Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

119K characters. Original on sec.gov · Markdown

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cummins Inc. and its consolidated subsidiaries are hereinafter sometimes referred to as “Cummins,” “we,” “our” or “us.”

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

Certain parts of this quarterly report contain forward-looking statements intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include those that are based on current expectations, estimates and projections about the industries in which we operate and management’s beliefs and assumptions. Forward-looking statements are generally accompanied by words such as "anticipates," "expects," "forecasts," "intends," "plans," "believes," "seeks," "estimates," "could," "should," "may" or words of similar meaning. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which we refer to as "future factors," which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Some future factors that could cause our results to differ materially from the results discussed in such forward-looking statements are discussed below and shareholders, potential investors and other readers are urged to consider these future factors carefully in evaluating forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. Future factors that could affect the outcome of forward-looking statements include the following:

GOVERNMENT REGULATION

any adverse results of our internal review into our emissions certification process and compliance with emission standards;
increased scrutiny from regulatory agencies, as well as unpredictability in the adoption, implementation and enforcement of emission standards around the world;
changes in international, national and regional trade laws, regulations and policies;
any adverse effects of the U.S. government's COVID-19 vaccine mandates;
changes in taxation;
global legal and ethical compliance costs and risks;
increasingly stringent environmental laws and regulations;
future bans or limitations on the use of diesel-powered products;

BU****SINESS CONDITIONS / DISRUPTIONS

any adverse effects of the conflict between Russia and Ukraine and the global response (including government bans or restrictions on doing business in Russia);
failure to successfully execute or integrate the acquisition of Meritor, Inc.;
failure to realize all of the anticipated benefits from our announced acquisition of Meritor, Inc.;
raw material, transportation and labor price fluctuations and supply shortages;
aligning our capacity and production with our demand;
the actions of, and income from, joint ventures and other investees that we do not directly control;
large truck manufacturers' and original equipment manufacturers' customers discontinuing outsourcing their engine supply needs or experiencing financial distress, bankruptcy or change in control;

PRODUCTS AND TECHNOLOGY

product recalls;
variability in material and commodity costs;
the development of new technologies that reduce demand for our current products and services;
lower than expected acceptance of new or existing products or services;
product liability claims;
our sales mix of products;

GENERAL

failure to complete, adverse results from or failure to realize the expected benefits of the separation of our filtration business;
our plan to reposition our portfolio of product offerings through exploration of strategic acquisitions and divestitures and related uncertainties of entering such transactions;
challenging markets for talent and ability to attract, develop and retain key personnel;
climate change and global warming;
exposure to potential security breaches or other disruptions to our information technology environment and data security;
political, economic and other risks from operations in numerous countries including political, economic and social uncertainty and the evolving globalization of our business;
competitor activity;
increasing competition, including increased global competition among our customers in emerging markets;
labor relations or work stoppages;
foreign currency exchange rate changes;
the performance of our pension plan assets and volatility of discount rates;
the price and availability of energy;
continued availability of financing, financial instruments and financial resources in the amounts, at the times and on the terms required to support our future business; and
other risk factors described in Part II, Item 1A in this quarterly report and our 202 1 Form 10-K, Part I, Item 1A, both under the caption "Risk Factors."

Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are made only as of the date of this quarterly report and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

ORGANIZATION OF INFORMATION

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) was prepared to provide the reader with a view and perspective of our business through the eyes of management and should be read in conjunction with our Management's Discussion and Analysis of Financial Condition and Results of Operations section of our 2021 Form 10-K. Our MD&A is presented in the following sections:

EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS
RESULTS OF OPERATIONS
OPERATING SEGMENT RESULTS
OUTLOOK
LIQUIDITY AND CAPITAL RESOURCES
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS

Overview

We are a global power leader that designs, manufactures, distributes and services diesel, natural gas, electric and hybrid powertrains and powertrain-related components including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems, automated transmissions, electric power generation systems, batteries, electrified power systems, hydrogen production and fuel cell products. We sell our products to original equipment manufacturers (OEMs), distributors, dealers and other customers worldwide. We have long-standing relationships with many of the leading manufacturers in the markets we serve, including PACCAR Inc, Navistar International Corporation, Daimler Trucks North America and Stellantis N.V. We serve our customers through a service network of approximately 500 wholly-owned, joint venture and independent distributor locations and more than 10,000 Cummins certified dealer locations in approximately 190 countries and territories.

Our reportable operating segments consist of Engine, Distribution, Components, Power Systems and New Power. This reporting structure is organized according to the products and markets each segment serves. The Engine segment produces engines (15 liters and smaller) and associated parts for sale to customers in on-highway and various off-highway markets. Our engines are used in trucks of all sizes, buses and recreational vehicles, as well as in various industrial applications, including construction, agriculture, power generation systems and other off-highway applications. The Distribution segment includes wholly-owned and partially-owned distributorships engaged in wholesaling engines, generator sets and service parts, as well as performing service and repair activities on our products and maintaining relationships with various OEMs throughout the world. The Components segment sells filtration products, aftertreatment systems, turbochargers, electronics, fuel systems and automated transmissions. The Power Systems segment is an integrated power provider, which designs, manufactures and sells engines (16 liters and larger) for industrial applications (including mining, oil and gas, marine and rail), standby and prime power generator sets, alternators and other power components. The New Power segment designs, manufactures, sells and supports hydrogen production solutions as well as electrified power systems ranging from fully electric to hybrid along with innovative components and subsystems, including battery and fuel cell technologies. The New Power segment is currently in the development phase with a primary focus on research and development activities for our power systems, components and subsystems. We continue to serve all our markets as they adopt electrification and alternative power technologies, meeting the needs of our OEM partners and end customers.

Our financial performance depends, in large part, on varying conditions in the markets we serve, particularly the on-highway, construction and general industrial markets. Demand in these markets tends to fluctuate in response to overall economic conditions. Our sales may also be impacted by OEM inventory levels, production schedules, stoppages and supply chain challenges. Economic downturns in markets we serve generally result in reduced sales of our products and can result in price reductions in certain products and/or markets. As a worldwide business, our operations are also affected by geopolitical risks (such as the conflict between Russia and Ukraine), currency, political, economic, public health crises, epidemics or pandemics and regulatory matters, including adoption and enforcement of environmental and emission standards, in the countries we serve. As part of our growth strategy, we invest in businesses in certain countries that carry high levels of these risks such as China, Brazil, India, Mexico, Russia and countries in the Middle East and Africa. At the same time, our geographic diversity and broad product and service offerings have helped limit the impact from a drop in demand in any one industry or customer or the economy of any single country on our consolidated results.

