Item 1. Condensed Consolidated Financial Statements

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Item 1. Condensed Consolidated Financial Statements

CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF NET INCOME

(Unaudited)



	Three months ended				Six months ended
In millions, except per share amounts	June 30, 2022		July 4, 2021		June 30, 2022		July 4, 2021
NET SALES (a) (Note 2)	$	6,586	$	6,111	$	12,971	$	12,203
Cost of sales (Note 3)	4,860		4,633		9,713		9,239
GROSS MARGIN	1,726		1,478		3,258		2,964

OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses	622		600		1,237		1,174
Research, development and engineering expenses	299		276		597		536
Equity, royalty and interest income from investees (Notes 3 and 5)	95		137		191		303



Other operating expense, net (Note 3)	3		4		114		12
OPERATING INCOME	897		735		1,501		1,545


Interest expense	34		29		51		57
Other (expense) income, net	(8)		73		(17)		74
INCOME BEFORE INCOME TAXES	855		779		1,433		1,562

Income tax expense (Note 6)	148		167		303		339
CONSOLIDATED NET INCOME	707		612		1,130		1,223

Less: Net income attributable to noncontrolling interests	5		12		10		20
NET INCOME ATTRIBUTABLE TO CUMMINS INC.	$	702	$	600	$	1,120	$	1,203

EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
Basic	$	4.97	$	4.14	$	7.90	$	8.24
Diluted	$	4.94	$	4.10	$	7.86	$	8.16

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
Basic	141.2		145.1		141.7		146.0
Dilutive effect of stock compensation awards	0.8		1.4		0.8		1.4
Diluted	142.0		146.5		142.5		147.4



(a) Includes sales to nonconsolidated equity investees of $281 million and $625 million for the three and six months ended June 30, 2022, compared with $423 million and $901 million for the comparable periods in 2021.

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

CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three months ended				Six months ended
In millions	June 30, 2022		July 4, 2021		June 30, 2022		July 4, 2021
CONSOLIDATED NET INCOME	$	707	$	612	$	1,130	$	1,223
Other comprehensive income (loss), net of tax (Note 13)
Change in pension and other postretirement defined benefit plans	6		17		22		46
Foreign currency translation adjustments	(245)		22		(241)		(34)

Unrealized gain (loss) on derivatives	43		(38)		71		34
Total other comprehensive (loss) income, net of tax	(196)		1		(148)		46
COMPREHENSIVE INCOME	511		613		982		1,269
Less: Comprehensive (loss) income attributable to noncontrolling interests	(10)		5		(13)		13
COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC.	$	521	$	608	$	995	$	1,256

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

CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


In millions, except par value	June 30, 2022		December 31, 2021
ASSETS
Current assets
Cash and cash equivalents	$	2,462	$	2,592

Marketable securities (Note 7)	536		595
Total cash, cash equivalents and marketable securities	2,998		3,187
Accounts and notes receivable, net
Trade and other	3,869		3,565
Nonconsolidated equity investees	287		425
Inventories (Note 8)	4,765		4,355
Prepaid expenses and other current assets	843		777
Total current assets	12,762		12,309
Long-term assets
Property, plant and equipment	9,374		9,358
Accumulated depreciation	(4,985)		(4,936)
Property, plant and equipment, net	4,389		4,422
Investments and advances related to equity method investees	1,544		1,538
Goodwill	1,391		1,287
Other intangible assets, net	1,054		900
Pension assets (Note 4)	1,461		1,488
Other assets (Note 9)	1,876		1,766
Total assets	$	24,477	$	23,710

LIABILITIES
Current liabilities
Accounts payable (principally trade)	$	3,405	$	3,021
Loans payable (Note 10)	165		208
Commercial paper (Note 10)	705		313
Accrued compensation, benefits and retirement costs	443		683
Current portion of accrued product warranty (Note 11)	796		755
Current portion of deferred revenue (Note 2)	871		855

Other accrued expenses (Note 9)	1,221		1,190
Current maturities of long-term debt (Note 10)	65		59
Total current liabilities	7,671		7,084
Long-term liabilities
Long-term debt (Note 10)	3,490		3,579
Pensions and other postretirement benefits (Note 4)	589		604
Accrued product warranty (Note 11)	714		684
Deferred revenue (Note 2)	852		850
Other liabilities (Note 9)	1,506		1,508
Total liabilities	$	14,822	$	14,309

Commitments and contingencies (Note 12)

EQUITY
Cummins Inc. shareholders’ equity
Common stock, $2.50 par value, 500 shares authorized, 222.5 and 222.5 shares issued	$	2,423	$	2,427
Retained earnings	17,450		16,741
Treasury stock, at cost, 81.5 and 80.0 shares	(9,439)		(9,123)

Accumulated other comprehensive loss (Note 13)	(1,696)		(1,571)



Total Cummins Inc. shareholders’ equity	8,738		8,474
Noncontrolling interests	917		927
Total equity	$	9,655	$	9,401
Total liabilities and equity	$	24,477	$	23,710

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

CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Six months ended
In millions	June 30, 2022		July 4, 2021
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income	$	1,130	$	1,223
Adjustments to reconcile consolidated net income to net cash provided by operating activities
Depreciation and amortization	328		337



Deferred income taxes	(112)		17
Equity in income of investees, net of dividends	(62)		(114)
Pension and OPEB expense (Note 4)	17		41
Pension contributions and OPEB payments (Note 4)	(55)		(68)
Share-based compensation expense	14		18




Russian suspension costs, net of recoveries (Note 3)	111		—
Asset impairments and other charges	36		—
Loss on corporate owned life insurance	85		12

Foreign currency remeasurement and transaction exposure	(10)		10
Changes in current assets and liabilities, net of acquisitions
Accounts and notes receivable	(252)		(331)
Inventories	(498)		(628)
Other current assets	(65)		(18)
Accounts payable	426		377
Accrued expenses	(281)		169
Changes in other liabilities	(11)		(34)

