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, 2023, 2022 and 2021

• Consolidated Statements of Comprehensive Income** for the years ended December 31, 2023, 2022 and 2021

• Consolidated Balance Sheets** at December 31, 2023 and 2022

• Consolidated Statements of Cash Flows** for the years ended December 31, 2023, 2022 and 2021

• Consolidated Statements of Changes in Redeemable Noncontrolling Interests and Equity** for the years ended December 31, 2023, 2022 and 2021

• Notes to the Consolidated Financial Statements**

NOTE						1						SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NOTE						2						AGREEMENT IN PRINCIPLE
NOTE						3						REVENUE FROM CONTRACTS WITH CUSTOMERS
NOTE						4						INVESTMENTS IN EQUITY INVESTEES
NOTE						5						INCOME TAXES
NOTE						6						MARKETABLE SECURITIES
NOTE						7						INVENTORIES
NOTE						8						PROPERTY, PLANT AND EQUIPMENT
NOTE						9						LEASES
NOTE						10						GOODWILL AND OTHER INTANGIBLE ASSETS
NOTE						11						PENSIONS AND OTHER POSTRETIREMENT BENEFITS
NOTE						12						SUPPLEMENTAL BALANCE SHEET DATA
NOTE						13						DEBT
NOTE						14						PRODUCT WARRANTY LIABILITY
NOTE						15						COMMITMENTS AND CONTINGENCIES
NOTE						16						CUMMINS INC. SHAREHOLDERS' EQUITY
NOTE						17						ACCUMULATED OTHER COMPREHENSIVE LOSS
NOTE						18						NONCONTROLLING INTERESTS
NOTE						19						STOCK INCENTIVE AND STOCK OPTION PLANS
NOTE						20						EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
NOTE						21						DERIVATIVES
NOTE						22						RUSSIAN OPERATIONS
NOTE						23						FORMATION OF ATMUS AND IPO
NOTE						24						ACQUISITIONS
NOTE						25						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, 2023. 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, 2023, 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/ JENNIFER RUMSEY						/s/ MARK A. SMITH
Chair 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, 2023 and 2022, and the related consolidated statements of net income, comprehensive income, changes in redeemable noncontrolling interests and equity and cash flows for each of the three years in the period ended December 31, 2023, 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, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023 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, 2023, 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 matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Annual Goodwill Impairment Tests – Automated Transmissions and Axles and Brakes Reporting Units

As described in Notes 1 and 10 to the consolidated financial statements, the Company’s consolidated goodwill balance was $2,499 million as of December 31, 2023, and as disclosed by management, the goodwill associated with the automated transmissions reporting unit and axles and brakes reporting unit (collectively, the “reporting units”) was $544 million and $764 million, respectively. Management performs the goodwill impairment tests as of the end of the fiscal third quarter, or on an interim basis in certain circumstances where impairment may be indicated. Management performs the annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. In estimating the fair value of each reporting unit, management used 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 reporting units 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 annual goodwill impairment tests for the reporting units is a critical audit matter are (i) the significant judgment by management when developing the fair value estimate of the reporting units; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to projections of revenue and gross margin for the reporting units and the discount rate for the axles and brakes reporting unit; 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 tests, including controls over the valuation of the reporting units. These procedures also included, among others (i) testing management’s process for developing the fair value estimate of the reporting units; (ii) evaluating the appropriateness of the discounted cash flow model used by management; (iii) testing the completeness and accuracy of underlying data used in the discounted cash flow model; and (iv) evaluating the reasonableness of significant assumptions used by management related to projections of revenue and gross margin for the reporting units and the discount rate for the axles and brakes reporting unit. Evaluating management’s assumptions related to projections of revenue and gross margin involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting units; (ii) the consistency with external market and industry data; and (iii) whether the assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of the discounted cash flow model and (ii) the reasonableness of the discount rate assumption for the axles and brakes reporting unit.

/s/PricewaterhouseCoopers LLP

Indianapolis, Indiana

February 12, 2024

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						2023						2022						2021
NET SALES (Notes 1 and 3)						$	34,065					$	28,074					$	24,021
Cost of sales						25,816						21,355						18,326
GROSS MARGIN						8,249						6,719						5,695
OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses						3,333						2,687						2,374
Research, development and engineering expenses						1,500						1,278						1,090
Equity, royalty and interest income from investees (Note 4)						483						349						506
Other operating expense, net (Note 2)						2,138						174						31
OPERATING INCOME						1,761						2,929						2,706
Interest expense						375						199						111
Other income, net						240						89						156
INCOME BEFORE INCOME TAXES						1,626						2,819						2,751
Income tax expense (Note 5)						786						636						587
CONSOLIDATED NET INCOME						840						2,183						2,164
Less: Net income attributable to noncontrolling interests						105						32						33
NET INCOME ATTRIBUTABLE TO CUMMINS INC.						$	735					$	2,151					$	2,131
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC. (Note 20)
Basic						$	5.19					$	15.20					$	14.74
Diluted						$	5.15					$	15.12					$	14.61

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

						Years ended December 31,
In millions						2023						2022						2021
CONSOLIDATED NET INCOME						$	840					$	2,183					$	2,164
Other comprehensive (loss) income, net of tax (Note 17)
Change in pension and other postretirement defined benefit plans						(421)						(81)						389
Foreign currency translation adjustments						92						(384)						(9)
Unrealized gain on derivatives						10						106						26
Total other comprehensive (loss) income, net of tax						(319)						(359)						406
COMPREHENSIVE INCOME						521						1,824						2,570
Less: Comprehensive income (loss) attributable to noncontrolling interests						102						(8)						28
COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC.						$	419					$	1,832					$	2,542

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						2023						2022
ASSETS
Current assets
Cash and cash equivalents						$	2,179					$	2,101
Marketable securities (Note 6)						562						472
Total cash, cash equivalents and marketable securities						2,741						2,573
Accounts and notes receivable, net						5,583						5,202
Inventories (Note 7)						5,677						5,603
Prepaid expenses and other current assets						1,197						1,073
Total current assets						15,198						14,451
Long-term assets
Property, plant and equipment, net (Note 8)						6,249						5,521
Investments and advances related to equity method investees (Note 4)						1,800						1,759
Goodwill (Note 10)						2,499						2,343
Other intangible assets, net (Note 10)						2,519						2,687
Pension assets (Note 11)						1,197						1,398
Other assets (Note 12)						2,543						2,140
Total assets						$	32,005					$	30,299
LIABILITIES
Current liabilities
Accounts payable (principally trade)						$	4,260					$	4,252
Loans payable (Note 13)						280						210
Commercial paper (Note 13)						1,496						2,574
Current maturities of long-term debt (Note 13)						118						573
Accrued compensation, benefits and retirement costs						1,108						617
Current portion of accrued product warranty (Note 14)						667						726
Current portion of deferred revenue (Note 3)						1,220						1,004
Other accrued expenses (Note 12)						3,754						1,465
Total current liabilities						12,903						11,421
Long-term liabilities
Long-term debt (Note 13)						4,802						4,498
Deferred revenue (Note 3)						966						844
Other liabilities (Note 12)						3,430						3,311
Total liabilities						$	22,101					$	20,074
Commitments and contingencies (Note 15)
Redeemable noncontrolling interests (Note 24)						$	—					$	258
EQUITY
Cummins Inc. shareholders’ equity (Note 16)
Common stock, $2.50 par value, 500 shares authorized, 222.5 and 222.5 shares issued						$	2,564					$	2,243
Retained earnings						17,851						18,037
Treasury stock, at cost, 80.7 and 81.2 shares						(9,359)						(9,415)
Accumulated other comprehensive loss (Note 17)						(2,206)						(1,890)
Total Cummins Inc. shareholders’ equity						8,850						8,975
Noncontrolling interests (Note 18)						1,054						992
Total equity						$	9,904					$	9,967
Total liabilities, redeemable noncontrolling interests and equity						$	32,005					$	30,299

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						2023						2022						2021
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income						$	840					$	2,183					$	2,164
Adjustments to reconcile consolidated net income to net cash provided by operating activities
Depreciation and amortization						1,024						784						662
Deferred income taxes (Note 5)						(457)						(274)						7
Equity in income of investees, net of dividends						(81)						64						(83)
Pension and OPEB expense (Note 11)						8						24						83
Pension contributions and OPEB payments (Note 11)						(134)						(85)						(102)
Russian suspension costs, net of recoveries (Note 22)						—						111						—
Changes in current assets and liabilities, net of acquisitions
Accounts and notes receivable						(330)						(697)						(174)
Inventories						—						(567)						(945)
Other current assets						(120)						(109)						2
Accounts payable						(66)						538						217
Accrued expenses (Note 2)						2,934						(170)						541
Other, net						348						160						(116)
Net cash provided by operating activities						3,966						1,962						2,256
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures						(1,213)						(916)						(734)
Acquisitions of businesses, net of cash acquired (Note 24)						(292)						(3,191)						—
Investments in marketable securities—acquisitions						(1,409)						(1,073)						(806)
Investments in marketable securities—liquidations (Note 6)						1,334						1,151						673
Other, net						(63)						(143)						(6)
Net cash used in investing activities						(1,643)						(4,172)						(873)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings						861						2,103						79
Net (payments) borrowings of commercial paper						(779)						2,261						(10)
Payments on borrowings and finance lease obligations						(1,136)						(1,550)						(73)
Dividend payments on common stock (Note 16)						(921)						(855)						(809)
Repurchases of common stock (Note 16)						—						(374)						(1,402)
Payments for purchase of redeemable noncontrolling interests (Note 24)						(175)						—						—
Other, net						(27)						84						(12)
Net cash (used in) provided by financing activities						(2,177)						1,669						(2,227)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS						(68)						50						35
Net increase (decrease) in cash and cash equivalents						78						(491)						(809)
Cash and cash equivalents at beginning of year						2,101						2,592						3,401
CASH AND CASH EQUIVALENTS AT END OF PERIOD						$	2,179					$	2,101					$	2,592

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

CUMMINS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY

In millions						Redeemable Noncontrolling Interests						Common Stock						Additional Paid-in Capital						Retained Earnings						Treasury Stock												Accumulated Other Comprehensive Loss						Total Cummins Inc. Shareholders’ Equity						Noncontrolling Interests						Total Equity
BALANCE AT DECEMBER 31, 2020						$	282					$	556					$	1,617					$	15,419					$	(7,779)											$	(1,982)					$	7,831					$	876					$	8,707
Net income						(13)																		2,131																								2,131						46						2,177
Other comprehensive income (loss), net of tax (Note 17)																																										411						411						(5)						406
Issuance of common stock																		1																														1						—						1
Repurchases of common stock (Note 16)																														(1,402)																		(1,402)						—						(1,402)
Cash dividends on common stock (Note 16)																								(809)																								(809)						—						(809)
Distributions to noncontrolling interests																																																—						(28)						(28)
Share-based awards																		1												55																		56						—						56
Fair value adjustment of redeemable noncontrolling interests						97												(97)																														(97)						—						(97)
Other shareholder transactions																		21												3																		24						—						24
BALANCE AT DECEMBER 31, 2021						$	366					$	556					$	1,543					$	16,741					$	(9,123)											$	(1,571)					$	8,146					$	889					$	9,035
Net income						(24)																		2,151																								2,151						56						2,207
Other comprehensive loss, net of tax (Note 17)																																										(319)						(319)						(40)						(359)
Issuance of common stock																		8																														8						—						8
Repurchases of common stock (Note 16)																														(374)																		(374)						—						(374)
Cash dividends on common stock (Note 16)																								(855)																								(855)						—						(855)
Distributions to noncontrolling interests																																																—						(38)						(38)
Share-based awards																		3												77																		80						—						80
Acquisition of business (Note 24)																																																—						111						111
Fair value adjustment of redeemable noncontrolling interests						(104)												104																														104						—						104
Other shareholder transactions						20												29												5																		34						14						48
BALANCE AT DECEMBER 31, 2022						$	258					$	556					$	1,687					$	18,037					$	(9,415)											$	(1,890)					$	8,975					$	992					$	9,967
Net income						(20)																		735																								735						125						860
Other comprehensive loss, net of tax (Note 17)																																										(316)						(316)						(3)						(319)
Issuance of common stock																		3																														3						—						3
Cash dividends on common stock (Note 16)																								(921)																								(921)						—						(921)
Distributions to noncontrolling interests																																																—						(57)						(57)
Share-based awards																		(4)												52																		48						—						48
Fair value adjustment of redeemable noncontrolling interests						33												(33)																														(33)						—						(33)
Acquisition of redeemable noncontrolling interests (Note 24)						(271)																																										—						—						—
Sale of Atmus stock (Note 23)																		285																														285						(3)						282
Other shareholder transactions																		70												4																		74						—						74
BALANCE AT DECEMBER 31, 2023						$	—					$	556					$	2,008					$	17,851					$	(9,359)											$	(2,206)					$	8,850					$	1,054					$	9,904

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, valvetrain technologies, controls systems, air handling systems, automated transmissions, axles, drivelines, brakes, suspension systems, electric power generation systems, batteries, electrified power systems, hydrogen production technologies 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 450 wholly-owned, joint venture and independent distributor locations and more than 19,000 Cummins certified dealer locations in approximately 190 countries and territories.

