties						(228)						(52)						(24)
Foreign currency translation and other						(1)						5						1
Balance, end of year						$	2,425					$	2,307					$	2,389

We recognized supplier recoveries of $170 million, $20 million and $67 million for the years ended December 31, 2021, 2020 and 2019, respectively.

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

						December 31,
In millions						2021						2020						Balance Sheet Location
Deferred revenue related to extended coverage programs
Current portion						$	286					$	261					Current portion of deferred revenue
Long-term portion						700						700						Deferred revenue
Total						$	986					$	961
Product warranty
Current portion						$	755					$	674					Current portion of accrued product warranty
Long-term portion						684						672						Accrued product warranty
Total						$	1,439					$	1,346
Total warranty accrual						$	2,425					$	2,307

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, 2021, the remaining accrual balance was $82 million.

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 as we strive to ensure the certification and compliance processes for all of our pick-up truck applications are consistent with our internal policies, engineering standards and applicable laws. During conversations with the EPA and CARB about the effectiveness of our pick-up truck applications, the regulators raised concerns that certain aspects of our emissions systems may reduce the effectiveness of

our emissions control systems and thereby act as defeat devices. As a result, our internal review focuses, in part, on the regulators’ concerns. We are working closely with the regulators to enhance our emissions systems to improve the effectiveness of all of our pick-up truck applications and to fully address the regulators’ requirements. Based on discussions with the regulators, we have developed a new calibration for the engines in model year 2019 RAM 2500 and 3500 trucks that has been included in all engines shipped since September 2019. During our ongoing discussions, the regulators turned their attention to other model years and other engines, most notably our pick-up truck applications for RAM 2500 and 3500 trucks for model years 2013 through 2018. 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, nor whether, or the extent to which, they could have a material adverse impact on our results of operations and cash flows.

Guarantees and Commitments

Periodically, we enter into guarantee arrangements, including guarantees of non-U.S. distributor financings, residual value guarantees on equipment under operating leases and other miscellaneous guarantees of joint ventures or third-party obligations. At December 31, 2021, the maximum potential loss related to these guarantees was $39 million.

We have arrangements with certain suppliers that require us to purchase minimum volumes or be subject to monetary penalties. At December 31, 2021, if we were to stop purchasing from each of these suppliers, the aggregate amount of the penalty would be approximately $73 million. These arrangements enable us to secure supplies of critical components and IT services. We do not currently anticipate paying any penalties under these contracts.

We enter into physical forward contracts with suppliers of platinum and palladium to purchase certain volumes of the commodities at contractually stated prices for various periods, which generally fall within two years. At December 31, 2021, the total commitments under these contracts were $101 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 $103 million at December 31, 2021.

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, 2021 and 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, 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						—
Shares acquired						—						5.7						—
Shares issued						0.1						(0.5)						—
Balance at December 31, 2021						222.5						80.0						—

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, 2021, consisting of shares issued and repurchased is presented in our Consolidated Statements of Changes in Equity.

In December 2021, the Board authorized the acquisition of up to $2.0 billion of additional common stock upon completion of the 2019 repurchase plan. In December 2019, the Board authorized the acquisition of up to $2.0 billion of additional common stock upon completion of the 2018 repurchase plan. For the year ended December 31, 2021, we made the following purchases under the stock repurchase program:

In millions (except per share amounts) For each quarter ended						Shares Purchased						Average Cost Per Share						Total Cost of Repurchases												Remaining Authorized Capacity (1)
April 4						1.7						$	247.35					$	418											$	1,576
July 4						2.7						252.66						672												904
October 3						0.6						231.57						138												766
December 31						0.7						222.14						174												2,592
Total						5.7						244.73						$	1,402
(1) The remaining $592 million authorized capacity under the 2019 plan was calculated based on the cost to purchase the shares, but excludes commission expenses in accordance with the authorized plan.

We repurchased $1,402 million, $641 million and $1,271 million of our common stock in the years ended December 31, 2021, 2020 and 2019, respectively.

Dividends

Total dividends paid to common shareholders in 2021, 2020 and 2019 were $809 million, $782 million and $761 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 July 2021, the Board authorized an increase to our quarterly dividend of 7.4 percent from $1.35 per share to $1.45 per share. In October 2020, the Board authorized a 3.0 percent increase to our quarterly cash dividend on our common stock from $1.311 per share to $1.35 per share. In July 2019, the Board approved a 15.0 percent increase to our quarterly dividend on our common stock from $1.14 per share to $1.311 per share. Cash dividends per share paid to common shareholders for the last three years were as follows:

						Quarterly Dividends
						2021						2020						2019
First quarter						$	1.35					$	1.311					$	1.14
Second quarter						1.35						1.311						1.14
Third quarter						1.45						1.311						1.311
Fourth quarter						1.45						1.35						1.311
Total						$	5.60					$	5.28					$	4.90

