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				Nine months ended
In millions, except per share amounts	September 30, 2022		October 3, 2021		September 30, 2022		October 3, 2021
NET SALES (a) (Note 2)	$	7,333	$	5,968	$	20,304	$	18,171
Cost of sales (Note 3)	5,691		4,554		15,404		13,793
GROSS MARGIN	1,642		1,414		4,900		4,378

OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses	708		571		1,945		1,745
Research, development and engineering expenses	348		266		945		802
Equity, royalty and interest income from investees (Notes 3 and 5)	70		94		261		397



Other operating expense, net (Note 3)	30		5		144		17
OPERATING INCOME	626		666		2,127		2,211


Interest expense	61		28		112		85
Other income, net	43		37		26		111
INCOME BEFORE INCOME TAXES	608		675		2,041		2,237

Income tax expense (Note 6)	199		134		502		473
CONSOLIDATED NET INCOME	409		541		1,539		1,764

Less: Net income attributable to noncontrolling interests	9		7		19		27
NET INCOME ATTRIBUTABLE TO CUMMINS INC.	$	400	$	534	$	1,520	$	1,737

EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
Basic	$	2.83	$	3.72	$	10.74	$	11.96
Diluted	$	2.82	$	3.69	$	10.68	$	11.86

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
Basic	141.1		143.5		141.5		145.2
Dilutive effect of stock compensation awards	0.9		1.2		0.8		1.3
Diluted	142.0		144.7		142.3		146.5



(a) Includes sales to nonconsolidated equity investees of $295 million and $920 million for the three and nine months ended September 30, 2022, compared with $385 million and $1,286 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				Nine months ended
In millions	September 30, 2022		October 3, 2021		September 30, 2022		October 3, 2021
CONSOLIDATED NET INCOME	$	409	$	541	$	1,539	$	1,764
Other comprehensive income (loss), net of tax (Note 15)
Change in pension and other postretirement defined benefit plans	6		17		28		63
Foreign currency translation adjustments	(379)		—		(620)		(34)

Unrealized gain on derivatives	41		3		112		37
Total other comprehensive (loss) income, net of tax	(332)		20		(480)		66
COMPREHENSIVE INCOME	77		561		1,059		1,830
Less: Comprehensive (loss) income attributable to noncontrolling interests	(6)		9		(19)		22
COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC.	$	83	$	552	$	1,078	$	1,808

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	September 30, 2022		December 31, 2021
ASSETS
Current assets
Cash and cash equivalents	$	2,499	$	2,592

Marketable securities (Note 7)	466		595
Total cash, cash equivalents and marketable securities	2,965		3,187
Accounts and notes receivable, net
Trade and other	4,450		3,565
Nonconsolidated equity investees	349		425
Inventories (Note 8)	5,543		4,355
Prepaid expenses and other current assets	1,091		777
Total current assets	14,398		12,309
Long-term assets
Property, plant and equipment	10,231		9,358
Accumulated depreciation	(5,030)		(4,936)
Property, plant and equipment, net	5,201		4,422
Investments and advances related to equity method investees	1,826		1,538
Goodwill (Note 9)	2,229		1,287
Other intangible assets, net (Note 9)	2,602		900
Pension assets (Note 4)	1,536		1,488
Other assets (Note 10)	1,977		1,766
Total assets	$	29,769	$	23,710

LIABILITIES
Current liabilities
Accounts payable (principally trade)	$	4,000	$	3,021
Loans payable (Note 11)	217		208
Commercial paper (Note 11)	2,393		313
Accrued compensation, benefits and retirement costs	575		683
Current portion of accrued product warranty (Note 12)	801		755
Current portion of deferred revenue (Note 2)	921		855

Other accrued expenses (Note 10)	1,568		1,190
Current maturities of long-term debt (Note 11)	55		59
Total current liabilities	10,530		7,084
Long-term liabilities
Long-term debt (Note 11)	5,450		3,579
Pensions and other postretirement benefits (Note 4)	678		604
Accrued product warranty (Note 12)	742		684
Deferred revenue (Note 2)	867		850
Other liabilities (Note 10)	1,892		1,508
Total liabilities	$	20,159	$	14,309

Commitments and contingencies (Note 13)
Redeemable noncontrolling interests (Notes 1 and 14)	$	252	$	366

EQUITY
Cummins Inc. shareholders’ equity
Common stock, $2.50 par value, 500 shares authorized, 222.5 and 222.5 shares issued	$	2,214	$	2,099
Retained earnings	17,628		16,741
Treasury stock, at cost, 81.5 and 80.0 shares	(9,449)		(9,123)

Accumulated other comprehensive loss (Note 15)	(2,013)		(1,571)



Total Cummins Inc. shareholders’ equity	8,380		8,146
Noncontrolling interests	978		889
Total equity	$	9,358	$	9,035
Total liabilities, redeemable noncontrolling interests and equity	$	29,769	$	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)


	Nine months ended
In millions	September 30, 2022		October 3, 2021
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income	$	1,539	$	1,764
Adjustments to reconcile consolidated net income to net cash provided by operating activities
Depreciation and amortization	544		497