Meritor Acquisition

On August 3, 2022, we completed the acquisition of Meritor with a purchase price of $2.9 billion (including debt repaid concurrent with the acquisition). Our consolidated results and segment results include Meritor's activity since the date of acquisition. Meritor was split into the newly formed axles and brakes business and electric powertrain. The results for the axles and brakes business are included in our Components segment while the electric powertrain portion is included in our Accelera segment. See NOTE 24, "ACQUISITIONS," for additional information.

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.

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 2022 and 2021 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 share of the results from 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 4, "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 the valuation of intangible assets and 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 obligations (OPEB) and related 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.

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, natural gas, electric and hybrid powertrains and powertrain-related components including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems, automated transmissions, axles, drivelines, brakes, valvetrain technologies, suspension systems, electric power generation systems and construction related projects, batteries, electrified power systems, electric powertrains, hydrogen production technologies, 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, electrolyzer and certain power generation contracts 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 systems and electrolyzer 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, 2023, 2022 and 2021.

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, 2023 or 2022.

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 loss of $30 million and $8 million and a net gain of $2 million for the years ended December 31, 2023, 2022 and 2021, 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 swaps and interest rate swaps and locks. These contracts are used strictly for hedging and not for speculative purposes.

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, 2023 and 2022, 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. Gains or losses are recorded directly to the Consolidated Statements of Net Income.

We are further exposed to foreign currency exchange risk as many of our subsidiaries are subject to fluctuations as the functional currencies of the underlying entities are not our U.S. dollar reporting currency. In order to minimize movements in certain investments, in 2022 we began entering into foreign exchange forwards designated as net investment hedges. These forwards are utilized to hedge portions of our net investments against the effect of exchange rate fluctuations on the translation of foreign currency balances to the U.S. dollar. The change in fair value related to the spot-to-forward rate difference is recorded as other income (expense) with all other changes in fair value deferred and reported as components of AOCL. The unrealized gain or loss is classified into income in the same period when the foreign subsidiary is sold or substantially liquidated.

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, 2023, 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 exception and are treated as purchase commitments. Additional information on the physical forwards is included in NOTE 15, "COMMITMENTS AND CONTINGENCIES."

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 21, "DERIVATIVES."

We record all derivatives at fair value in our financial statements. Cash flows related to derivatives that are designated as hedges are classified in the same manner as the item being hedged, 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 5, "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						2023						2022						2021
Cash payments for income taxes, net of refunds						$	1,181					$	903					$	521
Cash payments for interest, net of capitalized interest						374						184						111

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, 2023 and 2022, 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 6, "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 $75 million and $78 million at December 31, 2023, and 2022, 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, 2023 and 2022, approximately 12 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 7, "INVENTORIES," for additional information.

Property, Plant and Equipment

We record property, plant and equipment at cost, inclusive of assets under finance leases. 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 $691 million, $557 million and $514 million for the years ended December 31, 2023, 2022 and 2021, respectively. See NOTE 8, "PROPERTY, PLANT AND EQUIPMENT" and NOTE 9, "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 is 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 9, "LEASES," for additional information.

Goodwill

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

When we are required or opt to perform the quantitative impairment test, the fair value of each reporting unit is estimated with either the market approach or the income approach. 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 four 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 four situations are described further below:

• Within our Components segment, our emission solutions and Atmus businesses were aggregated into a single reporting unit,

• Within our Accelera segment, our fuel cell and electrolyzer businesses were aggregated into a single reporting unit and our epowertrain and traction systems 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 sensitivity analyses to determine how much our forecasts can fluctuate before the fair value of a reporting unit would be lower than its carrying amount. Future changes in the judgments, assumptions and estimates that are used in our goodwill impairment testing, including discount rates or future operating results and related cash flow projections, could result in significantly different estimates of the fair values in the future. An increase in discount rates, a reduction in projected cash flows or a combination of the two could lead to a reduction in the estimated fair values, which may result in impairment charges that could materially affect our financial statements in any given year. We perform the goodwill impairment assessment as of the end of our fiscal third quarter.

At December 31, 2023, our recorded goodwill was $2.5 billion, of which approximately 31 percent resided in the axles and brakes reporting unit, 22 percent in the automated transmissions reporting unit and 19 percent in the aggregated emission solutions and filtration reporting unit. While none of the reporting units recorded a goodwill impairment in 2023, the estimated fair value of two of these reporting units did not significantly exceed the carrying value in our annual impairment testing. Our automated transmissions reporting unit had an estimated fair value that exceeded its carrying value by approximately 7 percent and our axles and brakes reporting unit had an estimated fair value that exceeded its carrying value by approximately 12 percent. 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 10, "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 10, "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 10, "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 product campaigns. 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 14, "PRODUCT WARRANTY LIABILITY," for additional information.

Contingent Liabilities

We record an accrual for contingent liabilities when the amounts are probable and estimable. As the cash flow associated with most of our contingent liabilities can not be reasonably predicted, we record our estimated obligations on an undiscounted basis. In addition, our accrual does not include amounts for estimated legal defense costs as those are expensed in the period in which they are incurred.

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 $1.4 billion, $1.2 billion and $1.1 billion for the years ended December 31, 2023, 2022 and 2021, respectively. Contract reimbursements were $81 million, $110 million and $104 million for the years ended December 31, 2023, 2022 and 2021, 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.

The following is a summary of sales to and purchases from nonconsolidated equity investees:

						Years ended December 31,
In millions						2023						2022						2021
Sales to nonconsolidated equity investees						$	1,548					$	1,197					$	1,713
Purchases from nonconsolidated equity investees						2,628						1,838						1,796

The following is a summary of accounts receivable from and accounts payable to nonconsolidated equity investees:

In millions						December 31, 2023						December 31, 2022						Balance Sheet Location
Accounts receivable from nonconsolidated equity investees						$	530					$	376					Accounts and notes receivable, net
Accounts payable to nonconsolidated equity investees						324						292						Accounts payable (principally trade)

Supply Chain Financing

We currently have supply chain financing programs with financial intermediaries, which provide certain vendors the option to be paid by financial intermediaries earlier than the due date on the applicable invoice. When a vendor utilizes the program and receives an early payment from a financial intermediary, they take a discount on the invoice. We then pay the financial intermediary the face amount of the invoice on the original due date, which generally have 60 to 90 day payment terms. The maximum amount that we could have outstanding under the program was $512 million at December 31, 2023. We do not reimburse vendors for any costs they incur for participation in the program, their participation is completely voluntary and there are no assets pledged as security or other forms of guarantees provided for the committed payment to the finance provider or intermediary. As a result, all amounts owed to the financial intermediaries are presented as accounts payable in our Consolidated Balance Sheets. Amounts due to the financial intermediaries reflected in accounts payable at December 31, 2023, and 2022, were $199 million and $331 million, respectively.

The following table summarizes the changes in amounts due to financial intermediaries reflected in accounts payable for the year ended December 31, 2023:

In millions
Balance at December 31, 2022						$	331
Additional invoices presented for payment						1,141
Payments to financial intermediaries						(1,274)
Foreign currency translation adjustments and other						1
Balance at December 31, 2023						$	199

Government Assistance

From time to time, we receive assistance from government agencies primarily related to two areas (1) expense reimbursement and funding grants in the form of cash in conjunction with research and development projects and (2) incentives primarily related to investments in new or existing facilities. The grants and related projects range in term from 1 to 6 years. Generally, the grant awards for research are payable to us when we achieve specific milestones or deliverables. Certain grant awards are subject to audit, whereby non-compliance may result in a refund to the government agency. Grants related to investments supporting facilities are typically in the form of reimbursement for capital assets or expenses such as training the employees at those facilities.

We recognize grant awards related to research and development as an offset of the related research and development expenditure when the awards become payable upon us meeting a specific milestone or deliverable. We recognize grant awards for reimbursement of capital as a reduction in value of the related fixed asset. We recognize grants for reimbursement of training or other expenses as an offset to the related expense. For the years ended December 31, 2023, and 2022, government grants did not have a material impact on our financial statements as a whole, and we did not have any individually material grant awards.

RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Accounting Pronouncements Recently Adopted

In September 2022, the Financial Accounting Standards Board (FASB) issued a standard related to the disclosure of additional information about the use of supplier finance programs. Under the new standard, entities are required to disclose (1) key terms of the programs, (2) the amount outstanding that remains unpaid as of the end of the period, including where amounts are recorded in the balance sheets and (3) an annual rollforward of those obligations, including the amount of obligations confirmed and the amount of obligations subsequently paid. We adopted the new standard on January 1, 2023, on a retrospective basis other than the rollforward, which we adopted on a prospective basis beginning with our 2023 annual financial statements. The adoption did not have a material impact on our financial statements. See "Supply Chain Financing" section above for additional information.

Accounting Pronouncements Issued But Not Yet Effective

In November 2023, the FASB issued Accounting Standards Update (ASU) 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures," to enhance disclosures for significant segment expenses for all public entities required to report segment information in accordance with ASC 280. The standard did not change the definition of a segment, the method for determining segments or the criteria for aggregating operating segments into reportable segments. The amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Retrospective adoption is required for all prior periods presented in the financial statements. We plan to adopt the standard beginning with our 2024 Form 10-K. The adoption is not expected to have a material impact to our financial statements or disclosures.

In December 2023, the FASB issued ASU 2023-09, "Income Taxes (Topic 740): Improvements in Income Tax Disclosures" to enhance the transparency and decision usefulness of income tax disclosures. This amendment requires public companies to disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. Additionally, under the amendment entities are required to disclose the amount of income taxes paid disaggregated by federal, state and foreign taxes, as well as disaggregated by material individual jurisdictions. Finally, the amendment requires entities to disclose income from continuing operations before income tax expense disaggregated between domestic and foreign and income tax expense from continuing operations disaggregated by federal, state and foreign. The new rules are effective for annual periods beginning after December 15, 2024. We will adopt this standard on a prospective basis as allowed by the standard. The adoption of this standard is not expected to have a material impact on our Consolidated Financial Statements.

NOTE 2. AGREEMENT IN PRINCIPLE

In December 2023, we announced that we reached an agreement in principle with the Environmental Protection Agency (EPA), the California Air Resources Board (CARB), the Environmental and Natural Resources Division of the U.S. Department of Justice (DOJ) and the California Attorney General’s Office (CA AG) to resolve certain regulatory civil claims regarding our emissions certification and compliance process for certain engines primarily used in pick-up truck applications in the U.S (collectively, the Agreement in Principle). As part of the Agreement in Principle, among other things, we agreed to pay civil penalties, complete recall requirements, undertake mitigation projects, provide extended warranties, undertake certain testing, take certain corporate compliance measures and make certain payments. Failure to comply with the terms and conditions of the Agreement in Principle will subject us to further stipulated penalties. We recorded a charge of $2.036 billion in the fourth quarter of 2023 to resolve the matters addressed by the Agreement in Principle involving approximately one million of our pick-up truck applications in the U.S. The charge is included in other operating expense, net, in our Consolidated Statements of Net Income. See NOTE 15, "COMMITMENTS AND CONTINGENCIES," for further information.

The majority of the amount is expected to be paid in 2024 after final regulatory and judicial approvals are obtained. As a result, $1.938 billion is included in other current liabilities in our Consolidated Balance Sheets with the remainder included in other long-

term liabilities. Of the total charge, $1.732 billion (primarily related to penalties) will be non-deductible for U.S. federal income tax purposes. The remaining amount, related to emissions mitigation projects and payments, extended warranties and other related compliance expenses is deductible for U.S. federal income tax purposes.

NOTE 3. REVENUE FROM CONTRACTS WITH CUSTOMERS

Long-term Contracts

We have certain arrangements, primarily long-term maintenance agreements, construction contracts, product sales with associated performance obligations extending beyond a year, product sales with lead times extending beyond one year that are non-cancellable or for which the customer incurs a penalty for cancellation and extended warranty coverage arrangements that span a period in excess of one year. The aggregate amount of the transaction price for these contracts, excluding extended warranty coverage arrangements, as of December 31, 2023, was $2.1 billion. We expect to recognize the related revenue of $1.0 billion over the next 12 months and $1.1 billion over periods up to 10 years. See NOTE 14,"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:

						December 31,
In millions						2023						2022
Unbilled revenue						$	303					$	257
Deferred revenue						2,186						1,848

We recognized revenue of $733 million and $639 million in 2023 and 2022, 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 2023 or 2022.

Disaggregation of 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						2023						2022						2021
United States (1)						$	19,302					$	15,833					$	12,489
China						3,115						2,390						3,169
India						1,678						1,392						1,133
Other international (1)						9,970						8,459						7,230
Total net sales						$	34,065					$	28,074					$	24,021
(1) We revised $281 million from other international to United States for the year ended December 31, 2022.