Russian Operations

On March 17, 2022, the Board of Directors (the Board) decided to indefinitely suspend our operations in Russia due to the ongoing conflict in Ukraine. At the time of suspension, our Russian operations included a wholly-owned distributor in Russia, an unconsolidated joint venture and direct sales into Russia from our other business units. As a result of the suspension of operations, we evaluated the recoverability of assets in Russia and assessed other liabilities that may have been incurred. We have experienced and expect to continue to experience, an inability to collect customer receivables and may be the subject of litigation in connection with our suspension of commercial operations in Russia. We will continue to evaluate the situation as conditions evolve and may take additional actions as deemed necessary in future periods. The following summarizes the costs associated with the suspension of our Russian operations in our first quarter results on our Condensed Consolidated Statements of Net Income:



In millions	March 31, 2022
Inventory write-downs	$	59
Accounts receivable reserves	43
Impairment and other joint venture costs	31

Other	25
Total	$	158

Supply Chain Disruptions

We continue to experience supply chain disruptions and related financial impacts reflected as increased cost of sales. Our industry continues to be unfavorably impacted by supply chain constraints leading to shortages across multiple components categories and limiting our collective ability to meet end-user demand. Our customers are also experiencing other supply chain issues and slowing production. Should the supply chain issues continue for an extended period of time or worsen, the impact on our production and supply chain could have a material adverse effect on our results of operations, financial condition and cash flows. Our Board of Directors (the Board) continues to monitor and evaluate all of these factors and the related impacts on our business and operations, and we are diligently working to minimize the supply chain impacts to our business and to our customers.

First Quarter 2022 Results

A summary of our results is as follows:


	Three months ended
In millions, except per share amounts	March 31, 2022		April 4, 2021
Net sales	$	6,385	$	6,092
Net income attributable to Cummins Inc.	418		603
Earnings per common share attributable to Cummins Inc.
Basic	$	2.94	$	4.10
Diluted	2.92		4.07

Worldwide revenues increased 5 percent in the three months ended March 31, 2022, compared to the same period in 2021, due to higher demand in most operating segments and most geographic regions except China. Net sales in the U.S. and Canada improved 12 percent, primarily due to increased demand and favorable pricing in North American on-highway markets, which positively impacted all components businesses, and all distribution product lines. International demand (excludes the U.S. and Canada) declined 3 percent, with lower sales in China, partially offset by higher sales in Asia Pacific, Russia, Latin America and Europe. The decrease in international sales was principally due to lower demand in most components businesses in China, partially offset by higher demand in industrial markets (especially mining), power generation equipment (especially in China) and most distribution product lines in Russia. Unfavorable foreign currency fluctuations impacted international sales by 2 percent (primarily the Euro and Australian dollar). Our industry's sales continue to be unfavorably impacted by supply chain constraints leading to shortages across multiple components categories and limiting our collective ability to meet end-user demand. Our customers are also experiencing other supply chain issues slowing production.

The following table contains sales and EBITDA (defined as earnings or losses before interest expense, income taxes, depreciation and amortization and noncontrolling interests) by operating segment for the three months ended March 31, 2022 and April 4, 2021. See Note 15, "OPERATING SEGMENTS," to the Condensed Consolidated Financial Statements for additional information and a reconciliation of our segment information to the corresponding amounts in our Condensed Consolidated Statements of Net Income.


	Three months ended
Operating Segments	March 31, 2022							April 4, 2021						Percent change
			Percent							Percent				2022 vs. 2021
In millions	Sales		of Total		EBITDA			Sales		of Total		EBITDA		Sales		EBITDA
Engine	$	2,753	43	%	$	392		$	2,459	40	%	$	354	12	%	11	%
Distribution	2,117		33	%	110			1,835		30	%	160		15	%	(31)	%
Components	1,988		31	%	320			2,152		35	%	421		(8)	%	(24)	%
Power Systems	1,160		18	%	90			1,022		17	%	126		14	%	(29)	%
New Power	31		1	%	(67)			35		1	%	(51)		(11)	%	(31)	%
Intersegment eliminations	(1,664)		(26)	%	(90)			(1,411)		(23)	%	(30)		18	%	NM

Total	$	6,385	100	%	$	755	(1)	$	6,092	100	%	$	980	5	%	(23)	%

"NM" - not meaningful information
(1) EBITDA includes $158 million of costs associated with the suspension of our Russian operations and $17 million of costs associated with the planned separation of our Filtration business.

Net income attributable to Cummins Inc. was $418 million, or $2.92 per diluted share, on sales of $6.4 billion for the three months ended March 31, 2022, versus the comparable prior year period net income attributable to Cummins Inc. of $603 million, or $4.07 per diluted share, on sales of $6.1 billion. The decreases in net income attributable to Cummins Inc. and earnings per diluted share were driven by costs associated with the suspension of our Russian operations, increased consulting expenses driven by acquisitions and the work towards separation of the filtration business, lower equity, royalty and interest income from investees (primarily in China), costs related to asset impairments and other charges and higher unfavorable discrete tax items, partially offset by higher net sales and increased gross margin. See Note 3, "RUSSIAN OPERATIONS" to our Condensed Consolidated Financial Statements for additional information. The increase in gross margin was primarily due to favorable pricing, partially offset by higher material costs, losses related to inventory write-downs in our Russian operations and increased freight costs due to supply chain constraints. Diluted earnings per common share for the three months ended March 31, 2022, benefited $0.01 from fewer weighted-average shares outstanding due to the stock repurchase program.

We generated $164 million of cash from operations for the three months ended March 31, 2022, compared to $339 million for the comparable period in 2021. See the section titled "Cash Flows" in the "LIQUIDITY AND CAPITAL RESOURCES" section for a discussion of items impacting cash flows.

Our debt to capital ratio (total capital defined as debt plus equity) at March 31, 2022, was 30.6 percent, compared to 30.7 percent at December 31, 2021. The decrease was primarily due to lower debt balances since December 31, 2021. At March 31, 2022, we had $2.8 billion in cash and marketable securities on hand and access to our $3.5 billion credit facilities, if necessary, to meet currently anticipated working capital, investment and funding needs.