Other, net	(38)		(56)
Net cash provided by operating activities	763		955

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures	(251)		(212)
Investments in internal use software	(24)		(22)

Proceeds from sale of land	—		20
Investments in and net advances (to) from equity investees	(53)		10
Acquisitions of businesses, net of cash acquired (Note 14)	(245)		—

Investments in marketable securities—acquisitions	(433)		(362)
Investments in marketable securities—liquidations (Note 7)	461		381


Cash flows from derivatives not designated as hedges	(32)		12
Other, net	1		27
Net cash used in investing activities	(576)		(146)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings	56		20
Net borrowings (payments) of commercial paper	392		(123)
Payments on borrowings and finance lease obligations	(71)		(33)
Net payments under short-term credit agreements	(24)		(102)
Distributions to noncontrolling interests	(14)		(13)
Dividend payments on common stock	(411)		(394)
Repurchases of common stock	(347)		(1,090)
Proceeds from issuing common stock	19		26

Other, net	9		(13)
Net cash used in financing activities	(391)		(1,722)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	74		(7)
Net decrease in cash and cash equivalents	(130)		(920)
Cash and cash equivalents at beginning of year	2,592		3,401
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	2,462	$	2,481

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

CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)


	Three months ended
In millions, except per share amounts	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 MARCH 31, 2022	$	556	$	1,855	$	16,952	$	(9,412)	$	(1,515)	$	8,436	$	927	$	9,363

Net income					702						702		5		707
Other comprehensive loss, net of tax (Note 13)									(181)		(181)		(15)		(196)
Issuance of common stock			1								1		—		1

Repurchases of common stock							(36)				(36)		—		(36)
Cash dividends on common stock, $1.45 per share					(204)						(204)		—		(204)

Share-based awards			2				8				10		—		10

Other shareholder transactions			9				1				10		—		10
BALANCE AT JUNE 30, 2022	$	556	$	1,867	$	17,450	$	(9,439)	$	(1,696)	$	8,738	$	917	$	9,655

BALANCE AT APRIL 4, 2021	$	556	$	1,837	$	15,825	$	(8,172)	$	(1,937)	$	8,109	$	922	$	9,031

Net income					600						600		12		612
Other comprehensive income (loss), net of tax (Note 13)									8		8		(7)		1
Issuance of common stock			1								1		—		1

Repurchases of common stock							(672)				(672)		—		(672)
Cash dividends on common stock, $1.35 per share					(197)						(197)		—		(197)

Share-based awards			2				6				8		—		8

Other shareholder transactions			9								9		—		9
BALANCE AT JULY 4, 2021	$	556	$	1,849	$	16,228	$	(8,838)	$	(1,929)	$	7,866	$	927	$	8,793

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

CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)



	Six months ended
In millions, except per share amounts	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, 2021	$	556	$	1,871	$	16,741	$	(9,123)	$	(1,571)	$	8,474	$	927	$	9,401

Net income					1,120						1,120		10		1,130
Other comprehensive loss, net of tax (Note 13)									(125)		(125)		(23)		(148)
Issuance of common stock			1								1		—		1

Repurchases of common stock							(347)				(347)		—		(347)
Cash dividends on common stock, $2.90 per share					(411)						(411)		—		(411)
Distributions to noncontrolling interests											—		(14)		(14)
Share-based awards			(7)				26				19		—		19

Other shareholder transactions			2				5				7		17		24
BALANCE AT JUNE 30, 2022	$	556	$	1,867	$	17,450	$	(9,439)	$	(1,696)	$	8,738	$	917	$	9,655

BALANCE AT DECEMBER 31, 2020	$	556	$	1,848	$	15,419	$	(7,779)	$	(1,982)	$	8,062	$	927	$	8,989

Net income					1,203						1,203		20		1,223
Other comprehensive income (loss), net of tax (Note 13)									53		53		(7)		46
Issuance of common stock			1								1		—		1

Repurchases of common stock							(1,090)				(1,090)		—		(1,090)
Cash dividends on common stock, $2.70 per share					(394)						(394)		—		(394)
Distributions to noncontrolling interests											—		(13)		(13)
Share-based awards			(4)				30				26		—		26

Other shareholder transactions			4				1				5		—		5
BALANCE AT JULY 4, 2021	$	556	$	1,849	$	16,228	$	(8,838)	$	(1,929)	$	7,866	$	927	$	8,793

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

CUMMINS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Overview

Cummins Inc. (“Cummins,” “we,” “our” or “us”) was founded in 1919 as Cummins Engine Company, a corporation in Columbus, Indiana, and one of the first diesel engine manufacturers. In 2001, we changed our name to Cummins Inc. We are a global power leader that designs, manufactures, distributes and services diesel, natural gas, electric and hybrid powertrains and powertrain-related components including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems, automated transmissions, electric power generation systems, batteries, electrified power systems, hydrogen production and fuel cell products. We sell our products to original equipment manufacturers (OEMs), distributors, dealers and other customers worldwide. We serve our customers through a service network of approximately 500 wholly-owned, joint venture and independent distributor locations and more than 10,000 Cummins certified dealer locations in approximately 190 countries and territories.

Reporting Period

Beginning in 2022, we transitioned to a Gregorian calendar with our reporting period ending on the last day of the quarterly calendar period. In 2021 and prior, our reporting period ended on the Sunday closest to the last day of the quarterly calendar period. The second quarters of 2022 and 2021 ended on June 30 and July 4, respectively. Our fiscal year ends on December 31, regardless of the day of the week on which December 31 falls.