Segment Revenue

As previously announced, our Components segment reorganized its reporting structure to carve out the electronics business into the newly formed software and electronics business and combined the turbo technologies and fuel systems businesses into the newly formed engine components business. We started reporting results for the reorganized business in the first quarter of 2023 and reflected these changes for prior periods. On May 26, 2023, with the Atmus Filtration Technologies Inc. (Atmus) initial public offering (IPO), we changed the name of our Components' filtration business to Atmus. See NOTE 23, "FORMATION OF ATMUS AND IPO," for additional information.

Components segment external sales by business were as follows:

						Years ended December 31,
In millions						2023						2022						2021
Axles and brakes						$	4,822					$	1,879					$	—
Emission solutions						3,425						3,086						3,142
Atmus						1,345						1,259						1,171
Engine components						1,119						946						1,019
Automated transmissions						714						593						481
Software and electronics						106						84						119
Total sales						$	11,531					$	7,847					$	5,932

Engine segment external sales by market were as follows:

						Years ended December 31,
In millions						2023						2022						2021
Heavy-duty truck						$	3,391					$	2,995					$	2,511
Medium-duty truck and bus						2,622						2,412						1,978
Light-duty automotive						1,748						1,704						1,845
Total on-highway						7,761						7,111						6,334
Off-highway						1,113						1,088						1,255
Total sales						$	8,874					$	8,199					$	7,589

As previously announced, due to the indefinite suspension of operations in Russia, we reorganized the regional management structure of our Distribution segment and moved all Commonwealth of Independent States (CIS) sales into the Europe and Africa and Middle East regions. The Russian portion of prior period CIS sales moved to the Europe region. We started to report results for our new regional management structure in the first quarter of 2023 and reflected these changes for historical periods.

Distribution segment external sales by region were as follows:

						Years ended December 31,
In millions						2023						2022						2021
North America						$	7,054					$	5,948					$	4,902
Asia Pacific						1,091						1,011						901
Europe						848						914						962
China						424						351						323
Africa and Middle East						294						250						278
India						264						217						194
Latin America						224						210						182
Total sales						$	10,199					$	8,901					$	7,742

Distribution segment external sales by product line were as follows:

						Years ended December 31,
In millions						2023						2022						2021
Parts						$	4,052					$	3,809					$	3,136
Power generation						2,496						1,767						1,754
Engines						1,987						1,770						1,493
Service						1,664						1,555						1,359
Total sales						$	10,199					$	8,901					$	7,742

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

						Years ended December 31,
In millions						2023						2022						2021
Power generation						$	1,698					$	1,658					$	1,481
Industrial						970						843						820
Generator technologies						457						450						349
Total sales						$	3,125					$	2,951					$	2,650

NOTE 4. 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						2023						2022
Komatsu alliances						20-50%						$	331					$	295
Beijing Foton Cummins Engine Co., Ltd.						50%						194						189
Sisamex						50%						149						144
Dongfeng Cummins Engine Company, Ltd.						50%						128						106
Automotive Axles Limited						36%						125						125
Chongqing Cummins Engine Company, Ltd.						50%						110						118
Tata Cummins, Ltd.						50%						89						92
Cummins-Scania XPI Manufacturing, LLC						50%						85						130
Freios Master						49%						84						86
Other						Various						505						474
Investments and advances related to equity method investees												$	1,800					$	1,759

We have approximately $936 million in our investment account at December 31, 2023, that represents cumulative undistributed income in our equity investees. Dividends received from our unconsolidated equity investees were $257 million, $318 million and $336 million in 2023, 2022 and 2021, respectively.

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

						Years ended December 31,
In millions						2023						2022						2021
Manufacturing entities
Dongfeng Cummins Engine Company, Ltd.						$	65					$	45					$	82
Beijing Foton Cummins Engine Co., Ltd.						47						37						112
Chongqing Cummins Engine Company, Ltd.						36						32						39
Tata Cummins, Ltd.						29						27						18
All other manufacturers						91						28			(1)			131
Distribution entities
Komatsu Cummins Chile, Ltda.						55						44						32
All other distributors						16						11						10
Cummins share of net income						339						224						424
Royalty and interest income						144						125						82
Equity, royalty and interest income from investees						$	483					$	349					$	506
(1) Includes a $28 million impairment of our joint venture with KAMAZ and $3 million of royalty charges as part of our costs associated with the indefinite suspension of our Russian operations. In addition, on February 7, 2022, we purchased Westport Fuel System Inc.'s stake in Westport JV. See NOTE 24, "ACQUISITIONS," and NOTE 22, "RUSSIAN OPERATIONS," for additional information.

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 axles, drivelines, brakes and suspension systems for commercial diesel and natural gas applications, aftertreatment systems, turbochargers, fuel systems, filtration products, automated transmissions and electronics 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.

• 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.

• 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 and Brazil. Certain types of small construction equipment and industrial applications are also served by these engine families. The heavy-duty business produces 8.5 liter to 14.5 liter high performance heavy-duty diesel and natural gas engines in Beijing. Certain types of construction equipment and industrial applications are also served by these engine families.

• 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.

• Tata Cummins, Ltd. - Tata Cummins, Ltd. is a joint venture in India with Tata Motors Ltd., the largest automotive company in India and a member of the Tata group of companies. This joint venture manufactures Cummins' 3.8 to 8.9 liter diesel and natural gas engines in India with a power range from 75 to 400 horsepower for use in trucks and buses manufactured by Tata Motors, as well as for various on-highway, industrial and power generation applications for Cummins.

In September 2023, our Accelera business signed an agreement to form a joint venture with Daimler Trucks and Buses US Holding LLC (Daimler Truck), PACCAR Inc. (PACCAR) and EVE Energy to accelerate and localize battery cell production and the battery supply chain in the U.S., including building a 21-gigawatt hour battery production facility in Marshall County, Mississippi. The joint venture will manufacture battery cells for electric commercial vehicles and industrial applications. Accelera, Daimler Truck and PACCAR will each own 30 percent of the joint venture, while EVE Energy will own 10 percent. Total investment by the partners is expected to be in the range of $2 billion to $3 billion for the 21-gigawatt hour facility. The transaction is subject to closing conditions and receipt of applicable merger control and regulatory approvals including submission of a voluntary notice to the Committee on Foreign Investment in the U.S.

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						2023						2022						2021
Net sales						$	9,998					$	7,501					$	8,934
Gross margin						1,597						1,211						1,574
Net income						677						475						802
Cummins share of net income						$	339					$	224					$	424
Royalty and interest income						144						125						82
Total equity, royalty and interest from investees						$	483					$	349					$	506
Current assets						$	4,922					$	4,252
Long-term assets						2,021						1,935
Current liabilities						(3,812)						(3,224)
Long-term liabilities						(432)						(399)
Net assets						$	2,699					$	2,564
Cummins share of net assets						$	1,786					$	1,715

NOTE 5. INCOME TAXES

The following table summarizes income before income taxes:

						Years ended December 31,
In millions						2023						2022						2021
U.S. (loss) income						$	(541)					$	1,336					$	1,251
Foreign income						2,167						1,483						1,500
Income before income taxes						$	1,626					$	2,819					$	2,751

Income tax expense (benefit) consisted of the following:

						Years ended December 31,
In millions						2023						2022						2021
Current
U.S. federal and state						$	611					$	425					$	261
Foreign						632						485						319
Total current income tax expense						1,243						910						580
Deferred
U.S. federal and state						(468)						(229)						(12)
Foreign						11						(45)						19
Total deferred income tax (benefit) expense						(457)						(274)						7
Income tax expense						$	786					$	636					$	587

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

						Years ended December 31,
						2023						2022						2021
Statutory U.S. federal income tax rate						21.0		%				21.0		%				21.0		%
State income tax, net of federal effect						(0.4)						1.3						1.1
Differences in rates and taxability of foreign subsidiaries and joint ventures (1)						11.9						3.1						0.1
Research tax credits						(4.7)						(1.8)						(0.6)
Foreign derived intangible income						(4.2)						(2.0)						(1.0)
Agreement in Principle, federal impact (2)						22.4						—						—
Agreement in Principle, state impact (2)						2.1						—						—
Other, net						0.2						1.0						0.7
Effective tax rate						48.3		%				22.6		%				21.3		%
(1) Includes the jurisdictional mix of pre-tax income and impact of actual and planned repatriation of earnings back to the U.S.
(2) See NOTE 2, "AGREEMENT IN PRINCIPLE," for additional information.

The year ended December 31, 2023, contained unfavorable net discrete items of $397 million, primarily due to $398 million in the fourth quarter related to the $2.0 billion charge from the Agreement in Principle, $22 million of unfavorable adjustments for uncertain tax positions and $3 million of net unfavorable other discrete tax items, partially offset by $21 million of favorable return to provision adjustments and $5 million of favorable share-based compensation tax benefit. See NOTE 2, "AGREEMENT IN PRINCIPLE," for additional information.

The year ended December 31, 2022, contained discrete tax items that netted to zero, primarily due to $31 million of favorable changes in accrued withholding taxes, $29 million of favorable changes in tax reserves, $15 million of favorable valuation allowance adjustments and $9 million of favorable other net discrete items, offset by $69 million of unfavorable tax costs associated with internal restructuring ahead of the planned separation of Atmus and $15 million of unfavorable return to provision adjustments related to the 2021 filed tax returns.

The year ended December 31, 2021, contained $9 million of unfavorable net discrete tax items, 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.

At December 31, 2023, $6.0 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						2023						2022
Deferred tax assets
U.S. and state carryforward benefits						$	272					$	272
Foreign carryforward benefits						609						527
Employee benefit plans						347						258
Warranty expenses						483						458
Lease liabilities						125						110
Capitalized research and development expenditures						591						238
Accrued expenses						253						174
Other						78						126
Gross deferred tax assets						2,758						2,163
Valuation allowance						(789)						(704)
Total deferred tax assets						1,969						1,459
Deferred tax liabilities
Property, plant and equipment						(367)						(369)
Unremitted income of foreign subsidiaries and joint ventures						(179)						(210)
Employee benefit plans						(278)						(311)
Lease assets						(123)						(108)
Intangible assets						(406)						(435)
Other						(64)						(50)
Total deferred tax liabilities						(1,417)						(1,483)
Net deferred tax (liabilities) assets						$	552					$	(24)

Our 2023 U.S. carryforward benefits include $272 million of state credit and net operating loss carryforward benefits that begin to expire in 2024. Our foreign carryforward benefits include $609 million of net operating loss carryforwards that begin to expire in 2024. 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 $789 million and increased in 2023 by a net $85 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						2023						2022
Prepaid expenses and other current assets
Refundable income taxes						$	81					$	83
Other assets
Deferred income tax assets						1,082						625
Long-term refundable income taxes						27						14
Other accrued expenses
Income tax payable						242						173
Other liabilities
Long-term income taxes						111						192
Deferred income tax liabilities						530						649

A reconciliation of unrecognized tax benefits for the years ended December 31, 2023, 2022 and 2021 was as follows:

						December 31,
In millions						2023						2022						2021
Balance at beginning of year						$	283					$	89					$	122
Additions to tax positions due to acquisitions						8						189						—
Additions to current year tax positions						21						17						11
Additions to prior years' tax positions						19						17						16
Reductions to prior years' tax positions						(1)						(1)						(28)
Reductions for tax positions due to settlements with taxing authorities						—						(28)						(32)
Balance at end of year						$	330					$	283					$	89

Included in the December 31, 2023, 2022 and 2021, balances are $314 million, $270 million and $85 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 $33 million, $18 million and $15 million as of December 31, 2023, 2022 and 2021, 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 2018.

NOTE 6. MARKETABLE SECURITIES

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

						December 31,
						2023																		2022
In millions						Cost						Gross unrealized gains/(losses) (1)						Estimated fair value						Cost						Gross unrealized gains/(losses) (1)						Estimated fair value
Equity securities
Debt mutual funds						$	272					$	—					$	272					$	238					$	(5)					$	233
Certificates of deposit						246						—						246						209						—						209
Equity mutual funds						22						6						28						25						3						28
Debt securities						16						—						16						2						—						2
Marketable securities						$	556					$	6					$	562					$	474					$	(2)					$	472
(1) Unrealized gains and losses for debt securities are recorded in other comprehensive income while unrealized gains and losses for equity securities are recorded in our 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 2023 or 2022.

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

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

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

*•*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						2023						2022						2021
Proceeds from sales of marketable securities						$	1,075					$	750					$	494
Proceeds from maturities of marketable securities						259						401						179
Investments in marketable securities - liquidations						$	1,334					$	1,151					$	673

NOTE 7. INVENTORIES

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

						December 31,
In millions						2023						2022
Finished products						$	2,770					$	2,917
Work-in-process and raw materials						3,156						2,926
Inventories at FIFO cost						5,926						5,843
Excess of FIFO over LIFO						(249)						(240)
Inventories						$	5,677					$	5,603

NOTE 8. PROPERTY, PLANT AND EQUIPMENT

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

						December 31,
In millions						2023						2022
Land and buildings						$	3,039					$	2,908
Machinery, equipment and fixtures						7,245						6,598
Construction in process						1,390						1,001
Property, plant and equipment, gross						11,674						10,507
Less: Accumulated depreciation						(5,425)						(4,986)
Property, plant and equipment, net						$	6,249					$	5,521

NOTE 9. 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						2023						2022						2021
Operating lease cost						$	165					$	160					$	172
Finance lease cost
Amortization of right-of-use asset						20						19						16
Interest expense						4						4						4
Short-term lease cost						24						23						18
Variable lease cost						14						12						11
Total lease cost						$	227					$	218					$	221

Supplemental balance sheet information related to leases:

						December 31,
In millions						2023						2022						Balance Sheet Location
Assets
Operating lease assets						$	501					$	492					Other assets
Finance lease assets (1)						115						117						Property, plant and equipment, net
Total lease assets						$	616					$	609
Liabilities
Current
Operating lease liabilities						$	138					$	132					Other accrued expenses
Finance lease liabilities						17						32						Current maturities of long-term debt
Long-term
Operating lease liabilities						374						368						Other liabilities
Finance lease liabilities						94						81						Long-term debt
Total lease liabilities						$	623					$	613
(1) Finance lease assets were recorded net of accumulated amortization of $77 million and $78 million at December 31, 2023 and 2022.