In the first three months of 2022, we purchased $311 million, or 1.6 million shares, of our common stock.

On April 20, 2022, we filed a confidential registration statement announcing our intent to separate the filtration business into a stand-alone company.

On February 21, 2022, we entered into an agreement and plan of merger with Meritor, Inc. (Meritor) and Rose NewCo Inc. pursuant to which we agreed to acquire Meritor, a global leader of drivetrain, mobility, braking, aftermarket and electric powertrain solutions for commercial vehicle and industrial markets. We will pay $36.50 in cash per share of Meritor common stock, for a total transaction value of approximately $3.7 billion, including assumed debt and net of acquired cash.

On February 9, 2022, we reached an agreement with Altra Industrial Motion Corp to acquire its Jacobs Vehicle Systems business and closed the transaction in April 2022 with a purchase price of $346 million.

As a well-known seasoned issuer, we filed an automatic shelf registration of an undetermined amount of debt and equity with the Securities and Exchange Commission (SEC) on February 8, 2022.

On February 7, 2022, we purchased Westport Fuel System Inc.'s stake in the Cummins Westport Joint Venture for $42 million.

In the first three months of 2022, the investment loss on our U.S. pension trust was 2.7 percent while our U.K. pension trust loss was 5.8 percent. We anticipate making additional defined benefit pension contributions during the remainder of 2022 of $17 million for our U.S. and U.K. qualified and non-qualified pension plans. We expect our 2022 annual net periodic pension cost to approximate $31 million.

As of the date of this filing, our credit ratings and outlooks from the credit rating agencies remain unchanged.

RESULTS OF OPERATIONS



	Three months ended				Favorable/
	March 31, 2022		April 4, 2021		(Unfavorable)
In millions, except per share amounts			Amount		Percent
NET SALES	$	6,385	$	6,092	$	293	5	%
Cost of sales	4,853		4,606		(247)		(5)	%
GROSS MARGIN	1,532		1,486		46		3	%
OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses	615		574		(41)		(7)	%
Research, development and engineering expenses	298		260		(38)		(15)	%
Equity, royalty and interest income from investees	96		166		(70)		(42)	%

Other operating expense, net	111		8		(103)		NM
OPERATING INCOME	604		810		(206)		(25)	%

Interest expense	17		28		11		39	%
Other (expense) income, net	(9)		1		(10)		NM
INCOME BEFORE INCOME TAXES	578		783		(205)		(26)	%
Income tax expense	155		172		17		10	%
CONSOLIDATED NET INCOME	423		611		(188)		(31)	%
Less: Net income attributable to noncontrolling interests	5		8		3		38	%
NET INCOME ATTRIBUTABLE TO CUMMINS INC.	$	418	$	603	$	(185)	(31)	%
Diluted Earnings Per Common Share Attributable to Cummins Inc.	$	2.92	$	4.07	$	(1.15)	(28)	%

"NM" - not meaningful information


	Three months ended				Favorable/ (Unfavorable)
	March 31, 2022		April 4, 2021
Percent of sales			Percentage Points
Gross margin	24.0	%	24.4	%	(0.4)
Selling, general and administrative expenses	9.6	%	9.4	%	(0.2)
Research, development and engineering expenses	4.7	%	4.3	%	(0.4)

Net Sales

Net sales for the three months ended March 31, 2022, increased by $293 million versus the comparable period in 2021. The primary drivers were as follows:

Engine segment sales increased 12 percent due to favorable pricing and increased aftermarket sales in North America.
Distribution segment sales increased 15 percent principally due to higher demand across all product lines in North America.
Power Systems segment sales increased 14 percent primarily due to higher demand in global mining markets and power generation markets in China.

These increases were partially offset by the following drivers:

Components segment sales decreased 8 percent largely due to lower demand in most businesses in China, partially offset by higher demand North America.
Unfavorable foreign currency fluctuations of 1 percent of total sales, primarily in the Euro and Australian dollar.

Sales to international markets (excluding the U.S. and Canada), based on location of customers, for the three months ended March 31, 2022, were 42 percent of total net sales compared with 46 percent of total net sales for the comparable period in 2021. A more detailed discussion of sales by segment is presented in the “OPERATING SEGMENT RESULTS” section.

Cost of Sales

The types of expenses included in cost of sales are the following: parts and material consumption, including direct and indirect materials; salaries, wages and benefits; depreciation on production equipment and facilities and amortization of technology intangibles; estimated costs of warranty programs and campaigns; production utilities; production-related purchasing; warehousing, including receiving and inspection; freight costs; engineering support costs; repairs and maintenance; production and warehousing facility property insurance; rent for production facilities and other production overhead.

Gross Margin

Gross margin increased $46 million for the three months ended March 31, 2022 and decreased 0.4 points as a percentage of net sales, versus the comparable period in 2021. The increase in gross margin was primarily due to favorable pricing, partially offset by higher material costs, losses related to inventory write-downs in our Russian operations and increased freight costs due to supply chain constraints. The 0.4 decrease in gross margin as a percentage of net sales was principally due to losses related to higher material costs, inventory write-downs in our Russian operations and increased freight costs due to supply chain constraints which increased at a faster rate than increased sales.

The provision for base warranties issued as a percent of sales for the three months ended March 31, 2022, was 1.9 percent compared to 2.6 percent for the comparable period in 2021.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $41 million for the three months ended March 31, 2022, versus the comparable period in 2021, primarily due to higher consulting expenses driven by acquisitions and the work towards separation of the filtration business, partially offset by lower variable compensation expenses. Overall, selling, general and administrative expenses as a percentage of net sales increased to 9.6 percent in the three months ended March 31, 2022, from 9.4 percent in the comparable period in 2021. The increase in selling, general and administrative expenses as a percentage of net sales was mainly due to higher selling, general and administrative expenses which increased at a faster rate than the increase in net sales.

Research, Development and Engineering Expenses

Research, development and engineering expenses increased $38 million for the three months ended March 31, 2022, versus the comparable period in 2021 primarily due to higher spending on prototypes and increased consulting expenses. Overall, research, development and engineering expenses as a percentage of net sales increased to 4.7 percent in the three months ended March 31, 2022, from 4.3 percent in the comparable period in 2021. The increase in research, development and engineering expenses as a percentage of net sales was mainly due to higher research, development and engineering expenses which increased at a faster rate than the increase in net sales. Research activities continue to focus on development of new products to meet future emission standards around the world, improvements in fuel economy performance of diesel and natural gas powered engines and related components as well as development activities around fully electric, hybrid and hydrogen powertrain solutions.