Interim Condensed Financial Statements

The unaudited Condensed Consolidated Financial Statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of operations, financial position and cash flows. All such adjustments are of a normal recurring nature. The Condensed Consolidated Financial Statements were prepared in accordance with accounting principles in the United States of America (GAAP) pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial information. Certain information and footnote disclosures normally included in annual financial statements were condensed or omitted as permitted by such rules and regulations.

These interim condensed financial statements should be read in conjunction with the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021. Our interim period financial results for the three and six month periods presented are not necessarily indicative of results to be expected for any other interim period or for the entire year. The year-end Condensed Consolidated Balance Sheet data was derived from audited financial statements but does not include all required annual disclosures.

Reclassifications

Certain amounts for prior year periods were reclassified to conform to the current year presentation.

Use of Estimates in Preparation of Financial Statements

Preparation of financial statements requires management to make estimates and assumptions that affect reported amounts presented and disclosed in our Condensed Consolidated Financial Statements. Significant estimates and assumptions in these Condensed Consolidated Financial Statements require the exercise of judgment. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be different from these estimates.

Weighted-Average Diluted Shares Outstanding

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:


	Three months ended		Six months ended
	June 30, 2022	July 4, 2021	June 30, 2022	July 4, 2021
Options excluded	33,100	3,137	26,782	2,958

NOTE 2. REVENUE FROM CONTRACTS WITH CUSTOMERS

Long-term Contracts

The majority of our contracts are for a period of less than one year. We have certain long-term maintenance agreements, construction contracts and extended warranty coverage arrangements that span a period in excess of one year. The aggregate amount of the transaction price for long-term maintenance agreements and construction contracts allocated to performance obligations that were not satisfied as of June 30, 2022, was $723 million. We expect to recognize the related revenue of $128 million over the next 12 months and $595 million over periods up to 10 years. See NOTE 11, "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:


In millions	June 30, 2022		December 31, 2021
Unbilled revenue	$	128	$	100
Deferred revenue, primarily extended warranty	1,723		1,705

We recognized revenue of $176 million and $416 million for the three and six months ended June 30, 2022, compared with $133 million and $302 million for the comparable periods in 2021, 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 the three and six months ended June 30, 2022 or July 4, 2021.

Disaggregation of Revenue

Consolidated Revenue

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


	Three months ended				Six months ended
In millions	June 30, 2022		July 4, 2021		June 30, 2022		July 4, 2021
United States	$	3,788	$	3,263	$	7,245	$	6,323

China	520		832		1,173		1,789


India	311		217		620		547

Other international	1,967		1,799		3,933		3,544
Total net sales	$	6,586	$	6,111	$	12,971	$	12,203

Segment Revenue

Engine segment external sales by market were as follows:


	Three months ended				Six months ended
In millions	June 30, 2022		July 4, 2021		June 30, 2022		July 4, 2021
Heavy-duty truck	$	797	$	666	$	1,481	$	1,279
Medium-duty truck and bus	620		477		1,211		960
Light-duty automotive	425		466		912		940
Total on-highway	1,842		1,609		3,604		3,179
Off-highway	250		311		537		636
Total sales	$	2,092	$	1,920	$	4,141	$	3,815

Distribution segment external sales by region were as follows:


	Three months ended				Six months ended
In millions	June 30, 2022		July 4, 2021		June 30, 2022		July 4, 2021
North America	$	1,491	$	1,228	$	2,862	$	2,394
Asia Pacific	242		226		486		439
Europe	177		161		320		324
China	99		74		181		159
Russia	75		66		211		123
Latin America	56		48		97		88
Africa and Middle East	55		69		101		123
India	52		41		100		90
Total sales	$	2,247	$	1,913	$	4,358	$	3,740

Distribution segment external sales by product line were as follows:


	Three months ended				Six months ended
In millions	June 30, 2022		July 4, 2021		June 30, 2022		July 4, 2021
Parts	$	987	$	763	$	1,913	$	1,517
Power generation	440		452		838		868
Engines	428		349		866		682
Service	392		349		741		673
Total sales	$	2,247	$	1,913	$	4,358	$	3,740

Components segment external sales by business were as follows:


	Three months ended				Six months ended
In millions	June 30, 2022		July 4, 2021		June 30, 2022		July 4, 2021
Emission solutions	$	767	$	801	$	1,575	$	1,767
Filtration	319		303		627		604
Turbo technologies	195		207		392		432
Automated transmissions	143		147		277		262
Electronics and fuel systems	53		98		123		215
Total sales	$	1,477	$	1,556	$	2,994	$	3,280

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


	Three months ended				Six months ended
In millions	June 30, 2022		July 4, 2021		June 30, 2022		July 4, 2021
Power generation	$	408	$	381	$	807	$	732
Industrial	213		233		401		412
Generator technologies	113		85		209		167
Total sales	$	734	$	699	$	1,417	$	1,311

NOTE 3. 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 (the Unconsolidated JV) with KAMAZ Publicly Traded Company (KAMAZ), a Russian truck manufacturer with whom we share the Unconsolidated JV, and direct sales into Russia from our other business segments. As a result of the suspension of operations, we evaluated the recoverability of assets in Russia and assessed other potential liabilities. We experienced and expect to continue to experience, an inability to collect customer receivables and may be the subject of litigation as a consequence of our suspension of commercial operations in Russia. We recorded a charge of $158 million in the first quarter related to these actions. In the second quarter, we recovered certain inventory and other expense amounts reserved in the first quarter and incurred some small additional charges resulting in a net recovery of $47 million. As of June 30, 2022, we had approximately $17 million of inventory and $26 million of receivables in Russia, all of which are fully reserved. In addition, we have cash balances of $84 million, some of which will be used to fund ongoing employee, tax and contract settlement obligations. The following summarizes the costs (recoveries) associated with the suspension of our Russian operations in our Condensed Consolidated Statements of Net Income:


	Three months ended		Six months ended
In millions	June 30, 2022		June 30, 2022		Statement of Net Income Location
Inventory write-downs	$	(40)	$	19	Cost of sales
Accounts receivable reserves	—		43		Other operating expense, net
Impairment and other joint venture costs	—		31		Equity, royalty and interest income from investees

Other	(7)		18		Other operating expense, net
Total	$	(47)	$	111

We will continue to evaluate the situation as conditions evolve and may take additional actions as deemed necessary in future periods.