Supplemental cash flow and other information related to leases:

						Years ended December 31,
In millions						2023						2022						2021
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases						$	148					$	151					$	159
Operating cash flows from finance leases						4						4						4
Financing cash flows from finance leases						35						16						14
Right-of-use assets obtained in exchange for lease obligations
Operating leases						$	153					$	148					$	160
Finance leases						12						29						13

Additional information related to leases:

						December 31,
						2023						2022
Weighted-average remaining lease term (in years)
Operating leases						5.2						5.4
Finance leases						8.6						7.9
Weighted-average discount rate
Operating leases						4.2		%				3.7		%
Finance leases						5.0		%				4.7		%

Following is a summary of the future minimum lease payments related to finance and operating leases with terms of more than one year at December 31, 2023, together with the net present value of the minimum payments:

In millions						Finance Leases						Operating Leases
2024						$	23					$	155
2025						19						126
2026						15						92
2027						13						68
2028						12						45
After 2028						56						90
Total minimum lease payments						138						576
Interest						(27)						(64)
Present value of net minimum lease payments						$	111					$	512

NOTE 10. GOODWILL AND OTHER INTANGIBLE ASSETS

The following table summarizes the changes in the carrying amount of goodwill for the years ended December 31, 2023 and 2022:

In millions						Components						Accelera						Distribution						Power Systems						Engine																		Total
Balance at December 31, 2021						$	934					$	257					$	79					$	11					$	6																	$	1,287
Acquisitions						835						237						—						—						—																		1,072
Foreign currency translation and other						(17)						1						—						—						—																		(16)
Balance at December 31, 2022						1,752						495						79						11						6																		2,343
Acquisitions						122						—						4						—						18																		144
Foreign currency translation and other						10						1						—						—						1																		12
Balance at December 31, 2023						$	1,884					$	496					$	83					$	11					$	25																	$	2,499

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						2023						2022
Software						$	622					$	679
Less: Accumulated amortization						(323)						(410)
Software, net						299						269
Trademarks, patents, customer relationships and other						2,886						2,858
Less: Accumulated amortization						(666)						(440)
Trademarks, patents, customer relationships and other, net						2,220						2,418
Other intangible assets, net						$	2,519					$	2,687

Amortization expense for software and other intangibles totaled $324 million, $223 million and $144 million for the years ended December 31, 2023, 2022 and 2021, respectively. The projected amortization expense of our intangible assets, assuming no further acquisitions or dispositions, is as follows:

In millions						2024						2025						2026						2027						2028
Projected amortization expense						$	323					$	299					$	281					$	260					$	233

NOTE 11. 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 plan 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						2023						2022						2023						2022
Change in benefit obligation
Benefit obligation at the beginning of the year						$	3,171					$	3,012					$	1,398					$	1,887
Service cost						117						137						17						30
Interest cost						168						101						70						39
Actuarial loss (gain)						172						(643)						47						(702)
Benefits paid from fund						(223)						(200)						(87)						(70)
Benefits paid directly by employer						(25)						(25)						—						—
Plan amendment						1						3						—						—
Assumption of Meritor's benefit obligation						—						786						—						418
Foreign currency translation adjustments						—						—						80						(204)
Benefit obligation at end of year						$	3,381					$	3,171					$	1,525					$	1,398
Change in plan assets
Fair value of plan assets at beginning of year						$	3,828					$	3,548					$	1,670					$	2,390
Actual return on plan assets						221						(244)						(51)						(960)
Employer contributions						—						25						90						3
Benefits paid from fund						(223)						(200)						(87)						(70)
Assumption of Meritor's plan assets						—						699						—						565
Foreign currency translation adjustments						—						—						98						(258)
Fair value of plan assets at end of year						$	3,826					$	3,828					$	1,720					$	1,670
Funded status (including unfunded plans) at end of year						$	445					$	657					$	195					$	272
Amounts recognized in consolidated balance sheets
Pension assets						$	1,002					$	1,126					$	195					$	272
Accrued compensation, benefits and retirement costs						(27)						(24)						—						—
Other liabilities						(530)						(445)						—						—
Net amount recognized						$	445					$	657					$	195					$	272
Amounts recognized in accumulated other comprehensive loss
Net actuarial loss						$	493					$	273					$	606					$	402
Prior service cost						8						8						8						10
Net amount recognized						$	501					$	281					$	614					$	412

In addition to the pension plans in the above table, we also maintain less significant defined benefit pension plans in 15 other countries outside of the U.S. and the U.K. that comprise approximately 5 percent and 6 percent of our pension plan assets and benefit obligations, respectively, at December 31, 2023. These plans are reflected in other liabilities on our Consolidated Balance Sheets. In 2023 and 2022, we made $16 million and $12 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						2023						2022						2023						2022
Total ABO						$	3,334					$	3,138					$	1,504					$	1,376
Plans with ABO in excess of plan assets
ABO						1,067						1,044						—						—
Plans with PBO in excess of plan assets
PBO						1,116						1,078						—						—

Components of Net Periodic Pension Cost (Income)

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

						Qualified and Non-Qualified Pension Plans
						U.S. Plans																		U.K. Plans
In millions						2023						2022						2021						2023						2022						2021
Service cost						$	117					$	137					$	139					$	17					$	30					$	33
Interest cost						168						101						79						70						39						30
Expected return on plan assets						(277)						(229)						(199)						(105)						(87)						(85)
Amortization of prior service cost						2						1						1						1						1						2
Recognized net actuarial loss						8						23						47						—						3						31
Net periodic pension cost (income)						$	18					$	33					$	67					$	(17)					$	(14)					$	11

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

In millions						2023						2022						2021
Amortization of prior service cost						$	(3)					$	(2)					$	(3)
Recognized net actuarial loss						(8)						(26)						(78)
Incurred prior service cost						1						3						—
Incurred actuarial loss (gain)						432						173						(368)
Foreign currency translation adjustments						—						—						5
Total recognized in other comprehensive loss (income)						$	422					$	148					$	(444)
Total recognized in net periodic pension cost and other comprehensive loss (income)						$	423					$	167					$	(366)

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
						2023						2022						2023						2022
Discount rate						5.15		%				5.55		%				4.72		%				4.99		%
Cash balance crediting rate						4.55		%				4.56		%				—						—
Compensation increase rate						5.34		%				5.35		%				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
						2023						2022						2021						2023						2022						2021
Discount rate						5.55		%				3.31		%				2.62		%				4.99		%				2.26		%				1.50		%
Expected return on plan assets						7.00		%				6.50		%				6.25		%				5.00		%				4.01		%				4.00		%
Compensation increase rate						5.35		%				2.71		%				2.72		%				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 or corporate bonds.

U.S. Plan Assets

For the U.S. qualified pension plans, our assumption for the expected return is greatly influenced by our objective to match assets and liabilities and the increase in bond yields. 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 an assumption of 7.25 percent in 2024.

To achieve these objectives, we established the following targets:

Asset Class						Plan Target
U.S. equities						8		%
Non-U.S. equities						3		%
Global equities						5		%
Total equities						16		%
Real assets						5		%
Private equity/venture capital						5		%
Opportunistic credit						3		%
Fixed income						71		%
Total						100		%

The fixed income component of the plans 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 plans' exposure to changes in its discount rate (AA corporate bond yields). In order to achieve a hedge on more than the targeted 71 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 plans' risk of changes in 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

The methodology used to determine the rate of return on the 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						Plan Target
Equities						1		%
Property/secure income assets						8		%
Credit/bank loans						5		%
Diversified strategies						1		%
Private equity						5		%
Fixed income/insurance annuity						78		%
Cash						2		%
Total						100		%

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. plans, derivatives may be used to better match liability duration and are not used in a speculative way. The fixed income component of our portfolio hedges approximately 79 percent of the plans' exposure to interest rates and 79 percent of the plans' exposure to inflation. Based on the above discussion, we elected an assumption of 5.00 percent in 2024.

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, 2023
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.						$	73					$	—					$	—					$	73
Non-U.S.						36						—						—						36
Fixed income
Government debt												157						—						157
Corporate debt
U.S.						—						603						—						603
Non-U.S.						—						49						—						49
Asset/mortgaged backed securities						—						8						—						8
Net cash equivalents (1)						467						—						—						467
Private markets and real assets (2)						—						—						604						604
Net plan assets subject to leveling						$	576					$	817					$	604					$	1,997
Pending trade/purchases/sales																								(16)
Accruals (3)																								10
Investments measured at net asset value																								1,835
Net plan assets																								$	3,826

						Fair Value Measurements at December 31, 2022
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.						$	118					$	—					$	—					$	118
Non-U.S.						31						—						—						31
Fixed income
Government debt						—						188						—						188
Corporate debt
U.S.						—						423						—						423
Non-U.S.						12						41						—						53
Asset/mortgaged backed securities						7						—						—						7
Net cash equivalents (1)						499						9						—						508
Diversified strategies						14						—						—						14
Private markets and real assets (2)						—						—						641						641
Net plan assets subject to leveling						$	681					$	661					$	641					$	1,983
Accruals (3)																								7
Investments measured at net asset value																								1,838
Net plan assets																								$	3,828
(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 ($915 million and $938 million at December 31, 2023 and 2022, 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 ($222 million and $224 million at December 31, 2023 and 2022, respectively) - These commingled funds have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days.

*•*Government Debt ($257 million and $227 million at December 31, 2023 and 2022, respectively) - These commingled funds have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days.

• Real Estate ($134 million and $154 million at December 31, 2023 and 2022, 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 ($307 million and $277 million at December 31, 2023 and 2022, 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.

*•*Diversified Strategies ($0 million and $18 million at December 31, 2023 and 2022, 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						Private Markets						Real Assets						Total
Balance at December 31, 2021						$	471					$	80					$	551
Actual return on plan assets
Unrealized gains on assets still held at the reporting date						6						19						25
Purchases, sales and settlements, net						(12)						(17)						(29)
Assumption of Meritor's plan assets						94						—						94
Balance at December 31, 2022						559						82						641
Actual return on plan assets
Unrealized gains on assets still held at the reporting date						6						(13)						(7)
Purchases, sales and settlements, net						(28)						(2)						(30)
Balance at December 31, 2023						$	537					$	67					$	604

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, 2023
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.						$	12					$	—					$	—					$	12
Non-U.S.						8						—						—						8
Fixed income
Government debt						—						232						—						232
Corporate debt
U.S.						—						30						—						30
Non-U.S.						—						95						—						95
Net cash equivalents (1)						17						18						—						35
Insurance annuity						—						—						436						436
Private markets and real assets (2)						—						—						103						103
Net plan assets subject to leveling						$	37					$	375					$	539					$	951
Pending trade/purchases/sales																								1
Accruals (3)																								2
Investments measured at net asset value																								766
Net plan assets																								$	1,720

						Fair Value Measurements at December 31, 2022
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.						$	13					$	—					$	—					$	13
Non-U.S.						9						—						—						9
Fixed income
Government debt						—						222						—						222
Corporate debt
U.S.						—						24						—						24
Non-U.S.						—						80						—						80
Net cash equivalents (1)						27						11						—						38
Insurance annuity						—						—						428						428
Private markets and real assets (2)						—						—						390						390
Net plan assets subject to leveling						$	49					$	337					$	818					$	1,204
Pending trade/purchases/sales																								141
Accruals (3)																								2
Investments measured at net asset value																								323
Net plan assets																								$	1,670
(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 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 ($71 million and $77 million at December 31, 2023 and 2022, respectively) - These commingled funds have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days.

*•*Government Debt ($572 million and $64 million at December 31, 2023 and 2022, 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 ($117 million and $128 million at December 31, 2023 and 2022, 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 ($6 million and $54 million at December 31, 2023 and 2022, respectively) - This commingled fund has a NAV that is determined on a monthly basis and the investment may be sold at that value.