Equity, Royalty and Interest Income from Investees

Equity, royalty and interest income from investees decreased $70 million for the three months ended March 31, 2022, versus the comparable period in 2021, primarily due to the $28 million impairment of our Russian joint venture with KAMAZ, decreased earnings at Beijing Foton Cummins Engine Co., Ltd. and Dongfeng Cummins Engine Co., Ltd. and the February 7, 2022, purchase of Westport Fuel System Inc.'s stake in Cummins Westport Joint Venture. See NOTE 3, "RUSSIAN OPERATIONS" and NOTE 14 "ACQUISITIONS" to our Condensed Consolidated Financial Statements for additional information.

Other Operating Expense, Net

Other operating (expense) income, net was as follows:


	Three months ended
In millions	March 31, 2022			April 4, 2021
Russian suspension costs	$	(68)	(1)	$	—
Asset impairments and other charges	(36)			—
Amortization of intangible assets	(5)			(6)
Loss on write-off of assets	(5)			(4)
Gain on sale of assets, net	1			1
Royalty income, net	2			2
Other, net	—			(1)
Total other operating expenses, net	$	(111)		$	(8)



(1) See Note 3, "RUSSIAN OPERATIONS" to our Condensed Consolidated Financial Statements for additional information.

Interest Expense

Interest expense decreased $11 million for the three months ended March 31, 2022, versus the comparable period in 2021, primarily due to the performance on the fixed to floating swaps placed in 2021 for our 2030 and 2050 debt maturities.

Other (Expense) Income, Net

Other (expense) income, net was as follows:


	Three months ended
In millions	March 31, 2022		April 4, 2021
Loss on corporate owned life insurance	$	(37)	$	(32)
Foreign currency loss, net	(12)		(5)

Interest income	8		6
Non-service pension and OPEB credit	33		24




Other, net	(1)		8
Total other (expense) income, net	$	(9)	$	1

Income Tax Expense

Our effective tax rate for 2022 is expected to approximate 21.5 percent, excluding any discrete items that may arise.

Our effective tax rate for the three months ended March 31, 2022, was 26.8 percent and contained unfavorable discrete tax items of $31 million, primarily due to $18 million of unfavorable changes associated with uncertainty in our Russian operations, $9 million of unfavorable changes in tax reserves and $4 million of net unfavorable other discrete tax items.

Our effective tax rate for the three months ended April 4, 2021, was 22.0 percent and contained favorable discrete items of $4 million.

Noncontrolling Interests

Noncontrolling interests eliminate the income or loss attributable to non-Cummins ownership interests in our consolidated entities. Noncontrolling interests in income of consolidated subsidiaries for the three months ended March 31, 2022, decreased $3 million versus the comparable period in 2021. The decrease for the three months ended March 31, 2022, was primarily due to lower earnings at Cummins India Limited.

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

Net income and diluted earnings per common share attributable to Cummins Inc. for the three months ended March 31, 2022, decreased $185 million and $1.15 per diluted share versus the comparable period in 2021, primarily due to costs associated with the suspension of our Russian operations, increased consulting expenses driven by acquisitions and the work towards separation of the filtration business, lower equity, royalty and interest income from investees (primarily in China), costs related to asset impairments and other charges and higher unfavorable discrete tax items, partially offset by higher net sales and increased gross margin. See Note 3, "RUSSIAN OPERATIONS" to our Condensed Consolidated Financial Statements for additional information. Diluted earnings per common share for the three months ended March 31, 2022, benefited $0.01 from fewer weighted-average shares outstanding due to the stock repurchase program.

Comprehensive Income - Foreign Currency Translation Adjustment

The foreign currency translation adjustment was a net gain of $4 million for the three months ended March 31, 2022, compared to a net loss of $56 million for the three months ended April 4, 2021, driven by the following:


	Three months ended
	March 31, 2022			April 4, 2021
In millions	Translation adjustment		Primary currency driver vs. U.S. dollar	Translation adjustment		Primary currency driver vs. U.S. dollar
Wholly-owned subsidiaries	$	16	Brazilian real, partially offset by Indian rupee, British pound, Euro	$	(48)	Brazilian real, British pound, Chinese renminbi
Equity method investments	(4)		Indian rupee	(8)		Chinese renminbi
Consolidated subsidiaries with a noncontrolling interest	(8)		Indian rupee	—
Total	$	4		$	(56)

OPERATING SEGMENT RESULTS

Our reportable operating segments consist of the Engine, Distribution, Components, Power Systems and New Power segments. This reporting structure is organized according to the products and markets each segment serves. We use segment EBITDA as a primary basis for the Chief Operating Decision Maker to evaluate the performance of each of our reportable operating segments. We believe EBITDA is a useful measure of our operating performance as it assists investors and debt holders in comparing our performance on a consistent basis without regard to financing methods, capital structure, income taxes or depreciation and amortization methods, which can vary significantly depending upon many factors. Segment amounts exclude certain expenses not specifically identifiable to segments. See Note 15, "OPERATING SEGMENTS," to the Condensed Consolidated Financial Statements for additional information and a reconciliation of our segment information to the corresponding amounts in our Condensed Consolidated Statements of Net Income.

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

Engine Segment Results

Financial data for the Engine segment was as follows:


	Three months ended							Favorable/
	March 31,				April 4,			(Unfavorable)
In millions	2022				2021			Amount		Percent
External sales	$	2,049			$	1,895		$	154	8	%
Intersegment sales	704				564			140		25	%
Total sales	2,753				2,459			294		12	%

Research, development and engineering expenses	109				92			(17)		(18)	%
Equity, royalty and interest income from investees	44			(1)	113			(69)		(61)	%

Interest income	4				3			1		33	%

Russian suspension costs	32			(2)	—			(32)		NM

Segment EBITDA	392				354			38		11	%

								Percentage Points
Segment EBITDA as a percentage of total sales	14.2		%		14.4		%			(0.2)


"NM" - not meaningful information

(1) Includes a $28 million impairment of our joint venture with KAMAZ and $3 million of royalty charges as part of our costs associated with the suspension of our Russian operations. In addition, on February 7, 2022, we purchased Westport Fuel System Inc.'s stake in Cummins Westport Joint Venture. See NOTE 3, "RUSSIAN OPERATIONS" and NOTE 14, "ACQUISITIONS" to our Condensed Consolidated Financial Statements for additional information.
(2) Includes $31 million of Russian suspension costs reflected in the Equity, royalty and interest income from investees line above.