NOTE 4. PENSIONS AND OTHER POSTRETIREMENT BENEFITS

We sponsor funded and unfunded domestic and foreign defined benefit pension and other postretirement benefit (OPEB) plans. Contributions to these plans were as follows:


	Three months ended				Six months ended
In millions	June 30, 2022		July 4, 2021		June 30, 2022		July 4, 2021



Defined benefit pension contributions	$	6	$	12	$	39	$	54


OPEB payments, net	6		5		16		14


Defined contribution pension plans	20		17		56		52

We anticipate making additional defined benefit pension contributions during the remainder of 2022 of $10 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.

The components of net periodic pension and OPEB costs under our plans were as follows:


	Pension
	U.S. Plans				U.K. Plans				OPEB
	Three months ended
In millions	June 30, 2022		July 4, 2021		June 30, 2022		July 4, 2021		June 30, 2022		July 4, 2021
Service cost	$	34	$	35	$	8	$	9	$	—	$	—
Interest cost	22		20		9		7		1		1
Expected return on plan assets	(52)		(50)		(20)		(22)		—		—
Amortization of prior service cost	—		—		—		1		—		—
Recognized net actuarial loss	6		12		—		8		—		—
Net periodic benefit cost (credit)	$	10	$	17	$	(3)	$	3	$	1	$	1



	Pension
	U.S. Plans				U.K. Plans				OPEB
	Six months ended
In millions	June 30, 2022		July 4, 2021		June 30, 2022		July 4, 2021		June 30, 2022		July 4, 2021
Service cost	$	68	$	70	$	16	$	17	$	—	$	—
Interest cost	44		39		18		15		2		2
Expected return on plan assets	(104)		(100)		(40)		(43)		—		—
Amortization of prior service cost	—		—		—		1		—		—
Recognized net actuarial loss	12		24		1		16		—		—
Net periodic benefit cost (credit)	$	20	$	33	$	(5)	$	6	$	2	$	2

NOTE 5. EQUITY, ROYALTY AND INTEREST INCOME FROM INVESTEES

Equity, royalty and interest income from investees included in our Condensed Consolidated Statements of Net Income for the reporting periods was as follows:


	Three months ended				Six months ended
In millions	June 30, 2022		July 4, 2021		June 30, 2022			July 4, 2021
Manufacturing entities
Beijing Foton Cummins Engine Co., Ltd.	$	14	$	46	$	28		$	85
Dongfeng Cummins Engine Company, Ltd.	11		21		27			52
Chongqing Cummins Engine Company, Ltd.	7		10		16			20
Tata Cummins, Ltd.	5		1		14			7
All other manufacturers	13		28		3		(1)	83


Distribution entities
Komatsu Cummins Chile, Ltda.	12		9		19			15
All other distributors	3		1		5			4


Cummins share of net income	65		116		112			266
Royalty and interest income	30		21		79			37
Equity, royalty and interest income from investees	$	95	$	137	$	191		$	303


(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.

NOTE 6. INCOME TAXES

Our effective tax rates for the three and six months ended June 30, 2022, were 17.3 percent and 21.1 percent, respectively. Our effective tax rates for the three and six months ended July 4, 2021, were 21.4 percent and 21.7 percent, respectively.

The three months ended June 30, 2022, contained favorable discrete tax items of $36 million, primarily due to $36 million of favorable changes in tax reserves, $10 million of favorable changes associated with uncertainty in our Russian operations and $8 million of net favorable other discrete tax items, partially offset by $18 million of unfavorable tax costs associated with internal restructuring ahead of the planned separation of our filtration business.

The six months ended June 30, 2022, contained favorable net discrete tax items of $5 million, primarily due to $27 million of favorable changes in tax reserves and $4 million of net favorable other discrete tax items, partially offset by $18 million of unfavorable tax costs associated with internal restructuring ahead of the planned separation of our filtration business and $8 million of unfavorable changes associated with uncertainty in our Russian operations.

The three months ended July 4, 2021, contained unfavorable discrete items of $7 million, primarily due to a $10 million unfavorable statutory change in tax rates (mostly in the UK), partially offset by $3 million of other favorable discrete items.

The six months ended July 4, 2021, contained unfavorable discrete items of $3 million, primarily due to a $10 million unfavorable statutory change in tax rates (mostly in the UK), partially offset by $7 million of other favorable discrete items.

NOTE 7. MARKETABLE SECURITIES

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


	June 30, 2022						December 31, 2021
In millions	Cost		Gross unrealized gains/(losses)(1)		Estimated fair value		Cost		Gross unrealized gains/(losses)(1)		Estimated fair value

Equity securities





Certificates of deposit	$	296	$	—	$	296	$	299	$	—	$	299

Debt mutual funds	220		(5)		215		254		2		256
Equity mutual funds	22		3		25		29		10		39

Debt securities	—		—		—		1		—		1







Total marketable securities	$	538	$	(2)	$	536	$	583	$	12	$	595

(1) Unrealized gains and losses for debt securities are recorded in other comprehensive income while unrealized gains and losses for equity securities are recorded in other income, net in our Condensed 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 the six months ended June 30, 2022, or the year ended December 31, 2021.