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, 2021						$	514					$	33					$	356					$	903
Actual return on plan assets
Unrealized (losses) gains on assets still held at the reporting date						(178)						(2)						39						(141)
Purchases, sales and settlements, net						—						(23)						(13)						(36)
Assumption of Meritor's plan assets						92						—						—						92
Balance at December 31, 2022						428						8						382						818
Actual return on plan assets
Unrealized (losses) gains on assets still held at the reporting date						8						—						(35)						(27)
Purchases, sales and settlements, net						—						(1)						(251)						(252)
Balance at December 31, 2023						$	436					$	7					$	96					$	539

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 $67 million to our defined benefit pension plans in 2024. The table below presents expected future benefit payments under our pension plans:

						Qualified and Non-Qualified Pension Plans
In millions						2024						2025						2026						2027						2028						2029 - 2033
Expected benefit payments						$	360					$	358					$	361					$	364					$	370					$	1,872

Other Pension Plans

We also sponsor defined contribution plans for certain hourly and salaried employees. Our contributions to these plans were $130 million, $110 million and $92 million for the years ended December 31, 2023, 2022 and 2021.

Other Postretirement Benefits

Our 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						2023						2022
Change in benefit obligation
Benefit obligation at the beginning of the year						$	162					$	192
Interest cost						9						5
Plan participants' contributions						18						4
Actuarial gain						(2)						(25)
Benefits paid directly by employer						(37)						(36)
Assumption of Meritor's benefit obligation						—						22
Benefit obligation at end of year						$	150					$	162
Funded status at end of year						$	(150)					$	(162)
Amounts recognized in consolidated balance sheets
Accrued compensation, benefits and retirement costs						$	(19)					$	(21)
Other liabilities						(131)						(141)
Net amount recognized						$	(150)					$	(162)
Amounts recognized in accumulated other comprehensive loss
Net actuarial gain						$	(44)					$	(44)
Prior service credit						(3)						(3)
Net amount recognized						$	(47)					$	(47)

In addition to the OPEB plans in the above table, we also maintain less significant OPEB plans in five other countries outside the U.S. that comprise approximately 16 percent and 14 percent of our OPEB obligations at December 31, 2023 and 2022, 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						2023						2022						2021
Interest cost						$	9					$	5					$	5
Recognized net actuarial gain						(2)						—						—
Net periodic OPEB cost						$	7					$	5					$	5

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

						Years ended December 31,
In millions						2023						2022						2021
Recognized net actuarial gain						$	2					$	—					$	—
Incurred actuarial gain						(2)						(25)						(8)
Total recognized in other comprehensive loss (income)						$	—					$	(25)					$	(8)
Total recognized in net periodic OPEB cost and other comprehensive loss (income)						$	7					$	(20)					$	(3)

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:

						2023						2022
Discount rate						5.19		%				5.59		%

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

						2023						2022						2021
Discount rate						5.59		%				2.93		%				2.30		%

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 2023. The rate is assumed to decrease on a linear basis to 5.0 percent through 2032 and remain at that level thereafter.

Estimated Benefit Payments

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

In millions						2024						2025						2026						2027						2028						2029 - 2033
Expected benefit payments						$	20					$	18					$	16					$	16					$	15					$	58

NOTE 12. SUPPLEMENTAL BALANCE SHEET DATA

Other assets included the following:

									December 31,
			In millions						2023						2022
			Deferred income taxes						$	1,082					$	625
			Operating lease assets						501						492
			Corporate owned life insurance						417						390
			Other						543						633
			Other assets						$	2,543					$	2,140

Other accrued expenses included the following:

						December 31,
In millions						2023						2022
Agreement in Principle (1)						$	1,938					$	—
Marketing accruals						399						316
Other taxes payable						296						224
Income taxes payable						242						173
Current portion of operating lease liabilities						138						132
Other						741						620
Other accrued expenses						$	3,754					$	1,465
(1) See NOTE 2, "AGREEMENT IN PRINCIPLE," for additional information.

Other liabilities included the following:

						December 31,
In millions						2023						2022
Accrued product warranty						$	777					$	744
Pensions						530						445
Deferred income taxes						530						649
Operating lease liabilities						374						368
Accrued compensation						213						184
Other postretirement benefits						131						141
Mark-to-market valuation on interest rate derivatives						117						151
Long-term income taxes						111						192
Other long-term liabilities						647						437
Other liabilities						$	3,430					$	3,311

NOTE 13. DEBT

Loans Payable

Loans payable at December 31, 2023 and 2022 were $280 million and $210 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:

						2023						2022
Weighted-average interest rate						3.31		%				4.02		%

Commercial Paper

Our committed credit facilities provide access up to $4.0 billion of unsecured, short-term promissory notes (commercial paper) pursuant to the Board of Directors (the Board) authorized commercial paper programs. These programs facilitate the private placement of unsecured short-term debt through third-party brokers. We intend to use the net proceeds from the commercial paper borrowings for acquisitions and general corporate purposes. We had $1.496 billion and $2.574 billion in outstanding borrowings under our commercial paper programs at December 31, 2023 and 2022, respectively. The weighted-average interest rate for commercial paper at December 31 was as follows:

						2023						2022
Weighted-average interest rate						5.43		%				4.27		%

Revolving Credit Facilities

On June 5, 2023, we entered into an amended and restated 364-day credit agreement that allows us to borrow up to $2.0 billion of unsecured funds at any time prior to June 3, 2024. This credit agreement amended and restated the prior $1.5 billion 364-day credit facility that was scheduled to mature on August 16, 2023. In connection with the 364-day credit agreement, effective June 5, 2023, we terminated our $500 million incremental 364-day credit agreement dated August 17, 2022.

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. In connection with the new credit agreements, on August 17, 2022, we entered into an amendment to our $2.0 billion five-year facility to replace LIBOR with Secured Overnight Financing Rate (SOFR) as an interest rate benchmark and to make other conforming changes to interest rate determinations. Amounts payable under our revolving credit facility 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 SOFR rate loans was 0.85 percent per annum. Advances under the facility may be prepaid without premium or penalty, subject to customary breakage costs.

Our committed credit facilities provide access up to $4.0 billion, including our $2.0 billion 364-day facility that expires June 3, 2024, and our $2.0 billion five-year facility that expires on August 18, 2026. We intend to maintain credit facilities at the current or higher aggregate amounts by renewing or replacing these facilities at or before expiration. These revolving credit facilities are maintained primarily to provide backup liquidity for our commercial paper borrowings and general corporate purposes. Our 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, 2023, we were in compliance with the financial debt covenants. There were no outstanding borrowings under these facilities at December 31, 2023 and December 31, 2022.

The total combined borrowing capacity under the revolving credit facilities and commercial programs should not exceed $4.0 billion. At December 31, 2023, our $1.5 billion of commercial paper outstanding effectively reduced the $4.0 billion available capacity under our revolving credit facilities to $2.5 billion.

At December 31, 2023, we also had an additional $393 million available for borrowings under our international and other domestic credit facilities.

At December 31, 2023, Atmus had no outstanding borrowings under its $400 million revolving credit facility. See "Atmus Credit Agreement" section below for additional details.

Long-term Debt

A summary of long-term debt was as follows:

												December 31,
In millions						Interest Rate						2023						2022
Long-term debt
Senior notes, due 2023						3.65%						$	—					$	500
Hydrogenics promissory notes, due 2024 and 2025 (1)						—%						160						—
Term loan, due 2025 (2)(3)						Variable						1,150						1,550
Senior notes, due 2025 (4)						0.75%						500						500
Atmus term loan, due 2027 (5)						Variable						600						—
Debentures, due 2027						6.75%						58						58
Debentures, due 2028						7.125%						250						250
Senior notes, due 2030 (4)						1.50%						850						850
Senior notes, due 2043						4.875%						500						500
Senior notes, due 2050						2.60%						650						650
Debentures, due 2098 (6)						5.65%						165						165
Other debt												94						121
Unamortized discount and deferred issuance costs												(72)						(64)
Fair value adjustments due to hedge on indebtedness												(96)						(122)
Finance leases												111						113
Total long-term debt												4,920						5,071
Less: Current maturities of long-term debt												118						573
Long-term debt												$	4,802					$	4,498
(1) See NOTE 24, "ACQUISITIONS," for additional information.
(2) During 2023, we paid down $400 million of the term loan.
(3) In September 2023, we entered into a series of interest rate swaps in order to trade a portion of the floating rate into fixed rate. See "Interest Rate Risk" in NOTE 21, "DERIVATIVES," for additional information.
(4) In 2021, we entered into a series of interest rate swaps to effectively convert from a fixed rate to floating rate. See "Interest Rate Risk" in NOTE 21, "DERIVATIVES," for additional information.
(5) See "Atmus Credit Agreement" section below for additional information.
(6) The effective interest rate is 7.48 percent.

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

In millions						2024						2025						2026						2027						2028
Principal payments						$	118					$	1,797					$	67					$	614					$	266

On July 13, 2022, we entered into a loan agreement under which we may obtain delayed-draw loans in an amount up to $2.0 billion in the aggregate prior to October 13, 2022. We drew down the entire $2.0 billion balance on August 2, 2022, to help fund the acquisition of Meritor. The interest rate is based on SOFR for the one-month interest period plus the relevant spread. The loan will mature on August 1, 2025. As of December 31, 2023 we repaid $850 million of this term loan. The agreement contains customary events of default and financial and other covenants, including maintaining a net debt to capital ratio of no more than 0.65 to 1.0.

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, 2023, 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 8, 2022. Under this shelf registration we may offer, from time to time, debt securities, common stock, preferred and preference stock, depositary shares, warrants, stock purchase contracts and stock purchase units. Our current shelf is scheduled to expire in February 2025.

Interest Expense

For the years ended December 31, 2023, 2022 and 2021, total interest incurred was $383 million, $204 million and $113 million, respectively, and interest capitalized was $8 million, $5 million and $2 million, respectively.

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						2023						2022
Fair values of total debt (1)						$	6,375					$	7,400
Carrying value of total debt						6,696						7,855
(1) The fair value of debt is derived from Level 2 input measures.

Atmus Credit Agreement

On February 15, 2023, certain of our subsidiaries entered into an amendment to the $1.0 billion credit agreement (Credit Agreement), consisting of a $400 million revolving credit facility and a $600 million term loan facility, in anticipation of the separation of Atmus, extending the Credit Agreement termination date from March 30, 2023, to June 30, 2023. On May 26, 2023, Atmus drew down the entire $600 million term loan facility and borrowed $50 million under the revolving credit facility. Borrowings under the Credit Agreement mature in September 2027 (with quarterly payments on the term loan beginning in September 2024) and bear interest at varying rates, depending on the type of loan and, in some cases, the rates of designated benchmarks and the applicable borrower’s election. Generally, U.S. dollar-denominated loans bear interest at adjusted-term (SOFR) (which includes a 0.10 percent credit spread adjustment to term SOFR) for the applicable interest period plus a rate ranging from 1.125 percent to 1.75 percent. The Credit Agreement contains customary events of default and financial and other covenants, including maintaining a net leverage ratio of 4.0 to 1.0 and a minimum interest coverage ratio of 3.0 to 1.0. At December 31, 2023, there were no outstanding borrowings under the revolving credit facility and $600 million outstanding under the term loan facility. See NOTE 23, "FORMATION OF ATMUS AND IPO," for additional information.

NOTE 14. 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						2023						2022						2021
Balance at beginning of year						$	2,477					$	2,425					$	2,307
Provision for base warranties issued						602						515						503
Deferred revenue on extended warranty contracts sold						350						287						288
Provision for product campaigns issued						28						141						346
Payments made during period						(705)						(596)						(530)
Amortization of deferred revenue on extended warranty contracts						(300)						(298)						(260)
Changes in estimates for pre-existing product warranties and campaigns						37						(128)						(228)
Acquisitions (1)						—						147						—
Foreign currency translation adjustments and other						8						(16)						(1)
Balance at end of year						$	2,497					$	2,477					$	2,425
(1) See NOTE 24, "ACQUISITIONS," for additional information.

We recognized supplier recoveries of $36 million, $39 million and $170 million for the years ended December 31, 2023, 2022 and 2021, respectively.

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

						December 31,
In millions						2023						2022						Balance Sheet Location
Deferred revenue related to extended coverage programs
Current portion						$	279					$	290					Current portion of deferred revenue
Long-term portion						774						717						Deferred revenue
Total						$	1,053					$	1,007
Product warranty
Current portion						$	667					$	726					Current portion of accrued product warranty
Long-term portion						777						744						Other liabilities
Total						$	1,444					$	1,470
Total warranty accrual						$	2,497					$	2,477

NOTE 15. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

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

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

On June 28, 2022, KAMAZ Publicly Traded Company (KAMAZ) was designated to the List of Specially Designated Nationals and Blocked Persons by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC). We filed blocked property reports for relevant assets and sought relevant authorizations to extricate ourselves from our relationship with KAMAZ and its subsidiaries, including our unconsolidated joint venture with KAMAZ, in compliance with U.S. and other applicable laws. We received OFAC authorization on May 26, 2023, and from the U.K. Office of Financial Sanctions Implementation on September 15, 2023, which allowed us to finalize the exit of our unconsolidated joint venture with KAMAZ.

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 was conducted with external advisors as we continue to strive to ensure the certification and compliance processes for all of our pick-up truck applications are consistent with our internal policies, engineering standards and applicable laws.