Sales for our Engine segment by market were as follows:


	Three months ended						Favorable/
	March 31,			April 4,			(Unfavorable)
In millions	2022			2021			Amount		Percent
Heavy-duty truck	$	908		$	827		$	81	10	%
Medium-duty truck and bus	848			674			174		26	%
Light-duty automotive	498			481			17		4	%
Total on-highway	2,254			1,982			272		14	%
Off-highway	499			477			22		5	%
Total sales	$	2,753		$	2,459		$	294	12	%

							Percentage Points
On-highway sales as percentage of total sales	82		%	81		%			1

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


	Three months ended		Favorable/
	March 31,	April 4,	(Unfavorable)
	2022	2021	Amount	Percent
Heavy-duty	28,600	30,700	(2,100)	(7)	%
Medium-duty	72,600	73,100	(500)	(1)	%
Light-duty	66,500	68,500	(2,000)	(3)	%
Total unit shipments	167,700	172,300	(4,600)	(3)	%

Sales

Engine segment sales for the three months ended March 31, 2022, increased $294 million versus the comparable period in 2021. The following were the primary drivers by market:

Medium-duty truck and bus sales increased $174 million mainly due to favorable pricing and higher demand, especially in North America and Brazil.
Heavy-duty truck sales increased $81 million principally due to favorable pricing in North America, partially offset by lower demand in China.

Segment EBITDA

Engine segment EBITDA for the three months ended March 31, 2022, increased $38 million versus the comparable period in 2021, primarily due to favorable pricing, higher volumes (including aftermarket parts) and favorable mix, partially offset by higher material costs, lower equity, royalty and interest income from investees (principally Beijing Foton Cummins Engine Co., Ltd. and Dongfeng Cummins Engine Co., Ltd.), costs related to asset impairments and other charges and costs associated with the suspension of our Russian operations including a $28 million impairment of our joint venture with KAMAZ. See Note 3, "RUSSIAN OPERATIONS" to our Condensed Consolidated Financial Statements for additional information.

Distribution Segment Results

Financial data for the Distribution segment was as follows:


	Three months ended						Favorable/
	March 31,			April 4,			(Unfavorable)
In millions	2022			2021			Amount		Percent
External sales	$	2,111		$	1,827		$	284	16	%
Intersegment sales	6			8			(2)		(25)	%
Total sales	2,117			1,835			282		15	%

Research, development and engineering expenses	13			13			—		—	%
Equity, royalty and interest income from investees	16			17			(1)		(6)	%
Interest income	2			1			1		100	%

Russian suspension costs(1)	100			—			(100)		NM
Segment EBITDA	110			160			(50)		(31)	%

							Percentage Points
Segment EBITDA as a percentage of total sales	5.2		%	8.7		%			(3.5)

"NM" - not meaningful information

(1) See Note 3, "RUSSIAN OPERATIONS" to our Condensed Consolidated Financial Statements for additional information.

Sales for our Distribution segment by region were as follows:


	Three months ended				Favorable/
	March 31,		April 4,		(Unfavorable)
In millions	2022		2021		Amount		Percent
North America	$	1,367	$	1,171	$	196	17	%
Asia Pacific	246		214		32		15	%
Europe	149		163		(14)		(9)	%
Russia	136		57		79		NM
China	83		87		(4)		(5)	%
India	49		49		—		—	%
Africa and Middle East	46		54		(8)		(15)	%
Latin America	41		40		1		3	%
Total sales	$	2,117	$	1,835	$	282	15	%

"NM" - not meaningful information

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


	Three months ended				Favorable/
	March 31,		April 4,		(Unfavorable)
In millions	2022		2021		Amount		Percent
Parts	$	924	$	757	$	167	22	%
Engines	441		334		107		32	%
Power generation	401		418		(17)		(4)	%
Service	351		326		25		8	%
Total sales	$	2,117	$	1,835	$	282	15	%

Sales

Distribution segment sales for the three months ended March 31, 2022, increased $282 million versus the comparable period in 2021. The following were the primary drivers by region:

North American sales increased $196 million, representing 70 percent of the total change in Distribution segment sales, mainly due to higher demand for parts and vocational engines.
Russian sales increased $79 million as a result of increased demand for engines and parts.

These increases were partially offset by unfavorable foreign currency fluctuations, primarily in the Australian dollar and Euro.

Segment EBITDA

Distribution segment EBITDA for the three months ended March 31, 2022, decreased $50 million versus the comparable period in 2021, primarily due to costs associated with the suspension of our Russian operations and unfavorable foreign currency fluctuations (principally in the Russian ruble and Australian dollar), partially offset by higher volumes and favorable pricing. See Note 3, "RUSSIAN OPERATIONS" to our Condensed Consolidated Financial Statements for additional information.

Components Segment Results

Financial data for the Components segment was as follows:


	Three months ended						Favorable/
	March 31,			April 4,			(Unfavorable)
In millions	2022			2021			Amount		Percent
External sales	$	1,517		$	1,724		$	(207)	(12)	%
Intersegment sales	471			428			43		10	%
Total sales	1,988			2,152			(164)		(8)	%

Research, development and engineering expenses	76			75			(1)		(1)	%
Equity, royalty and interest income from investees	28			19			9		47	%
Interest income	1			1			—		—	%

Russian suspension costs(1)	6			—			(6)		NM
Segment EBITDA	320			421			(101)		(24)	%

							Percentage Points
Segment EBITDA as a percentage of total sales	16.1		%	19.6		%			(3.5)

"NM" - not meaningful information

(1) See Note 3, "RUSSIAN OPERATIONS" to our Condensed Consolidated Financial Statements for additional information.