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

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

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

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

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

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


	Six months ended
In millions		June 30, 2022		July 4, 2021
Proceeds from sales of marketable securities		$	346	$	273
Proceeds from maturities of marketable securities		115		108
Investments in marketable securities - liquidations		$	461	$	381

NOTE 8. INVENTORIES

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


In millions	June 30, 2022		December 31, 2021
Finished products	$	2,635	$	2,538
Work-in-process and raw materials	2,349		2,009
Inventories at FIFO cost	4,984		4,547
Excess of FIFO over LIFO	(219)		(192)
Total inventories	$	4,765	$	4,355

NOTE 9. SUPPLEMENTAL BALANCE SHEET DATA

Other assets included the following:



In millions	June 30, 2022		December 31, 2021
Deferred income taxes	$	525	$	428
Operating lease assets	430		444
Corporate owned life insurance	407		492

Other	514		402
Other assets	$	1,876	$	1,766

Other accrued expenses included the following:



In millions	June 30, 2022		December 31, 2021
Marketing accruals	$	297	$	303
Other taxes payable	195		234
Income taxes payable	152		107
Current portion of operating lease liabilities	120		128
Other	457		418
Other accrued expenses	$	1,221	$	1,190

Other liabilities included the following:



In millions	June 30, 2022		December 31, 2021

Deferred income taxes	$	395	$	403
Operating lease liabilities	315		326
Long-term income taxes	192		263
Accrued compensation	162		177
Mark-to-market valuation on interest rate derivatives	114		19
Other long-term liabilities	328		320
Other liabilities	$	1,506	$	1,508

NOTE 10. DEBT

Loans Payable and Commercial Paper

Loans payable, commercial paper and the related weighted-average interest rates were as follows:


In millions	June 30, 2022			December 31, 2021


Loans payable (1)	$	165		$	208

Commercial paper	705		(2)	313		(3)




(1) Loans payable consist primarily of notes payable to various domestic and international financial institutions. It is not practicable to aggregate these notes and calculate a quarterly weighted-average interest rate.
(2) The weighted-average interest rate, inclusive of all brokerage fees, was 1.33 percent at June 30, 2022. This included $105 million of borrowings under the Europe program that were at a negative weighted-average interest rate of 0.20 percent and $600 million of borrowings under the U.S. program at a weighted-average interest rate of 1.60 percent.
(3) The weighted-average interest rate, inclusive of all brokerage fees, was negative 0.01 percent at December 31, 2021. This included $113 million of borrowings under the Europe program that were at a negative weighted-average interest rate of 0.39 percent and $200 million of borrowings under the U.S. program at a weighted-average interest rate of 0.21 percent.

We can issue up to $3.5 billion of unsecured, short-term promissory notes (commercial paper) pursuant to the Board authorized commercial paper programs. The programs facilitate the private placement of unsecured short-term debt through third-party brokers. We intend to use the net proceeds from the commercial paper borrowings for acquisitions and general corporate purposes.

Revolving Credit Facilities

As of June 30, 2022, we had 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 June 30, 2022 and December 31, 2021.

At June 30, 2022, the $705 million of outstanding commercial paper effectively reduced the $3.5 billion of revolving credit capacity to $2.8 billion.

At June 30, 2022, we also had an additional $271 million available for borrowings under our international and other domestic credit facilities.

Long-term Debt

A summary of long-term debt was as follows:


In millions	Interest Rate	June 30, 2022		December 31, 2021
Long-term debt
Senior notes, due 2023	3.65%	$	500	$	500
Senior notes, due 2025(1)	0.75%	500		500
Debentures, due 2027	6.75%	58		58
Debentures, due 2028	7.125%	250		250
Senior notes, due 2030(1)	1.50%	850		850
Senior notes, due 2043	4.875%	500		500
Senior notes, due 2050	2.60%	650		650
Debentures, due 2098(2)	5.65%	165		165

Other debt		149		110

Unamortized discount and deferred issuance costs		(65)		(68)
Fair value adjustments due to hedge on indebtedness		(85)		34
Finance leases		83		89
Total long-term debt		3,555		3,638
Less: Current maturities of long-term debt		65		59
Long-term debt		$	3,490	$	3,579

(1) In 2021, we entered into a series of interest rate swaps to effectively convert from a fixed rate to floating rate. See "Interest Rate Risk" below for additional information.
(2) The effective interest rate is 7.48 percent.

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



In millions	2022		2023		2024		2025		2026
Principal payments	$	44	$	545	$	41	$	508	$	54

Interest Rate Risk

Beginning in the second half of 2021, we entered into a series of interest rate swaps to effectively convert our $500 million senior notes, due in 2025, from a fixed rate of 0.75 percent to a floating rate equal to the three-month LIBOR plus a spread, and 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 following table summarizes the gains and losses:


	Three months ended				Six months ended
In millions	June 30, 2022					June 30, 2022
Type of Swap	Gain (Loss) on Swaps		Gain (Loss) on Borrowings				Gain (Loss) on Swaps		Gain (Loss) on Borrowings
Interest rate swaps(1)	$	(39)	$	34			$	(111)	$	114

(1) The difference between the gain (loss) on swaps and borrowings represents hedge ineffectiveness.

We have interest rate lock agreements to reduce the variability of the cash flows of the interest payments on a total of $500 million of fixed rate debt forecast to be issued in 2023 to replace our senior notes at maturity. The following table summarizes the gains and losses, net of tax, recognized in other comprehensive income:


In millions	Three months ended				Six months ended
Type of Swap	June 30, 2022		July 4, 2021		June 30, 2022		July 4, 2021
Interest rate locks	$	43	$	(33)	$	82	$	28

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:


In millions	June 30, 2022		December 31, 2021
Fair value of total debt (1)	$	4,109	$	4,461
Carrying value of total debt	4,425		4,159

(1) The fair value of debt is derived from Level 2 input measures.

Shelf Registration

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.