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 derivatives									Total attributable to Cummins Inc.						Noncontrolling interests						Total
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						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						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)
Other comprehensive income before reclassifications
Before-tax amount						425						(5)												38									458						$	(5)					$	453
Tax (expense) benefit						(103)						1												(12)									(114)						—						(114)
After-tax amount						322						(4)												26									344						(5)						339
Amounts reclassified from accumulated other comprehensive income(1)						67						—												—									67						—						67
Net current period other comprehensive income (loss)						389						(4)												26									411						$	(5)					$	406
Balance at December 31, 2021						$	(346)					$	(1,208)											$	(17)								$	(1,571)
(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						2021						2020
Eaton Cummins Automated Transmission Technologies						$	518					$	538
Cummins India Ltd.						347						319
Hydrogenics Corporation (1)						38						50
Other						24						20
Total						$	927					$	927
(1) See Note 20, "ACQUISITION," 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. Most awards 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, 2021, 2020 and 2019, was approximately $36 million, $30 million and $48 million, respectively. In addition, non-employee director share-based compensation expense for the years ended December 31, 2021, 2020 and 2019, 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, 2021, 2020 and 2019, was $9 million, $4 million and $4 million, respectively. The total unrecognized compensation expense (net of estimated forfeitures) related to nonvested awards for our employee share-based plans was approximately $55 million at December 31, 2021 and is expected to be recognized over a weighted-average period of approximately 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, 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
Granted						16,550						232.44
Exercised						(400,154)						138.93
Forfeited						(48,828)						153.72
Balance at December 31, 2021						2,743,098						$	143.51					5.8						$	205
Exercisable, December 31, 2019						1,665,710						$	123.55					4.8						$	92
Exercisable, December 31, 2020						1,589,015						$	130.28					4.6						$	151
Exercisable, December 31, 2021						1,629,588						$	136.74					4.4						$	133

The weighted-average grant date fair value of options granted during the years ended December 31, 2021, 2020 and 2019, was $46.03, $25.40 and $31.04, respectively. The total intrinsic value of options exercised during the years ended December 31, 2021, 2020 and 2019, was approximately $41 million, $40 million and $35 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, 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
Granted						217,684						234.22						26,224						265.41
Vested						(131,744)						146.55						—						—
Forfeited						(22,745)						171.91						—						—
Balance at December 31, 2021						440,149						$	183.72					29,928						$	252.99

The total vesting date fair value of performance shares vested during the years ended December 31, 2021, 2020 and 2019, was $35 million, $41 million and $27 million, respectively. There were no restricted shares vested for the year ended December 31, 2021. The total fair value of restricted shares vested was less than $1 million and less than $1 million for the years ended December 31, 2020 and 2019, 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:

						2021						2020						2019
Expected life (years)						6						6						6
Risk-free interest rate						1.15		%				0.62		%				2.41		%
Expected volatility						28.68		%				27.05		%				23.79		%
Dividend yield						2.95		%				2.88		%				2.68		%

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 excluded shares of common stock held in the Employee Benefits Trust (EBT) from the calculation of the weighted-average common shares outstanding until those shares are distributed from the EBT to the Retirement Savings Plan. The EBT was fully depleted at December 31, 2021. Following are the computations for basic and diluted earnings per share:

						Years ended December 31,
In millions, except per share amounts						2021						2020						2019
Net income attributable to Cummins Inc.						$	2,131					$	1,789					$	2,260
Weighted-average common shares outstanding
Basic						144.6						148.2						155.4
Dilutive effect of stock compensation awards						1.3						0.8						0.7
Diluted						145.9						149.0						156.1
Earnings per common share attributable to Cummins Inc.
Basic						$	14.74					$	12.07					$	14.54
Diluted						14.61						12.01						14.48

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,
						2021						2020						2019
Options excluded						6,463						645,334						473,845

NOTE 20. ACQUISITION

The acquisition for the year ended December 31, 2019, was 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
Hydrogenics Corporation						9/09/19						81%						$	235					$	—					$	235																	$	161					$	161					$	34
(1) All results from the acquired entity were included in segment results subsequent to the acquisition date, and the acquisition was accounted for as a business combination and included in the New Power segment on the date of acquisition.
(2) Intangible assets acquired in the business combination 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.

No material acquisitions occurred during the years ended December 31, 2021 or 2020.

NOTE 21. RESTRUCTURING ACTIONS

We executed restructuring actions in the form of voluntary and involuntary employee separation programs in the fourth quarter of 2019. These actions were 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. We reduced our worldwide workforce by approximately 2,300 employees. We incurred a charge of $119 million ($90 million after-tax) in the fourth quarter of 2019 for these actions. The voluntary actions were completed by December 31, 2019 and the involuntary actions were completed by June 28, 2020.