In December 2023, we announced that we reached the Agreement in Principle with EPA, CARB, the Environmental and Natural Resources Division of the DOJ and the CA AG to resolve certain regulatory civil claims regarding our emissions certification and compliance process for certain engines primarily used in pick-up truck applications in the U.S. As part of the Agreement in Principle, among other things, we agreed to pay civil penalties, complete recall requirements, undertake mitigation projects, provide extended warranties, undertake certain testing, take certain corporate compliance measures and make other payments. Failure to comply with the Agreement in Principle will subject us to further stipulated penalties. We recorded a charge of $2.036 billion in the fourth quarter of 2023 to resolve the matters addressed by the Agreement in Principle involving approximately one million of our pick-up truck applications in the U.S. This charge was in addition to the previously announced charges of $59 million for the recalls of model years 2013 through 2018 RAM 2500 and 3500 trucks and model years 2016 through 2019 Titan trucks. The Agreement in Principle remains subject to final regulatory and judicial approvals, and we cannot be certain that the Agreement in Principle will be approved, in its current form, or at all. See NOTE 2, "AGREEMENT IN PRINCIPLE," for additional information.

We have also been in communication with other non-U.S. regulators regarding matters related to the emission systems in our engines and may also become subject to additional regulatory review in connection with these matters.

In connection with our announcement of our entry into the Agreement in Principle, we have become subject to shareholder, consumer and third-party litigation regarding the matters covered by the Agreement in Principle and we may become subject to additional litigation in connection with these matters.

The consequences resulting from the resolution of the foregoing matters are uncertain and the related expenses and reputational damage could have a material adverse impact on our results of operations, financial condition 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, 2023, the maximum potential loss related to these guarantees was $41 million.

We have arrangements with certain suppliers that require us to purchase minimum volumes or be subject to monetary penalties. At December 31, 2023, if we were to stop purchasing from each of these suppliers, the aggregate amount of the penalty would be approximately $393 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, palladium and iridium to purchase certain volumes of the commodities at contractually stated prices for various periods, which generally fall within two years. At December 31, 2023, the total commitments under these contracts were $104 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 $178 million at December 31, 2023.

Indemnifications

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

• product liability and license, patent or trademark indemnifications;

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

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

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

NOTE 16. 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, 2023 and 2022, 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
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
Shares acquired						—						1.9
Shares issued						—						(0.7)
Balance at December 31, 2022						222.5						81.2
Shares issued						—						(0.5)
Balance at December 31, 2023						222.5						80.7

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, 2023, consisting of shares issued and repurchased is presented in our Consolidated Statements of Changes in Redeemable Noncontrolling Interests and Equity.

In December 2021, the Board authorized the acquisition of up to $2.0 billion of additional common stock upon completion of the $2.0 billion repurchase plan authorized in 2019. The dollar value remaining available for future purchases under the 2019 program at December 31, 2023, was $218 million.

We did not make any repurchases of common stock during 2023. We repurchased $374 million and $1,402 million of our common stock in the years ended December 31, 2022 and 2021, respectively.

Dividends

Total dividends paid to common shareholders in 2023, 2022 and 2021 were $921 million, $855 million and $809 million, respectively. Declaration and payment of dividends in the future depends upon our income and liquidity position, among other factors, and is subject to declaration by the Board, who meets quarterly to consider our dividend payment. We expect to fund dividend payments with cash from operations.

In July 2023, the Board authorized an increase to our quarterly dividend of 7.0 percent from $1.57 per share to $1.68 per share. In July 2022, the Board authorized an 8.3 percent increase to our quarterly cash dividend on our common stock from $1.45 per share to $1.57 per share. In July 2021, the Board approved a 7.4 percent increase to our quarterly dividend on our common stock from $1.35 per share to $1.45 per share. Cash dividends per share paid to common shareholders for the last three years were as follows:

						Quarterly Dividends
						2023						2022						2021
First quarter						$	1.57					$	1.45					$	1.35
Second quarter						1.57						1.45						1.35
Third quarter						1.68						1.57						1.45
Fourth quarter						1.68						1.57						1.45
Total						$	6.50					$	6.04					$	5.60

NOTE 17. ACCUMULATED OTHER COMPREHENSIVE LOSS

Following are the changes in accumulated other comprehensive (loss) income 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, 2020						$	(735)					$	(1,204)											$	(43)								$	(1,982)
Other comprehensive income (loss) 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)
Other comprehensive income (loss) before reclassifications
Before-tax amount						(123)						(350)												136									(337)						$	(40)					$	(377)
Tax benefit (expense)						19						6												(32)									(7)						—						(7)
After-tax amount						(104)						(344)												104									(344)						(40)						(384)
Amounts reclassified from accumulated other comprehensive income (1)						23						—												2									25						—						25
Net current period other comprehensive income (loss)						(81)						(344)												106									(319)						$	(40)					$	(359)
Balance at December 31, 2022						$	(427)					$	(1,552)											$	89								$	(1,890)
Other comprehensive income (loss) before reclassifications
Before-tax amount						(541)						96												35									(410)						$	(3)					$	(413)
Tax benefit (expense)						113						(1)												(7)									105						—						105
After-tax amount						(428)						95												28									(305)						(3)						(308)
Amounts reclassified from accumulated other comprehensive income (1)						7						—												(18)									(11)						—						(11)
Net current period other comprehensive (loss) income						(421)						95												10									(316)						$	(3)					$	(319)
Balance at December 31, 2023						$	(848)					$	(1,457)											$	99								$	(2,206)
(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 18. NONCONTROLLING INTERESTS

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

						December 31,
In millions						2023						2022
Eaton Cummins Automated Transmission Technologies						$	534					$	525
Cummins India Ltd.						388						342
Other						132						125
Noncontrolling interests						$	1,054					$	992

NOTE 19. 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 stock and restricted stock units are awarded from time to time at no cost to certain employees. Restrictions limit the sale or transfer of the shares during a defined period. Most awards are not entitled to cash dividends and voting rights until vesting. Generally, the shares vest and become free from restrictions ratably over a three-year service period, provided the participant remains an employee. The fair value of the awards typically equals the average market price of our stock on the grant date adjusted for the present value of dividends over the vesting period. 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, 2023, 2022 and 2021, was approximately $79 million, $33 million and $36 million, respectively. The excess tax benefit associated with our employee share-based plans for the years ended December 31, 2023, 2022 and 2021, was $7 million, $8 million and $9 million, respectively. The total unrecognized compensation expense (net of estimated forfeitures) related to nonvested awards for our employee share-based plans was approximately $95 million at December 31, 2023 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, 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
Granted						18,900						207.79
Exercised						(586,990)						137.83
Forfeited						(29,045)						148.08
Balance at December 31, 2022						2,145,963						145.57
Granted						17,500						225.39
Exercised						(345,250)						142.69
Forfeited						(3,793)						144.16
Balance at December 31, 2023						1,814,420						$	146.89					4.2						$	169
Exercisable, December 31, 2021						1,629,588						$	136.74					4.4						$	133
Exercisable, December 31, 2022						1,655,298						$	146.37					4.6						$	159
Exercisable, December 31, 2023						1,814,420						$	146.89					4.2						$	169

The weighted-average grant date fair value of options granted during the years ended December 31, 2023, 2022 and 2021, was $57.01, $45.74 and $46.03, respectively. The total intrinsic value of options exercised during the years ended December 31, 2023, 2022 and 2021, was approximately $35 million, $53 million and $41 million, respectively.

The share-based activity and 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, 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
Granted						230,535						184.92						215,260						209.08
Vested						(122,188)						148.99						(5,513)						249.79
Forfeited						(63,197)						182.68						(3,262)						211.37
Balance at December 31, 2022						485,299						193.17						236,413						213.66
Granted						170,205						222.86						176,128						223.92
Vested						(99,425)						126.38						(74,270)						215.38
Forfeited						(68,566)						199.69						(27,931)						217.01
Balance at December 31, 2023						487,513						$	216.24					310,340						$	218.77

The total vesting date fair value of performance shares vested during the years ended December 31, 2023, 2022 and 2021, was $25 million, $24 million and $35 million, respectively. The total fair value of restricted shares vested was $17 million, $1 million and $0 for the years ended December 31, 2023, 2022 and 2021, 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:

						2023						2022						2021
Expected life (years)						6						6						6
Risk-free interest rate						3.91		%				2.32		%				1.15		%
Expected volatility						28.73		%				28.40		%				28.68		%
Dividend yield						2.81		%				2.85		%				2.95		%

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 20. 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, which is calculated using the treasury-stock method for share-based awards. Following are the computations for basic and diluted earnings per share:

						Years ended December 31,
In millions, except per share amounts						2023						2022						2021
Net income attributable to Cummins Inc.						$	735					$	2,151					$	2,131
Weighted-average common shares outstanding
Basic						141.7						141.5						144.6
Dilutive effect of stock compensation awards						1.0						0.8						1.3
Diluted						142.7						142.3						145.9
Earnings per common share attributable to Cummins Inc.
Basic						$	5.19					$	15.20					$	14.74
Diluted						5.15						15.12						14.61

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,
						2023						2022						2021
Options excluded						10,587						20,595						6,463

NOTE 21. DERIVATIVES

We are exposed to financial risk resulting from volatility in foreign exchange rates, interest rates and commodity prices. This risk is closely monitored and managed through the use of physical forward contracts (which are not considered derivatives) and financial derivative instruments including foreign currency forward contracts, commodity swap contracts and interest rate swaps and locks. Financial derivatives are used expressly for hedging purposes and under no circumstances are they used for speculative purposes. When material, we adjust the estimated fair value of our derivative contracts for counterparty or our credit risk. None of our derivative instruments are subject to collateral requirements. Substantially all of our derivative contracts are subject to master netting arrangements, which provide us with the option to settle certain contracts on a net basis when they settle on the same day with the same currency. In addition, these arrangements provide for a net settlement of all contracts with a given counterparty in the event that the arrangement is terminated due to the occurrence of default or a termination event.

Foreign Currency Exchange Rate Risk

We had foreign currency forward contracts with notional amounts of $4.5 billion at December 31, 2023, with the following currencies comprising 85 percent of outstanding foreign currency forward contracts: British pound, Chinese renminbi, Canadian dollar, Australian dollar and Swedish kronor. We had foreign currency forward contracts with notional amounts of $3.6 billion at December 31, 2022, with the following currencies comprising 88 percent of outstanding foreign currency forward contracts: Chinese renminbi, British pound, Canadian dollar, Australian dollar and Euro.

We are further exposed to foreign currency exchange risk as many of our subsidiaries are subject to fluctuations as the functional currencies of the underlying entities are not our U.S. dollar reporting currency. To help minimize movements for certain investments, in the third quarter of 2022 we began entering into foreign exchange forwards designated as net investment hedges for certain of our investments. Under the current terms of our foreign exchange forwards, we agreed with third parties to sell British pound in exchange for U.S. dollar currency at a specified rate at the maturity of the contract. The notional amount of these hedges at December 31, 2023, was $808 million.

The following table summarizes the net investment hedge activity in AOCL:

						Years ended December 31,
In millions						2023												2022
Type of Derivative						Gain (Loss) Recognized in AOCL												Gain (Loss) Reclassified from AOCL into Earnings						Gain (Loss) Recognized in AOCL												Gain (Loss) Reclassified from AOCL into Earnings
Foreign exchange forwards						$	(30)											$	—					$	(22)											$	—

Interest Rate Risk

In September 2023, we entered into a series of interest rate swaps with a total notional value of $500 million in order to trade a portion of the floating rate into a fixed rate on our term loan, due in 2025. The maturity date of the interest rate swaps is August 1, 2025. The weighted-average interest rate of the interest rate swaps is 5.72 percent. We designated the swaps as cash flow hedges. The gains and losses on these derivative instruments are initially recorded in other comprehensive income and reclassified into earnings as interest expense in the Consolidated Financial Statements as each interest payment is accrued.

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

						Year ended December 31,
In millions						2023
Type of Swap						Gain (Loss) Recognized in AOCL						Gain (Loss) Reclassified from AOCL into Interest Expense
Interest rate swaps						$	(4)					$	—

In 2021, we entered into a series of interest rate swaps to effectively convert our $500 million senior notes, due in 2025, from a fixed rate of 0.75 percent to a floating rate equal to the three-month LIBOR plus a spread. We also entered into a series of interest rate swaps to effectively convert $765 million of our $850 million senior notes, due in 2030, from a fixed rate of 1.50 percent to a floating rate equal to the three-month LIBOR plus a spread. The fallback protocol in our derivative agreements allowed for a transition from LIBOR to SOFR in the third quarter of 2023. We designated the swaps as fair value hedges. The gain or loss on these derivative instruments, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, are recognized in current income

as interest expense. The net swap settlements that accrue each period are also reported in the Consolidated Financial Statements as interest expense. In March 2023, we settled a portion of our 2021 interest rate swaps with a notional amount of $100 million. The $7 million loss on settlement will be amortized over the remaining term of the related debt.