Sales for our Components segment by business were as follows:


	Three months ended				Favorable/
	March 31,		April 4,		(Unfavorable)
In millions	2022		2021		Amount		Percent
Emission solutions	$	910	$	1,035	$	(125)	(12)	%
Filtration	382		372		10		3	%
Turbo technologies	346		367		(21)		(6)	%
Electronics and fuel systems	216		263		(47)		(18)	%
Automated transmissions	134		115		19		17	%
Total sales	$	1,988	$	2,152	$	(164)	(8)	%

Sales

Components segment sales for the three months ended March 31, 2022, decreased $164 million versus the comparable period in 2021. The following were the primary drivers by business:

Emission solutions sales decreased $125 million primarily due to lower demand in China, partially offset by stronger demand in North America.
Electronics and fuel systems sales decreased by $47 million principally due to weaker demand in China.

These decreases were partially offset by increased sales of $19 million in the automated transmission business mainly due to stronger demand in North America and China.

Segment EBITDA

Components segment EBITDA for the three months ended March 31, 2022, decreased $101 million versus the comparable period in 2021, mainly due to lower volumes and increased material costs.

Power Systems Segment Results

Financial data for the Power Systems segment was as follows:


	Three months ended						Favorable/
	March 31,			April 4,			(Unfavorable)
In millions	2022			2021			Amount		Percent
External sales	$	683		$	612		$	71	12	%
Intersegment sales	477			410			67		16	%
Total sales	1,160			1,022			138		14	%

Research, development and engineering expenses	64			57			(7)		(12)	%
Equity, royalty and interest income from investees	11			12			(1)		(8)	%
Interest income	1			1			—		—	%

Russian suspension costs(1)	20			—			(20)		NM
Segment EBITDA	90			126			(36)		(29)	%

							Percentage Points
Segment EBITDA as a percentage of total sales	7.8		%	12.3		%			(4.5)

"NM" - not meaningful information



(1) See Note 3, "RUSSIAN OPERATIONS" to our Condensed Consolidated Financial Statements for additional information.

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


	Three months ended				Favorable/
	March 31,		April 4,		(Unfavorable)
In millions	2022		2021		Amount		Percent
Power generation	$	664	$	611	$	53	9	%
Industrial	393		324		69		21	%
Generator technologies	103		87		16		18	%
Total sales	$	1,160	$	1,022	$	138	14	%

Sales

Power Systems segment sales for the three months ended March 31, 2022, increased $138 million versus the comparable period in 2021. The following were the primary drivers by product line:

Industrial sales increased $69 million due to stronger demand in global mining markets and oil and gas markets in China and North America.
Power generation sales increased $53 million due to higher demand in China, partially offset by weaker demand in North America.

Segment EBITDA

Power Systems segment EBITDA for the three months ended March 31, 2022, decreased $36 million versus the comparable period in 2021, mainly due to costs associated with the suspension of our Russian operations, increased freight costs due to supply chain constraints and higher material costs, partially offset by higher volumes. See Note 3, "RUSSIAN OPERATIONS" to our Condensed Consolidated Financial Statements for additional information.

New Power Segment Results

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



	Three months ended				Favorable/
	March 31,		April 4,		(Unfavorable)
In millions	2022		2021		Amount		Percent
External sales	$	25	$	34	$	(9)	(26)	%
Intersegment sales	6		1		5		NM
Total sales	31		35		(4)		(11)	%

Research, development and engineering expenses	36		23		(13)		(57)	%
Equity, royalty and interest (loss) income from investees	(3)		5		(8)		NM

Segment EBITDA	(67)		(51)		(16)		(31)	%




"NM" - not meaningful information

OUTLOOK

Supply Chain Disruptions

Business Outlook

Our outlook reflects the following positive trends and challenges to our business that could impact our revenue and earnings potential for the remainder of 2022.

Positive Trends

We expect demand for pick-up trucks in North America to remain strong.
We expect North American medium-duty and heavy-duty truck demand will remain strong.
We believe market demand for trucks in India will continue the improvement trend from the second half of 2021.
We anticipate our aftermarket business will continue to improve, driven primarily by increased truck utilization in North America and improved demand in our Power Systems business.
Our liquidity of $6.0 billion in cash, marketable securities and available credit facilities puts us in a strong position to deal with any uncertainties that may arise in the remainder of 2022.

Challenges

Supply constraints driven by strong demand in multiple end markets and regions may lead to increased costs, including higher freight and conversion costs.
Continued increases in material and commodity costs could negatively impact earnings.
Our industry's sales continue to be unfavorably impacted by supply chain constraints leading to shortages across multiple components categories and limiting our collective ability to meet end-user demand. Our customers are also experiencing other supply chain issues slowing production.
Resurgence of COVID-19 in China led to lockdowns in several cities that negatively impacted the economy and our end markets. These lockdowns will also contribute to further disruptions in the global supply chain, negatively impacting both our revenues and profitability.
We expect market demand in truck and construction markets in China to decline from 2021 full year levels.
The indefinite suspension of our operations in Russia is expected to impact our revenue and profitability. The 2021 sales through our wholly-owned distributor in Russia and direct sales into Russia were 2.7 percent of net sales.
We expect to incur incremental expenses as a result of the expected completion of the Meritor, Inc. acquisition and its integration into our business.
Planned separation of our filtration business into a stand-alone company is expected to result in incremental expenses.

LIQUIDITY AND CAPITAL RESOURCES

Key Working Capital and Balance Sheet Data

We fund our working capital with cash from operations and short-term borrowings, including commercial paper, when necessary. Various assets and liabilities, including short-term debt, can fluctuate significantly from month to month depending on short-term liquidity needs. As a result, working capital is a prime focus of management's attention. Working capital and balance sheet measures are provided in the following table:


Dollars in millions	March 31, 2022			December 31, 2021
Working capital (1)	$	5,084		$	5,225
Current ratio	1.68			1.74
Accounts and notes receivable, net	$	4,368		$	3,990
Days' sales in receivables	60			59
Inventories	$	4,586		$	4,355
Inventory turnover	4.2			4.6
Accounts payable (principally trade)	$	3,497		$	3,021
Days' payable outstanding	60			57
Total debt	$	4,125		$	4,159
Total debt as a percent of total capital	30.6		%	30.7		%

(1) Working capital includes cash and cash equivalents.