NOTE 11. 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:


	Six months ended
In millions	June 30, 2022			July 4, 2021
Balance, beginning of year	$	2,425		$	2,307
Provision for base warranties issued	267			302
Deferred revenue on extended warranty contracts sold	145			136
Provision for product campaigns issued	65			46
Payments made during period	(289)			(283)

Amortization of deferred revenue on extended warranty contracts	(146)			(124)
Changes in estimates for pre-existing product warranties	(47)			(74)
Foreign currency translation and other	106		(1)	(6)

Balance, end of period	$	2,526		$	2,304

(1) Includes $95 million of product warranty liability related to the acquisition of Cummins Westport Joint Venture. See NOTE 14, "ACQUISITIONS," to our Condensed Consolidated Financial Statements for additional information.

We recognized supplier recoveries of $10 million and $23 million for the three and six months ended June 30, 2022, compared with $5 million and $9 million for the comparable periods in 2021.

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


In millions	June 30, 2022		December 31, 2021		Balance Sheet Location
Deferred revenue related to extended coverage programs
Current portion	$	296	$	286	Current portion of deferred revenue
Long-term portion	720		700		Deferred revenue
Total	$	1,016	$	986

Product warranty
Current portion	$	796	$	755	Current portion of accrued product warranty
Long-term portion	714		684		Accrued product warranty
Total	$	1,510	$	1,439

Total warranty accrual	$	2,526	$	2,425

Engine System Campaign Accrual

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

The campaigns launched in the third quarter of 2018 are being completed in phases across the affected population. The total engine system campaign charge, excluding supplier recoveries, was $410 million. In the fourth quarter of 2020, we recorded an additional $20 million charge related to this campaign, as a change in estimate, to bring the total campaign, excluding supplier recoveries, to $430 million. At June 30, 2022, the remaining accrual balance was $63 million.

NOTE 12. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

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

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

On June 28, 2022, 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. We filed blocked property reports for relevant assets and are seeking relevant authorizations to extricate ourselves from our relationship with KAMAZ and its subsidiaries, including the Unconsolidated JV, in compliance with U.S. law.

On April 29, 2019, we announced that we were conducting a formal internal review of our emissions certification process and compliance with emission standards for our pick-up truck applications, following conversations with the EPA and CARB regarding certification of our engines in model year 2019 RAM 2500 and 3500 trucks. This review is being conducted with external advisors as we strive to ensure the certification and compliance processes for all of our pick-up truck applications are consistent with our internal policies, engineering standards and applicable laws. During conversations with the EPA and CARB about the effectiveness of our pick-up truck applications, the regulators raised concerns that certain aspects of our emissions systems may reduce the effectiveness of our emissions control systems and thereby act as defeat devices. As a result, our internal review focuses, in part, on the regulators’ concerns. We are working closely with the regulators to enhance our emissions systems to improve the effectiveness of all of our pick-up truck applications and to fully address the regulators’ requirements. Based on discussions with the regulators, we have developed a new calibration for the engines in model year 2019 RAM 2500 and 3500 trucks that has been included in all engines shipped since September 2019. During our ongoing discussions, the regulators turned their attention to other model years and other engines, most notably our pick-up truck applications for RAM 2500 and 3500 trucks for model years 2013 through 2018. In connection with these and other ongoing discussions with the EPA and CARB, we are developing a new software calibration and will recall model years 2013 through 2018 RAM 2500 and 3500 trucks. We accrued $30 million for the recall during the first quarter of 2022, an amount that reflects our current estimate of the cost of the recall.

We will continue to work together closely with the relevant regulators to develop and implement recommendations for improvement and seek to reach further resolutions as part of our ongoing commitment to compliance. Due to the presence of many unknown facts and circumstances, we are not yet able to estimate any further financial impact of these matters. It is possible that the consequences of any remediation plans resulting from our formal review and these regulatory processes could have a material adverse impact on our results of operations and cash flows.

Guarantees and Commitments

Periodically, we enter into guarantee arrangements, including guarantees of non-U.S. distributor financings, residual value guarantees on equipment under operating leases and other miscellaneous guarantees of joint ventures or third-party obligations. At June 30, 2022, 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 June 30, 2022, if we were to stop purchasing from each of these suppliers, the aggregate amount of the penalty would be approximately $126 million. These arrangements enable us to secure supplies of critical components and IT services. We do not currently anticipate paying any penalties under these contracts.

We enter into physical forward contracts with suppliers of platinum and palladium to purchase certain volumes of the commodities at contractually stated prices for various periods, which generally fall within two years. At June 30, 2022, the total commitments under these contracts were $91 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 $117 million at June 30, 2022.

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 13. ACCUMULATED OTHER COMPREHENSIVE LOSS

Following are the changes in accumulated other comprehensive income (loss) by component for the three months ended:



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 March 31, 2022	$	(330)	$	(1,196)	$	11		$	(1,515)
Other comprehensive income before reclassifications
Before-tax amount	—		(235)		59			(176)		$	(15)	$	(191)
Tax benefit (expense)	1		5		(15)			(9)		—		(9)
After-tax amount	1		(230)		44			(185)		(15)		(200)
Amounts reclassified from accumulated other comprehensive income (loss)(1)	5		—		(1)			4		—		4

Net current period other comprehensive income (loss)	6		(230)		43		(2)	(181)		$	(15)	$	(196)
Balance at June 30, 2022	$	(324)	$	(1,426)	$	54		$	(1,696)

Balance at April 4, 2021	$	(706)	$	(1,260)	$	29		$	(1,937)
Other comprehensive income before reclassifications
Before-tax amount	—		29		(45)			(16)		$	(7)	$	(23)
Tax benefit	1		—		9			10		—		10
After-tax amount	1		29		(36)			(6)		(7)		(13)
Amounts reclassified from accumulated other comprehensive income (loss)(1)	16		—		(2)			14		—		14
Net current period other comprehensive income (loss)	17		29		(38)		(2)	8		$	(7)	$	1
Balance at July 4, 2021	$	(689)	$	(1,231)	$	(9)		$	(1,929)

(1) Amounts are net of tax. Reclassifications out of accumulated other comprehensive income and the related tax effects are immaterial for separate disclosure.
(2) Primarily related to interest rate lock activity. See the Interest Rate Risk section in NOTE 10, "DEBT," for additional information.