The following table summarizes the gains and losses:

						Years ended December 31,
In millions						2023																		2022												2021
Type of Swap						Gain (Loss) on Swaps						Gain (Loss) on Borrowings																		Gain (Loss) on Swaps						Gain (Loss) on Borrowings						Gain (Loss) on Swaps						Gain (Loss) on Borrowings
Interest rate swaps (1)						$	31					$	(32)																	$	(148)					$	145					$	(3)					$	2
(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 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 originally 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 are 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. In 2022, we settled certain rate lock agreements with notional amounts totaling $150 million for $49 million in cash. In 2023, we settled all remaining rate lock agreements with notional amounts totaling $350 million for $101 million. The majority of the $150 million of gains on settlements will remain in other comprehensive income and will be amortized over the term of the debt anticipated to be issued in early 2024. The following table summarizes the interest rate lock activity in AOCL:

						Year ended December 31,
In millions						2023												2022												2021
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						$	14											$	2					$	112											$	—					$	19											$	—

Cash Flow Hedging

The following table summarizes the effect on our Consolidated Statements of Net Income for derivative instruments classified as cash flow hedges. The table does not include amounts related to ineffectiveness as it was not material for the periods presented.

						Years ended December 31,
In millions						2023						2022						2021
Gain (loss) reclassified from AOCL into income - Net sales (1)						$	17					$	(4)					$	(4)
Gain reclassified from AOCL into income - Cost of sales (1)(2)						3						1						6
(1) Includes foreign currency forward contracts.
(2) Includes commodity swap contracts.

Derivatives Not Designated as Hedging Instruments

The following table summarizes the effect on our Consolidated Statements of Net Income for derivative instruments not designated as hedging instruments:

						Years ended December 31,
In millions						2023						2022						2021
(Loss) gain recognized in income - Cost of sales (1)						$	(3)					$	2					$	—
(Loss) gain recognized in income - Other income, net (1)						(21)						(5)						45
(1) Includes foreign currency forward contracts.

Fair Value Amount and Location of Derivative Instruments

The following table summarizes the location and fair value of derivative instruments on our Consolidated Balance Sheets:

						Derivatives Designated as Hedging Instruments												Derivatives Not Designated as Hedging Instruments
						December 31,												December 31,
In millions						2023						2022						2023						2022
Notional amount						$	2,997					$	3,051					$	3,610					$	2,900
Derivative assets
Prepaid expenses and other current assets						$	14					$	18					$	16					$	27
Other assets						—						80						—						—
Total derivative assets (1)						$	14					$	98					$	16					$	27
Derivative liabilities
Other accrued expenses						$	43					$	19					$	14					$	3
Other liabilities						117						151						—						—
Total derivative liabilities (1)						$	160					$	170					$	14					$	3
(1) Estimates of the fair value of all derivative assets and liabilities above are derived from Level 2 inputs, which are estimated using actively quoted prices for similar instruments from brokers and observable inputs where available, including market transactions and third-party pricing services, or net asset values provided to investors. We do not currently have any Level 3 input measures and there were no transfers into or out of Level 2 or 3 during 2023 or 2022.

We elected to present our derivative contracts on a gross basis in our Consolidated Balance Sheets. Had we chosen to present on a net basis, we would have derivatives in a net asset position of $4 million and $52 million and derivatives in a net liability position of $148 million and $100 million at December 31, 2023, and 2022, respectively.

NOTE 22. RUSSIAN OPERATIONS

On March 17, 2022, the Board indefinitely suspended our operations in Russia due to the ongoing conflict in Ukraine. At the time of suspension, our Russian operations included a wholly-owned distributor in Russia, an unconsolidated joint venture with KAMAZ (a Russian truck manufacturer) and direct sales into Russia from our other business segments. As a result of the indefinite suspension of operations, we evaluated the recoverability of assets in Russia and assessed other potential liabilities. The following summarizes the costs associated with the suspension of our Russian operations in our Consolidated Statements of Net Income:

												Year ended
In millions												December 31, 2022						Statement of Net Income Location
Inventory write-downs												$	17					Cost of sales
Accounts receivable reserves												41						Other operating expense, net
Impairment and other joint venture costs												31						Equity, royalty and interest income from investees
Other												22						Other operating expense, net
Russian suspension costs, net of recoveries												$	111

For the year ended December 31, 2023, there were no material additional costs.

NOTE 23. FORMATION OF ATMUS AND IPO

On May 23, 2023, in connection with the Atmus IPO, Cummins issued approximately $350 million of commercial paper with certain lenders. On May 26, 2023, Atmus shares began trading on the New York Stock Exchange under the symbol "ATMU." The IPO was completed on May 30, 2023, whereby Cummins exchanged 19.5 percent (approximately 16 million shares) of its ownership in Atmus, at $19.50 per share, to retire $299 million of the commercial paper as proceeds from the offering through a non-cash transaction.

In connection with the completion of the IPO, through a series of asset and equity contributions, we transferred the filtration business to Atmus. In exchange, Atmus transferred consideration of $650 million to Cummins, which consisted primarily of the net proceeds from a term loan facility and revolver executed by Atmus during May 2023. The commercial paper issued and retired through the IPO proceeds, coupled with the $650 million received, was used for the retirement of our historical debt and payment of dividends. The difference between the commercial paper retired from the IPO, other IPO related fees and the net book value of our divested interest was $285 million and was recorded as an offset to additional paid-in capital. Of our consolidated cash and cash equivalents at December 31, 2023, $166 million is retained by Atmus for its working capital purposes. See NOTE 13*, "DEBT,"* for additional information.

We will continue to consolidate the financial position and results of Atmus, so long as we retain control. The earnings attributable to the divested, noncontrolling interest for the year ended December 31, 2023, were $17 million. At December 31, 2023, the noncontrolling interest associated with Atmus is reflected in noncontrolling interests in our Consolidated Balance Sheets.

Subject to market conditions, we intend to make a tax-free split-off of Atmus, pursuant to which Cummins will offer its stockholders the option to exchange their shares of Cummins common stock for shares of Atmus common stock in an exchange offer.

NOTE 24. ACQUISITIONS

Acquisitions for the years ended December 31, 2023 and 2022, were as follows:

Entity Acquired (Dollars in millions)						Date of Acquisition						Additional Percent Interest Acquired						Payments to Former Owners						Acquisition Related Debt Retirements						Total Purchase Consideration						Type of Acquisition**(1)**												Goodwill Acquired						Intangibles Recognized**(2)**
2023
Cummins France SA						10/31/23						100		%				$	25					$	5					$	30					COMB												$	4					$	—
Faurecia						10/02/23						100		%				210						—						210			(3)			COMB												90						—
Hydrogenics Corporation (Hydrogenics)						06/29/23						19		%				287						48						335			(4)			EQUITY												—						—
Teksid Hierro de Mexico, S.A. de C.V. (Teksid MX)						04/03/23						100		%				143						—						143			(5)			COMB												18						—
2022
Siemens Commercial Vehicles Propulsion (Siemens CVP)						11/30/22						100		%				$	187					$	—					$	187					COMB												$	70					$	106
Meritor, Inc. (Meritor)						08/03/22						100		%				2,613						248						2,861						COMB												926						1,610
Jacobs Vehicle Systems (Jacobs)						04/08/22						100		%				345						—						345						COMB												108						164
Cummins Westport, Inc. (Westport JV)						02/07/22						50		%				42						—						42						COMB												—						20
(1) All results from acquired entities were included in segment results subsequent to the acquisition date. Previously consolidated entities were accounted for as equity transactions (EQUITY). Newly consolidated entities were accounted for as business combinations (COMB).
(2) Intangible assets acquired in the business combination were mostly customer, technology and trade name related.
(3) Total purchase consideration included $30 million for the settlement of accounts payable that were treated as an operating cash outflow.
(4) Hydrogenics entered into three non-interest-bearing promissory notes with $175 million paid on July 31, 2023, and the remaining $160 million due in three installments through 2025.
(5) Total purchase consideration included $32 million for the settlement of accounts payable that were treated as an operating cash outflow.

Faurecia

On October 2, 2023, we purchased, from the Forvia Group, all of the equity ownership of Faurecia's U.S. and Europe commercial vehicle exhaust business for $210 million, subject to certain working capital and other customary adjustments, and does not contain any contingent consideration. The acquisition provides canning and assembly operations for full exhaust systems primarily for on-highway applications, ensures the long-term supply of aftertreatment components, minimizes opportunities for supply disruptions, adds significant technical and manufacturing resources and enhances our existing portfolio. The values assigned to individual assets acquired and liabilities assumed are preliminary based on management's current best estimate and subject to change as certain matters are finalized. The primary areas that remain open are related to contingent liabilities and deferred taxes.

The preliminary purchase price allocation was as follows:

In millions
Cash and cash equivalents						$	8
Accounts and notes receivable, net (1)						52
Inventories						32
Property, plant and equipment						93
Goodwill						90
Other current and long-term assets						46
Accounts payable (principally trade)						(62)
Other current and long-term liabilities						(49)
Total purchase price						$	210
(1) Includes $30 million of Cummins receivables that were eliminated against payables at other Cummins entities.

Goodwill was determined based on the residual difference between the fair value of consideration transferred and the value assigned to tangible assets and liabilities. All of the goodwill is expected to be deductible for tax purposes. Among the factors contributing to a purchase price resulting in the recognition of goodwill are an acquired workforce and other economic benefits that are anticipated to arise from operational synergies from combining the business with Cummins.

The results of this business were reported in our Components segment within the emission solutions business. Since we are the primary customer of this business, the acquisition is not expected to result in material incremental sales to our business. Pro forma financial information for the acquisition was not presented as the effects were not material to our Consolidated Financial Statements.

Hydrogenics Corporation - Redeemable Noncontrolling Interest

On June 29, 2023, a share purchase agreement was executed with a 19 percent minority shareholder in one of our businesses, Hydrogenics Corporation (Hydrogenics), whereby we agreed to pay the minority shareholder $335 million for their 19 percent ownership, including the settlement of shareholder loans of $48 million. As part of the share purchase agreement, Hydrogenics entered into three non-interest-bearing promissory notes with $175 million paid on July 31, 2023, and the remaining $160 million due in three installments through 2025. We recorded the non-interest-bearing promissory notes at their present value in our Consolidated Financial Statements. The debt amount, net of unamortized debt discount, was $148 million and reflected in current maturities of long-term debt and long-term debt at December 31, 2023.

Prior to the execution of this transaction, the minority shareholder had, among other rights and subject to related obligations and restrictive covenants, rights that were exercisable between September 2022 and September 2026 to require us to (1) purchase such shareholder's shares (put option) at an amount up to the fair market value (calculated pursuant to a process outlined in the shareholders' agreement) and (2) sell to such shareholder Hydrogenics' electrolyzer business at an amount up to the fair market value of the electrolyzer business (calculated pursuant to a process outlined in the shareholders’ agreement). The estimated fair value of the put option was recorded as redeemable noncontrolling interests in our Consolidated Financial Statements with an offset to additional paid-in capital, and at December 31, 2022, the balance was $258 million. The redeemable noncontrolling interest balance was reduced to zero as of the acquisition date.

Teksid Hierro de Mexico, S.A. de C.V.

On April 3, 2023, we purchased all of the equity ownership interest of Teksid Hierro de Mexico, S.A. de C.V. (Teksid MX) and Teksid, Inc. from Stellantis N.V. for approximately $143 million (including $32 million for the settlement of accounts payable), subject to certain adjustments set forth in the agreement. Teksid MX operates a cast iron foundry located in Monclova, Mexico, which primarily forges blocks and heads used in our and other manufacturers’ engines. Teksid, Inc. facilitates the commercialization of Teksid MX products in North America. Since we are the primary customer of the foundry, the acquisition is not expected to result in material incremental sales to our business. Approximately $90 million of the purchase price was allocated to property, plant and equipment. The remainder was allocated primarily to working capital assets and liabilities (including approximately $16 million of cash and cash equivalents) and resulted in approximately $18 million of goodwill, none of which is deductible for tax purposes. In the third quarter we finalized the purchase accounting and made certain other adjustments, which resulted in a $7 million decrease in goodwill. The results of the business were reported in our Engine segment. Pro forma financial information for the acquisition was not presented as the effects were not material to our Consolidated Financial Statements.

Siemens CVP

On November 30, 2022, we acquired Siemens' Commercial Vehicles Propulsion business for approximately $187 million, subject to working capital and other customary adjustments, and was allocated primarily to intangible assets, goodwill and inventories. This business develops, designs and produces electric drive systems including electric motors, inverters, software and related services for the commercial vehicle markets. This acquisition is included in our Accelera segment. This acquisition added key capabilities in direct drive and transmission-based remote mount electric motors, inverters, software and related services that are critical elements in the next generation of electric powertrain, which will accelerate our ability to offer global customers a wider array of electrified product solutions across commercial vehicle applications. Final purchase accounting adjustments did not significantly impact goodwill.

Meritor, Inc.

On August 3, 2022, we completed the acquisition of Meritor whereby we paid $36.50 per share for each outstanding share of Meritor, a global leader of drivetrain, mobility, braking, aftermarket and electric powertrain solutions for commercial vehicle and industrial markets. The total purchase price was $2.9 billion, including debt that was retired on the closing date of $248 million. In addition, we assumed $1.0 billion of additional debt, of which $0.9 billion was retired prior to the end of the third quarter of 2022. The acquisition was funded with a combination of $2.0 billion in new debt (see NOTE 13, "DEBT" for additional details), cash on hand and additional commercial paper borrowings. The integration of Meritor’s people, technology and capabilities position us as one of the few companies able to provide integrated powertrain solutions across combustion and electric power applications at a time when demand for decarbonized solutions is continuing to accelerate. The majority of this business was be included within our Components segment with the exception of the electric powertrain business, which was included in our Accelera segment.