Cash Flows

Cash and cash equivalents were impacted as follows:


	Three months ended
In millions	March 31, 2022		April 4, 2021		Change
Net cash provided by operating activities	$	164	$	339	$	(175)
Net cash used in investing activities	(10)		(25)		15
Net cash used in financing activities	(497)		(745)		248
Effect of exchange rate changes on cash and cash equivalents	27		(12)		39
Net decrease in cash and cash equivalents	$	(316)	$	(443)	$	127

Net cash provided by operating activities decreased $175 million for the three months ended March 31, 2022, versus the comparable period in 2021, primarily due to higher working capital requirements of $237 million and lower consolidated net income of $188 million, partially offset by Russian suspension costs of $158 million, favorable changes in other liabilities of $70 million and lower equity earnings, net of dividends of $60 million. During the first three months of 2022, the higher working capital requirements resulted in a cash outflow of $530 million compared to a cash outflow of $293 million in the comparable period in 2021, mainly due to higher variable compensation payouts in accrued expenses, partially offset by favorable changes in inventories.

Net cash used in investing activities decreased $15 million for the three months ended March 31, 2022, versus the comparable period in 2021, primarily due to $83 million of cash acquired from the acquisition of Cummins Westport Joint Venture, net of the purchase price, partially offset by higher capital expenditures of $17 million, unfavorable changes in cash flows from derivatives not designated as hedges of $16 million, higher investments in and advances to equity investees of $8 million and lower net liquidations of marketable securities of $7 million.

Net cash used in financing activities decreased $248 million for the three months ended March 31, 2022, versus the comparable period in 2021, primarily due to higher net borrowings under short-term credit agreements of $131 million and lower repurchases of common stock of $107 million.

The effect of exchange rate changes on cash and cash equivalents for the three months ended March 31, 2022, versus the comparable period in 2021, increased $39 million primarily due to favorable fluctuations in the British pound of $36 million.

Sources of Liquidity

We generate significant ongoing cash flow. Cash provided by operations is our principal source of liquidity with $164 million generated in the three months ended March 31, 2022. Our sources of liquidity include:


	March 31, 2022
In millions	Total		U.S.		International		Primary location of international balances
Cash and cash equivalents	$	2,276	$	821	$	1,455	China, Singapore, Belgium, Australia, Mexico, India

Marketable securities (1)	527		106		421		India
Total	$	2,803	$	927	$	1,876
Available credit capacity
Revolving credit facilities (2)	$	3,189
International and other uncommitted domestic credit facilities	$	253




(1) The majority of marketable securities could be liquidated into cash within a few days.
(2) The five-year credit facility for $2.0 billion and the 364-day credit facility for $1.5 billion, maturing August 2026 and August 2022, respectively, are maintained primarily to provide backup liquidity for our commercial paper borrowings and general corporate purposes. At March 31, 2022, we had $311 million of commercial paper outstanding, which effectively reduced the available capacity under our revolving credit facilities to $3.2 billion.

Cash, Cash Equivalents and Marketable Securities

A significant portion of our cash flow is generated outside the U.S. We manage our worldwide cash requirements considering available funds among the many subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. As a result, we do not anticipate any local liquidity restrictions to preclude us from funding our operating needs with local resources.

If we distribute our foreign cash balances to the U.S. or to other foreign subsidiaries, we could be required to accrue and pay withholding taxes, for example, if we repatriated cash from certain foreign subsidiaries whose earnings we asserted are completely or partially permanently reinvested. Foreign earnings for which we assert permanent reinvestment outside the U.S. consist primarily of earnings of our China, India and Netherlands domiciled subsidiaries. At present, we do not foresee a need to repatriate any earnings for which we asserted permanent reinvestment. However, to help fund cash needs of the U.S. or other international subsidiaries as they arise, we repatriate available cash from certain foreign subsidiaries whose earnings are not permanently reinvested when it is cost effective to do so.

Debt Facilities and Other Sources of Liquidity

We have access to committed credit facilities totaling $3.5 billion, including the $1.5 billion 364-day facility that expires August 17, 2022 and our $2.0 billion five-year facility that expires on August 18, 2026. We intend to maintain credit facilities at the current or higher aggregate amounts by renewing or replacing these facilities at or before expiration. These revolving credit facilities are maintained primarily to provide backup liquidity for our commercial paper borrowings and general corporate purposes. There were no outstanding borrowings under these facilities at March 31, 2022.

We can issue up to $3.5 billion of unsecured, short-term promissory notes (commercial paper) pursuant to the Board authorized commercial paper programs. These programs facilitate the private placement of unsecured short-term debt through third-party brokers. We intend to use the net proceeds from the commercial paper borrowings for acquisitions and general corporate purposes. The total combined borrowing capacity under the revolving credit facilities and commercial programs should not exceed $3.5 billion. See Note 10, "DEBT," to our Condensed Consolidated Financial Statements for additional information.

At March 31, 2022, we had $311 million of commercial paper outstanding, which effectively reduced the available capacity under our revolving credit facilities to $3.2 billion.

As a well-known seasoned issuer, we filed an automatic shelf registration of an undetermined amount of debt and equity with the SEC on February 8, 2022. Under this shelf registration we may offer, from time to time, debt securities, common stock, preferred and preference stock, depositary shares, warrants, stock purchase contracts and stock purchase units.

In July 2017, the U.K.'s Financial Conduct Authority, which regulates the London Interbank Offered Rate (LIBOR), announced it intends to phase out LIBOR by the end of 2021. The cessation date for submission and publication of rates for certain tenors of LIBOR has since been extended until mid-2023. Various central bank committees and working groups continue to discuss replacement

of benchmark rates, the process for amending existing LIBOR-based contracts and the potential economic impacts of different alternatives. The Alternative Reference Rates Committee has identified the Secured Overnight Financing Rate (SOFR) as its preferred alternative rate for U.S. dollar LIBOR. SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions. We have evaluated the potential impact of the replacement of the LIBOR benchmark interest rate including risk management, internal operational readiness and monitoring the Financial Accounting Standards Board standard-setting process to address financial reporting issues that might arise in connection with transition from LIBOR to a new benchmark rate. While we do not believe the change will materially impact us due to our operational and system readiness coupled with relevant contractual fallback language, we continue to evaluate all eventual transition risks. In anticipation of LIBOR's phase out, our most recent revolving credit agreements include a well-documented transition mechanism for selecting a benchmark replacement rate for LIBOR, subject to our agreement. Additionally, with respect to our $1.3 billion in LIBOR-based fixed to variable rate swaps maturing in 2025 and 2030, we reviewed and believe our adherence to the 2020 LIBOR fallback protocol will allow for a smooth transition to the designated replacement rate when that transition occurs.