Following are the changes in accumulated other comprehensive income (loss) by component for the six months ended:




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, 2021	$	(346)	$	(1,208)	$	(17)		$	(1,571)
Other comprehensive income before reclassifications
Before-tax amount	14		(224)		95			(115)		$	(23)	$	(138)
Tax (expense) benefit	(3)		6		(22)			(19)		—		(19)
After-tax amount	11		(218)		73			(134)		(23)		(157)
Amounts reclassified from accumulated other comprehensive income (loss)(1)	11		—		(2)			9		—		9
Net current period other comprehensive income (loss)	22		(218)		71		(2)	(125)		$	(23)	$	(148)
Balance at June 30, 2022	$	(324)	$	(1,426)	$	54		$	(1,696)

Balance at December 31, 2020	$	(735)	$	(1,204)	$	(43)		$	(1,982)
Other comprehensive income before reclassifications
Before-tax amount	15		(31)		48			32		$	(7)	$	25
Tax (expense) benefit	(2)		4		(13)			(11)		—		(11)
After-tax amount	13		(27)		35			21		(7)		14
Amounts reclassified from accumulated other comprehensive income (loss)(1)	33		—		(1)			32		—		32
Net current period other comprehensive income (loss)	46		(27)		34		(2)	53		$	(7)	$	46
Balance at July 4, 2021	$	(689)	$	(1,231)	$	(9)		$	(1,929)










(1) Amounts are net of tax. Reclassifications out of accumulated other comprehensive income and the related tax effects are immaterial for separate disclosure.
(2) Primarily related to interest rate lock activity. See the Interest Rate Risk section in NOTE 10, "DEBT," for additional information.

NOTE 14. ACQUISITIONS

On February 7, 2022, we purchased Westport Fuel System Inc.'s stake in the Cummins Westport Joint Venture. 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 are not material to our Condensed Consolidated Financial Statements.

On April 8, 2022, we completed the acquisition of Jacobs Vehicle Systems business (Jacobs) from Altra Industrial Motion Corp. Sales of this business were $194 million in 2021. The purchase price was $346 million in cash, subject to typical adjustments related to closing working capital and other amounts and does not contain any contingent consideration. Jacobs is a supplier of engine braking, cylinder deactivation and start and stop thermal management technologies. The acquisition furthers our investment in key technologies and capabilities to drive growth, while securing our supply base. The preliminary purchase price allocation was as follows:


In millions
Cash	$	18
Accounts receivable	24
Inventory	15
Fixed assets	70
Intangible assets
Customer relationships	108
Technology	31
Trade name	25
Goodwill	108
Accounts payable	(21)
Deferred tax liability, net	(27)
Other, net	(5)
Total purchase price	$	346

Customer relationship assets represent the value of the long-term strategic relationship the business has with its significant customers, which we are amortizing over nine years. The assets were valued using an income approach, specifically the "multi-period excess earnings" method, which identifies an estimated stream of revenues and expenses for a particular group of assets from which deductions of portions of the projected economic benefits, attributable to assets other than the subject asset (contributory assets), are deducted in order to isolate the prospective earnings of the subject asset. This value is considered a level 3 measurement under the GAAP fair value hierarchy. Key assumptions used in the valuation of customer relationships include: (1) a rate of return of 18 percent and (2) renewal probability assumptions. Technology assets primarily represent the associated patents and know how related to the engine braking and emission technology, which we are amortizing over a range of 7 to 12 years. Trade name represents the value of Jacobs trade names in the marketplace, which we are amortizing over 14 years. These assets were valued using the "relief-from-royalty" method, which is a combination of both the income approach and market approach that values a subject asset based on an estimate of the "relief" from the royalty expense that would be incurred if the subject asset were licensed from a third party. Key assumptions impacting these values include: (1) market royalty rates of 2 to 7 percent, (2) rates of return of 17 to 18 percent and (3) technology obsolescence of 7 to 10 percent. These values are considered a level 3 measurement under the GAAP fair value hierarchy. Annual amortization of the intangible assets for the next five years is expected to approximate $18 million.

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 Jacob’s 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 second quarter results were revenues of $37 million and income of $2 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 are not material to our Condensed Consolidated Financial Statements.

On February 21, 2022, we entered into an Agreement and Plan of Merger (the Merger Agreement) with Meritor, Inc. (Meritor) and Rose NewCo Inc. (Merger Sub) 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. At closing, Merger Sub will merge into Meritor with Meritor as the surviving entity and becoming our wholly-owned subsidiary. This acquisition will be reported in our Components and New Power segments. Pursuant to the terms of the Merger Agreement, we agreed to pay $36.50 in cash per share of Meritor common stock.

On May 26, 2022, Meritor's shareholders voted to approve the Merger Agreement. On August 3, 2022, we completed the acquisition of Meritor with a purchase price of $3.0 billion (including convertible debt). We repaid $250 million of Meritor's debt as part of the acquisition, and we intend to pay off an additional $310 million in the third quarter of 2022. The acquisition was funded with borrowings drawn under the $2.0 billion term loan agreement and $1.3 billion of additional commercial paper borrowings. The integration of Meritor's people, products and capabilities in axle and brake technology will position us as a leading provider of integrated powertrain solutions across internal combustion and electric power applications. See NOTE 16, “SUBSEQUENT EVENTS,” for additional information related to the $2.0 billion loan agreement. Due to the timing of the acquisition, the initial purchase accounting is not yet complete and will follow in the third quarter Form 10-Q filing.