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. The New Power segment is currently in the development phase with a primary focus on research and development activities for our power systems, components and subsystems. We continue to serve all our markets as they adopt electrification and alternative power technologies, meeting the needs of our OEM partners and end customers.

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

The accounting policies of our operating segments are the same as those applied in our 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
2021
External sales						$	7,589					$	7,742					$	5,932					$	2,650					$	108					$	24,021
Intersegment sales						2,365						30						1,733						1,765						8						5,901
Total sales						9,954						7,772						7,665						4,415						116						29,922
Research, development and engineering expenses						399						48						307						234						102						1,090
Equity, royalty and interest income (loss) from investees						340						63						50						56						(3)						506
Interest income						8						7						5						5						—						25
Segment EBITDA						1,411						731						1,180						496						(223)						3,595
Depreciation and amortization (1)						205						116						183						131						24						659
Net assets						1,554						2,294						2,938						2,251						602						9,639
Investments and advances to equity investees						742						329						254						164						49						1,538
Capital expenditures						341						92						184						80						37						734
2020
External sales						$	5,925					$	7,110					$	4,650					$	2,055					$	71					$	19,811
Intersegment sales						2,097						26						1,374						1,576						1						5,074
Total sales						8,022						7,136						6,024						3,631						72						24,885
Research, development and engineering expenses						290						31						264						212						109						906
Equity, royalty and interest income (loss) from investees						312						62						61						21						(4)						452
Interest income						9						4						4						4						—						21
Segment EBITDA						1,235						665						961						343						(172)						3,032
Depreciation and amortization (1)						208						122						192						130						18						670
Net assets						1,306						2,444						2,878						2,134						504						9,266
Investments and advances to equity investees						681						313						215						200						32						1,441
Capital expenditures						202						89						140						79						18						528

(Table continued on next page)

In millions						Engine						Distribution						Components						Power Systems						New Power						Total Segments
2019
External sales						$	7,570					$	8,040					$	5,253					$	2,670					$	38					$	23,571
Intersegment sales						2,486						31						1,661						1,790						—						5,968
Total sales						10,056						8,071						6,914						4,460						38						29,539
Research, development and engineering expenses						337						28						300						230						106						1,001
Equity, royalty and interest income from investees						200						52						40						38						—						330
Interest income						15						15						8						8						—						46
Segment EBITDA (excluding restructuring actions)						1,472						693						1,117						524						(148)						3,658
Restructuring actions (2)						18						37						20						12						1						88
Segment EBITDA						1,454						656						1,097						512						(149)						3,570
Depreciation and amortization (1)						202						115						222						118						12						669
Capital expenditures						240						136						191						107						26						700
(1) 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 $3 million for the years ended 2021, 2020 and 2019, respectively. A portion of depreciation expense is included in "Research, development and engineering expense."
(2) See Note 21 "RESTRUCTURING ACTIONS," for additional information.

A reconciliation of our total segment sales to total net sales in the Consolidated Statements of Net Income was as follows:

						Years ended December 31,
In millions						2021						2020						2019
Total segment sales						$	29,922					$	24,885					$	29,539
Elimination of intersegment sales						(5,901)						(5,074)						(5,968)
Total net sales						$	24,021					$	19,811					$	23,571

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						2021						2020						2019
TOTAL SEGMENT EBITDA						$	3,595					$	3,032					$	3,570
Intersegment elimination						(74)						76						42
Less:
Interest expense						111						100						109
Depreciation and amortization						659						670						669
INCOME BEFORE INCOME TAXES						2,751						2,338						2,834
Less: Income tax expense						587						527						566
CONSOLIDATED NET INCOME						2,164						1,811						2,268
Less: Net income attributable to noncontrolling interests						33						22						8
NET INCOME ATTRIBUTABLE TO CUMMINS INC.						$	2,131					$	1,789					$	2,260

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						2021						2020
Net assets for operating segments						$	9,639					$	9,266
Cash, cash equivalents and marketable securities						3,187						3,862
Net liabilities deducted in arriving at net assets (1)						9,486						8,947
Pension and OPEB adjustments excluded from net assets						966						67
Deferred tax assets not allocated to segments						428						479
Deferred debt costs not allocated to segments						4						3
Total assets						$	23,710					$	22,624
(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						2021						2020
United States						$	3,978					$	3,776
China						1,136						1,010
India						573						595
United Kingdom						384						370
Netherlands						314						295
Mexico						195						187
Canada						163						149
Other international countries						554						545
Total long-lived assets						$	7,297					$	6,927

Our largest customer is PACCAR Inc. Worldwide sales to this customer were approximately $3.6 billion, $2.9 billion and $3.9 billion for the years ended December 31, 2021, 2020 and 2019, representing 15 percent, 15 percent and 17 percent, respectively, of our consolidated net sales. No other customer accounted for more than 10 percent of consolidated net sales.