Supply Chain Financing

We currently have supply chain financing programs with financial intermediaries, which provide certain vendors the option to be paid by financial intermediaries earlier than the due date on the applicable invoice. When a vendor utilizes the program and receives an early payment from a financial intermediary, they take a discount on the invoice. We then pay the financial intermediary the face amount of the invoice on the regularly scheduled due date. The maximum amount that we may have outstanding under the program is $361 million. We do not reimburse vendors for any costs they incur for participation in the program and their participation is completely voluntary. As a result, all amounts owed to the financial intermediaries are presented as "Accounts payable" in our Condensed Consolidated Balance Sheets. Amounts due to the financial intermediaries reflected in accounts payable at March 31, 2022, were $295 million.

Uses of Cash

Stock Repurchases

In December 2021, the Board authorized the acquisition of up to $2.0 billion of additional common stock upon completion of the 2019 repurchase plan. In December 2019, the Board authorized the acquisition of up to $2.0 billion of additional common stock upon completion of the 2018 repurchase plan. In the first three months of 2022, we made the following purchases under the 2019 stock repurchase program:


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

March 31	1.6	$	199.27	$	311	$	2,281





(1) The remaining $281 million authorized capacity under the 2019 plan was calculated based on the cost to purchase the shares, but excludes commission expenses in accordance with the authorized plan.

We intend to repurchase outstanding shares from time to time during 2022 to enhance shareholder value.

Dividends

We paid dividends of $207 million during the three months ended March 31, 2022.

Capital Expenditures

Capital expenditures, including spending on internal use software, for the three months ended March 31, 2022, were $115 million versus $98 million in the comparable period in 2021. We plan to spend an estimated $850 million to $900 million in 2022 on capital expenditures, excluding internal use software, with over 60 percent of these expenditures expected to be invested in North America. In addition, we plan to spend an estimated $70 million to $80 million on internal use software in 2022.

Current Maturities of Short and Long-Term Debt

We had $311 million of commercial paper outstanding at March 31, 2022, that matures in less than one year. The maturity schedule of our existing long-term debt does not require significant cash outflows until 2023 when our 3.65 percent senior notes and 2025 when our 0.75 percent senior notes are due. Required annual long-term debt principal payments range from $24 million to $548 million over the next five years (including the remainder of 2022). See Note 10, "DEBT," to the Condensed Consolidated Financial Statements for additional information.

Pensions

Our global pension plans, including our unfunded and non-qualified plans, were 121 percent funded at December 31, 2021. Our U.S. defined benefit plan, which represented approximately 52 percent of the worldwide pension obligation, was 138 percent funded, and our U.K. defined benefit plan was 127 percent funded at December 31, 2021. The funded status of our pension plans is dependent upon a variety of variables and assumptions including return on invested assets, market interest rates and levels of voluntary contributions to the plans. In the first three months of 2022, the investment loss on our U.S. pension trust was 2.7 percent while our U.K. pension trust loss was 5.8 percent. Approximately 67 percent of our pension plan assets are held in highly liquid investments such as fixed income and equity securities. The remaining 33 percent of our plan assets are held in less liquid, but market valued investments, including real estate, private equity, venture capital, opportunistic credit and insurance contracts. We anticipate making additional defined benefit pension contributions during the remainder of 2022 of $17 million for our U.S. and U.K. qualified and non-qualified pension plans. These contributions may be made from trusts or company funds either to increase pension assets or to make direct benefit payments to plan participants. We expect our 2022 annual net periodic pension cost to approximate $31 million.

Credit Ratings

Our rating and outlook from each of the credit rating agencies as of the date of filing are shown in the table below:



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

Moody’s Investors Service, Inc.	A2	P1	Stable

(1) Credit ratings are not recommendations to buy, are subject to change, and each rating should be evaluated independently of any other rating. In addition, we undertake no obligation to update disclosures concerning our credit ratings, whether as a result of new information, future events or otherwise.

Management's Assessment of Liquidity

Our financial condition and liquidity remain strong. Our solid balance sheet and credit ratings enable us to have ready access to credit and the capital markets. We assess our liquidity in terms of our ability to generate adequate cash to fund our operating, investing and financing activities. We believe our existing cash and marketable securities, operating cash flow and revolving credit facilities provide us with the financial flexibility needed to fund common stock repurchases, dividend payments, targeted capital expenditures, projected pension obligations, acquisitions, working capital and debt service obligations through 2022 and beyond. We continue to generate significant cash from operations and maintain access to our revolving credit facilities and commercial paper programs as noted above.

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

A summary of our significant accounting policies is included in Note 1, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,” of the Notes to the Consolidated Financial Statements of our 2021 Form 10-K, which discusses accounting policies that we have selected from acceptable alternatives.

Our Condensed Consolidated Financial Statements are prepared in accordance with generally accepted accounting principles that often require management to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts presented and disclosed in the financial statements. Management reviews these estimates and assumptions based on historical experience, changes in business conditions and other relevant factors they believe to be reasonable under the circumstances. In any given reporting period, our actual results may differ from the estimates and assumptions used in preparing our Condensed Consolidated Financial Statements.

Critical accounting estimates are defined as follows: the estimate requires management to make assumptions about matters that were highly uncertain at the time the estimate was made; different estimates reasonably could have been used; or if changes in the estimate are reasonably likely to occur from period to period and the change would have a material impact on our financial condition or results of operations. Our senior management has discussed the development and selection of our accounting policies, related accounting estimates and the disclosures set forth below with the Audit Committee of the Board. Our critical accounting estimates disclosed in the Form 10-K address estimating liabilities for warranty programs, assessing goodwill impairment, accounting for income taxes and pension benefits.

A discussion of our critical accounting estimates may be found in the “Management’s Discussion and Analysis” section of our 2021 Form 10-K under the caption “APPLICATION OF CRITICAL ACCOUNTING ESTIMATES.” Within the context of these critical accounting estimates, we are not currently aware of any reasonably likely events or circumstances that would result in different policies or estimates being reported in the first three months of 2022.

Previous: Item 1. Condensed Consolidated Financial Statements · Next: Item 3. Quantitative and Qualitative Disclosures About Market Risk