The final purchase price allocation has been updated as follows:

In millions
Cash and cash equivalents						$	98
Accounts and notes receivable, net						640
Inventories						750
Property, plant and equipment						841
Intangible assets						1,610
Investments and advances related to equity method investees						382
Goodwill						926
Pension assets						147
Other current and long-term assets						322
Accounts payable (principally trade)						(711)
Net deferred taxes						(277)
Other liabilities (pensions and other postretirement benefits)						(129)
Long-term debt						(962)
Other current and long-term liabilities						(665)
Noncontrolling interests						(111)
Total purchase price						$	2,861

During 2023, we finalized our accounting for the Meritor, Inc. acquisition. The primary components of the change were to increase contingent liabilities by $70 million offset by finalization of deferred taxes and tax reserves, with a net increase to goodwill of $32 million. There was no impact to the Consolidated Statements of Net Income for any of the changes.

The estimated fair values (all considered Level 3 measurements) of the identifiable intangible assets acquired, their weighted-average useful lives, the related valuation methodology and key assumptions are as follows:

						Fair Value (in millions)						Weighted-Average Useful Life (in years)						Valuation Methodology						Key Assumptions
Customer relationships						$	960					12						Multi-period excess earnings						Revenue, EBITDA(1), discount rate, customer renewal rates, customer attrition rates
Technology						345						8						Relief-from-royalty						Royalty rate, discount rate, obsolescence factor
Trade name						305						21						Relief-from-royalty						Royalty rate, discount rate
(1) Earnings or losses before interest expense, income taxes, depreciation and amortization and noncontrolling interests.

Annual amortization of the intangible assets for the next five years is expected to approximate $142 million per year.

Goodwill was determined based on the residual difference between the fair value of consideration transferred and the value assigned to tangible and intangible assets and liabilities. Goodwill was allocated to the Components segment ($759 million) and the Accelera segment ($167 million) based on the relative value of those businesses compared to the assets and liabilities assigned to them. We do not expect any of the goodwill to be deductible for tax purposes. Among the factors contributing to a purchase price resulting in the recognition of goodwill are Meritor’s expected future customers, new versions of technologies, an acquired workforce, other economic benefits that are anticipated to arise from future product sales and operational synergies from combining the business with Cummins.

Included in our results for the year ended December 31, 2022, were revenues of $1.9 billion and net loss of $43 million related to this business. In addition, in 2022 we incurred acquisition related costs of $30 million included in selling, general and administrative expenses in our Consolidated Statements of Net Income.

The following table presents the supplemental consolidated results of the Company for the years ended December 2022 and 2021, on an unaudited pro-forma basis as if the acquisition had been consummated on January 1, 2021. The primary adjustments reflected in the pro-forma results related to (1) increase in interest expense for debt used to fund the acquisition, (2) removal of acquisition related costs from 2022 (and included in 2021) and (3) changes related to purchase accounting primarily related to amortization of intangibles, fixed assets and joint ventures. The unaudited pro forma financial information presented below does not purport to represent the actual results of operations that Cummins and Meritor would have achieved had the companies been combined during the periods presented and was not intended to project the future results of operations that the combined company could achieve after the acquisition. The unaudited pro forma financial information does not reflect any potential cost savings, operating efficiencies, long-term debt pay down estimates, financial synergies or other strategic benefits as a result of the acquisition or any restructuring costs to achieve those benefits.

(Unaudited)												Years ended December 31,
In millions																		2022						2021
Net sales																		$	30,841					$	27,949
Net income																		2,196						2,058

The Meritor acquisition increased net assets in the Components segment by $3.8 billion and Accelera segment by $0.3 billion in 2022.

Jacobs Vehicle Systems

On April 8, 2022, we completed the acquisition of Jacobs Vehicle Systems business (Jacobs) from Altra Industrial Motion Corp. The purchase price was $345 million in cash and does not contain any contingent consideration. Jacobs is a supplier of engine braking, cylinder deactivation and start and stop thermal management technologies (valvetrain technologies). The acquisition furthers our investment in key technologies and capabilities to drive growth, while securing our supply base.

The final purchase price allocation was as follows:

In millions
Cash and cash equivalents						$	18
Accounts and notes receivable, net						24
Inventories						15
Property, plant and equipment						70
Intangible assets						164
Goodwill						108
Accounts payable (principally trade)						(21)
Net deferred taxes						(27)
Other, net						(6)
Total purchase price						$	345

The estimated fair values (all considered Level 3 measurements) of the identifiable intangible assets acquired, their weighted-average useful lives, the related valuation methodology and key assumptions are as follows:

						Fair Value (in millions)						Weighted-Average Useful Life (in years)						Valuation Methodology						Key Assumptions
Customer relationships						$	108					9						Multi-period excess earnings						Discount rate, customer renewal rates
Technology						31						7						Relief-from-royalty						Royalty rate, rate of return, obsolescence factor
Trade name						25						14						Relief-from-royalty						Royalty rate, discount

Annual amortization of the intangible assets for the next five years is expected to approximate $18 million per year.

Goodwill was determined based on the residual difference between the fair value of consideration transferred and the value assigned to tangible and intangible assets and liabilities. Approximately $9 million of the goodwill is deductible for tax purposes. Among the factors contributing to a purchase price resulting in the recognition of goodwill are Jacobs' expected future customers, new versions of technologies, an acquired workforce and other economic benefits that are anticipated to arise from future product sales and operational synergies from combining the business with Cummins.

Included in our results for the year ended December 31, 2022, were revenues of $118 million and loss of $1 million related to this business. The results of this business were reported in our Components segment. Pro forma financial information for the acquisition was not presented as the effects were not material to our Consolidated Financial Statements.

Westport JV

On February 7, 2022, we purchased Westport Fuel System Inc.'s stake in Westport JV. We will continue to operate the business as the sole owner. The purchase price was $42 million and was allocated primarily to cash, warranty and deferred revenue related to extended coverage contracts. The results of the business were reported in our Engine segment. Pro forma financial information for the acquisition was not presented as the effects were not material to our Consolidated Financial Statements.

NOTE 25. OPERATING SEGMENTS

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

Our reportable operating segments consist of Components, Engine, Distribution, Power Systems and Accelera. This reporting structure is organized according to the products and markets each segment serves. The Components segment sells axles, drivelines, brakes and suspension systems for commercial diesel and natural gas applications, aftertreatment systems, turbochargers, fuel systems, valvetrain technologies, filtration products, automated transmissions and electronics. 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 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 Accelera segment designs, manufactures, sells and supports hydrogen production technologies as well as electrified power systems with innovative components and subsystems, including battery, fuel cell and electric powertrain technologies. The Accelera segment is currently in the early stages of commercializing these technologies with efforts primarily focused on the development of our electrolyzers for hydrogen production and electrified power systems and related components and subsystems. We continue to serve all our markets as they adopt electrification and alternative power technologies, meeting the needs of our OEM partners and end customers.

We use segment earnings or losses before interest expense, income taxes, depreciation and amortization and noncontrolling interests (EBITDA) as the 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 and certain Atmus separation costs to individual segments. EBITDA may not be consistent with measures used by other companies.

As previously announced, in March 2023, we rebranded our New Power segment as "Accelera" to better represent our commitment to zero-emission technologies. In addition, we moved our NPROXX joint venture from the Accelera segment to the Engine segment, which adjusted both the equity, royalty and interest income from investees and segment EBITDA line items for the current and prior year. We started to report results for the changes within our operating segments effective January 1, 2023, and reflected these changes in the historical periods presented.

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

In millions						Components						Engine						Distribution												Power Systems						Accelera						Total Segments
2023
External sales						$	11,531					$	8,874					$	10,199											$	3,125					$	336					$	34,065
Intersegment sales						1,878						2,810						50												2,548						18						7,304
Total sales						13,409						11,684						10,249												5,673						354						41,369
Research, development and engineering expenses						387						614						57												237						203						1,498
Equity, royalty and interest income (loss) from investees						97						251						97												53						(15)						483
Interest income						31						19						34												9						2						95
Segment EBITDA						1,840			(1)			1,630						1,209												836						(443)						5,072
Depreciation and amortization (2)						491						225						115												122						63						1,016
Net assets						6,965						930						2,348												1,938						1,159						13,340
Investments and advances to equity investees						582						660						396												132						25						1,795
Capital expenditures						373						538						103												115						84						1,213
2022
External sales						$	7,847					$	8,199					$	8,901											$	2,951					$	176					$	28,074
Intersegment sales						1,889						2,746						28												2,082						22						6,767
Total sales						9,736						10,945						8,929												5,033						198						34,841
Research, development and engineering expenses						309						506						52												240						171						1,278
Equity, royalty and interest income (loss) from investees						71						160			(3)			77												43						(2)						349
Interest income						12						14						16												7						—						49
Russian suspension costs (4)						5						33			(5)			54												19						—						111
Segment EBITDA						1,346			(6)			1,535						888												596						(334)						4,031
Depreciation and amortization (2)						304						205						114												120						38						781
Net assets						7,306						1,451						2,698												2,382						1,158						14,995
Investments and advances to equity investees						617						617						352												138						33						1,757
Capital expenditures						264						368						114												96						74						916
2021
External sales						$	5,932					$	7,589					$	7,742											$	2,650					$	108					$	24,021
Intersegment sales						1,733						2,365						30												1,765						8						5,901
Total sales						7,665						9,954						7,772												4,415						116						29,922
Research, development and engineering expenses						307						399						48												234						102						1,090
Equity, royalty and interest income from investees						50						335						63												56						2						506
Interest income						5						8						7												5						—						25
Segment EBITDA						1,180						1,406						731												496						(218)						3,595
Depreciation and amortization (2)						183						205						116												131						24						659
Net assets						2,938						1,554						2,294												2,251						602						9,639
Investments and advances to equity investees						254						771						329												164						20						1,538
Capital expenditures						184						341						92												80						37						734
(1) Includes $78 million of costs associated with the IPO and separation of Atmus for the year ended December 31, 2023.
(2) Depreciation and amortization, as shown on a segment basis, excludes the amortization of debt discount and deferred costs included in the Consolidated Statements of Net Income as interest expense. The amortization of debt discount and deferred costs were $8 million, $3 million and $3 million for the years ended 2023, 2022 and 2021, respectively. A portion of depreciation expense is included in research, development and engineering expense.
(3) Includes a $28 million impairment of our joint venture with KAMAZ and $3 million of royalty charges as part of our costs associated with the indefinite suspension of our Russian operations. See NOTE 22, "RUSSIAN OPERATIONS," for additional information.
(4) See NOTE 22, "RUSSIAN OPERATIONS," for additional information.
(5) Includes $31 million of Russian suspension costs reflected in the equity, royalty and interest income (loss) from investees line above.
(6) Includes $83 million of costs related to the acquisition and integration of Meritor and $28 million of costs associated with the separation of Atmus.

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						2023						2022						2021
TOTAL SEGMENT EBITDA						$	5,072					$	4,031					$	3,595
Intersegment eliminations and other (1)						(2,055)						(232)						(74)
Less:
Interest expense						375						199						111
Depreciation and amortization						1,016						781						659
INCOME BEFORE INCOME TAXES						$	1,626					$	2,819					$	2,751
(1) Intersegment eliminations and other included $2.0 billion related to the Agreement in Principle, $22 million of costs associated with the IPO and separation of Atmus and $21 million of voluntary retirement and voluntary separation charges for the year ended December 31, 2023. The year ended December 31, 2022, included $53 million of costs associated with the planned separation of Atmus. See NOTE 2, "AGREEMENT IN PRINCIPLE," for additional information.

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						2023						2022
Net assets for operating segments						$	13,340					$	14,995
Cash, cash equivalents and marketable securities						2,741						2,573
Net liabilities deducted in arriving at net segment assets (1)						14,531						11,270
Pension and OPEB adjustments excluded from net segment assets						307						832
Deferred tax assets not allocated to segments						1,082						625
Deferred debt costs not allocated to segments						4						4
Total assets						$	32,005					$	30,299
(1) Liabilities deducted in arriving at net segment assets include certain accounts payable, accrued expenses, long-term liabilities and other items.

See NOTE 3, "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						2023						2022
United States						$	5,013					$	4,714
China						1,030						1,052
India						681						665
Mexico						583						429
United Kingdom						489						431
Netherlands						437						334
Brazil						261						256
Canada						171						168
Other international countries						819						731
Total long-lived assets						$	9,484					$	8,780

Our largest customer is PACCAR Inc. Worldwide sales to this customer were approximately $5.5 billion, $4.5 billion and $3.6 billion for the years ended December 31, 2023, 2022 and 2021, representing 16 percent, 16 percent and 15 percent, respectively, of our consolidated net sales. No other customer accounted for more than 10 percent of consolidated net sales.