NOTE 15. 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 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 with innovative components and subsystems, including battery and fuel cell technologies. The New Power segment is currently in the development phase with a primary focus on research and development activities for our power systems, components and subsystems. We continue to serve all our markets as they adopt electrification and alternative power technologies, meeting the needs of our OEM partners and end customers.

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

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

Summarized financial information regarding our reportable operating segments for the three months ended is shown in the table below:


In millions	Engine		Distribution		Components		Power Systems		New Power		Total Segments
Three months ended June 30, 2022
External sales	$	2,092	$	2,247	$	1,477	$	734	$	36	$	6,586
Intersegment sales	683		6		473		469		6		1,637
Total sales	2,775		2,253		1,950		1,203		42		8,223



Research, development and engineering expenses	116		13		73		58		39		299
Equity, royalty and interest income (loss) from investees	59		21		9		10		(4)		95

Interest income	1		3		2		1		—		7

Russian suspension costs (recoveries)(1)	1		(45)		(2)		(1)		—		(47)

Segment EBITDA	422		297		352		128		(80)		1,119
Depreciation and amortization(2)	49		29		49		31		8		166



Three months ended July 4, 2021
External sales	$	1,920	$	1,913	$	1,556	$	699	$	23	$	6,111
Intersegment sales	571		7		438		444		1		1,461
Total sales	2,491		1,920		1,994		1,143		24		7,572



Research, development and engineering expenses	99		12		79		60		26		276
Equity, royalty and interest income (loss) from investees	104		15		12		9		(3)		137

Interest income	1		2		1		1		—		5
Segment EBITDA	402		201		301		139		(60)		983
Depreciation and amortization(2)	50		30		46		33		7		166










(1) See NOTE 3, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information.
(2) Depreciation and amortization, as shown on a segment basis, excludes the amortization of debt discount and deferred costs included in the Condensed Consolidated Statements of Net Income as Interest expense. A portion of depreciation expense is included in Research, development and engineering expenses.

Summarized financial information regarding our reportable operating segments for the six months ended is shown in the table below:



In millions	Engine			Distribution		Components		Power Systems		New Power		Total Segments
Six months ended June 30, 2022
External sales	$	4,141		$	4,358	$	2,994	$	1,417	$	61	$	12,971
Intersegment sales	1,387			12		944		946		12		3,301
Total sales	5,528			4,370		3,938		2,363		73		16,272



Research, development and engineering expenses	225			26		149		122		75		597
Equity, royalty and interest income (loss) from investees	103		(1)	37		37		21		(7)		191

Interest income	5			5		3		2		—		15
Russian suspension costs(2)	33		(3)	55		4		19		—		111
Segment EBITDA	814			407		672		218		(147)		1,964
Depreciation and amortization(4)	100			57		92		62		15		326


Six months ended July 4, 2021
External sales	$	3,815		$	3,740	$	3,280	$	1,311	$	57	$	12,203
Intersegment sales	1,135			15		866		854		2		2,872
Total sales	4,950			3,755		4,146		2,165		59		15,075



Research, development and engineering expenses	191			25		154		117		49		536
Equity, royalty and interest income from investees	217			32		31		21		2		303

Interest income	4			3		2		2		—		11
Segment EBITDA	756			361		722		265		(111)		1,993
Depreciation and amortization(4)	101			60		94		68		12		335


(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. See NOTE 3, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information.
(2) See NOTE 3, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information.
(3) Includes $31 million of Russian suspension costs reflected in the Equity, royalty and interest income (loss) from investees line above.
(4) Depreciation and amortization, as shown on a segment basis, excludes the amortization of debt discount and deferred costs included in the Condensed Consolidated Statements of Net Income as Interest expense. The amortization of debt discount and deferred costs was $2 million and $2 million for the six months ended June 30, 2022 and July 4, 2021, respectively. A portion of depreciation expense is included in Research, development and engineering expenses.

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


	Three months ended				Six months ended
In millions	June 30, 2022		July 4, 2021		June 30, 2022		July 4, 2021
Total segment sales	$	8,223	$	7,572	$	16,272	$	15,075
Elimination of intersegment sales	(1,637)		(1,461)		(3,301)		(2,872)
Total net sales	$	6,586	$	6,111	$	12,971	$	12,203

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


	Three months ended				Six months ended
In millions	June 30, 2022		July 4, 2021		June 30, 2022		July 4, 2021
TOTAL SEGMENT EBITDA	$	1,119	$	983	$	1,964	$	1,993

Intersegment eliminations and other(1)	(64)		(9)		(154)		(39)

Less:
Interest expense	34		29		51		57
Depreciation and amortization	166		166		326		335
INCOME BEFORE INCOME TAXES	855		779		1,433		1,562
Less: Income tax expense	148		167		303		339
CONSOLIDATED NET INCOME	707		612		1,130		1,223
Less: Net income attributable to noncontrolling interests	5		12		10		20
NET INCOME ATTRIBUTABLE TO CUMMINS INC.	$	702	$	600	$	1,120	$	1,203

(1)Intersegment eliminations and other included $24 million and $41 million of costs associated with the planned separation of our Filtration business for the three and six months ended June 30, 2022.

NOTE 16. SUBSEQUENT EVENTS

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 initial interest rate, based on the Secured Overnight Financing Rate for the one-month interest period plus the relevant spread, is 3.11 percent. The loan will mature on August 2, 2025.

On August 3, 2022, we completed the acquisition of Meritor with a purchase price of $3.0 billion (including convertible debt). We borrowed an additional $1.3 billion under our commercial paper program to complete the acquisition. The acquisition reduced our borrowing capacity under the revolving credit facilities to $1.43 billion at the time of filing. See NOTE 14, "ACQUISITIONS," for additional information.

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