Deferred income taxes	(194)		44
Equity in income of investees, net of dividends	(30)		(150)
Pension and OPEB expense (Note 4)	23		62
Pension contributions and OPEB payments (Note 4)	(71)		(86)
Share-based compensation expense	24		25




Russian suspension costs, net of recoveries (Note 3)	112		—
Asset impairments and other charges	36		—
Loss on corporate owned life insurance	114		11

Foreign currency remeasurement and transaction exposure	(136)		27
Changes in current assets and liabilities, net of acquisitions
Accounts and notes receivable	(333)		(353)
Inventories	(597)		(919)
Other current assets	(18)		(45)
Accounts payable	353		416
Accrued expenses	(124)		435
Changes in other liabilities	(41)		(59)

Other, net	(56)		(145)
Net cash provided by operating activities	1,145		1,524

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures	(453)		(362)
Investments in internal use software	(44)		(36)

Proceeds from sale of land	—		20
Investments in and net advances from (to) equity investees	(50)		3
Acquisitions of businesses, net of cash acquired (Note 16)	(3,008)		—

Investments in marketable securities—acquisitions	(738)		(569)
Investments in marketable securities—liquidations (Note 7)	819		602


Cash flows from derivatives not designated as hedges	(29)		19
Other, net	7		45
Net cash used in investing activities	(3,496)		(278)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings (Notes 11 and 16)	2,076		35
Net borrowings (payments) of commercial paper	2,080		(123)
Payments on borrowings and finance lease obligations	(1,070)		(57)
Net borrowings (payments) under short-term credit agreements	21		(93)
Distributions to noncontrolling interests	(38)		(28)
Dividend payments on common stock	(633)		(601)
Repurchases of common stock	(370)		(1,228)
Proceeds from issuing common stock	36		27

Other, net	9		(11)
Net cash provided by (used in) financing activities	2,111		(2,079)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	147		20
Net decrease in cash and cash equivalents	(93)		(813)
Cash and cash equivalents at beginning of year	2,592		3,401
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	2,499	$	2,588

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

CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY

(Unaudited)


	Three months ended
In millions, except per share amounts	Redeemable Noncontrolling Interests		Common Stock		Additional Paid-in Capital		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Loss		Total Cummins Inc. Shareholders’ Equity		Noncontrolling Interests		Total Equity
BALANCE AT JUNE 30, 2022	$	226	$	556	$	1,668	$	17,450	$	(9,439)	$	(1,696)	$	8,539	$	890	$	9,429

Net income	(7)						400						400		16		416
Other comprehensive loss, net of tax (Note 15)											(317)		(317)		(15)		(332)
Issuance of common stock					7								7		—		7

Repurchases of common stock									(23)				(23)		—		(23)
Cash dividends on common stock, $1.57 per share							(222)						(222)		—		(222)
Distributions to noncontrolling interests													—		(24)		(24)
Share-based awards					4				13				17		—		17
Acquisition of business													—		111		111
Fair value adjustment of redeemable noncontrolling interests	33				(33)								(33)		—		(33)
Other shareholder transactions					12								12		—		12
BALANCE AT SEPTEMBER 30, 2022	$	252	$	556	$	1,658	$	17,628	$	(9,449)	$	(2,013)	$	8,380	$	978	$	9,358

BALANCE AT JULY 4, 2021	$	346	$	556	$	1,548	$	16,228	$	(8,838)	$	(1,929)	$	7,565	$	882	$	8,447

Net income	(3)						534						534		10		544
Other comprehensive income, net of tax (Note 15)											18		18		2		20


Repurchases of common stock									(138)				(138)		—		(138)
Cash dividends on common stock, $1.45 per share							(207)						(207)		—		(207)
Distributions to noncontrolling interests													—		(15)		(15)
Share-based awards									1				1		—		1

Fair value adjustment of redeemable noncontrolling interests	(42)				42								42		—		42
Other shareholder transactions					7				1				8		—		8
BALANCE AT OCTOBER 3, 2021	$	301	$	556	$	1,597	$	16,555	$	(8,974)	$	(1,911)	$	7,823	$	879	$	8,702

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

CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY

(Unaudited)



	Nine months ended
In millions, except per share amounts	Redeemable Noncontrolling Interests		Common Stock		Additional Paid-in Capital		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Loss		Total Cummins Inc. Shareholders’ Equity		Noncontrolling Interests		Total Equity
BALANCE AT DECEMBER 31, 2021	$	366	$	556	$	1,543	$	16,741	$	(9,123)	$	(1,571)	$	8,146	$	889	$	9,035

Net income	(18)						1,520						1,520		37		1,557
Other comprehensive loss, net of tax (Note 15)											(442)		(442)		(38)		(480)
Issuance of common stock					8								8		—		8

Repurchases of common stock									(370)				(370)		—		(370)
Cash dividends on common stock, $4.47 per share							(633)						(633)		—		(633)
Distributions to noncontrolling interests													—		(38)		(38)
Share-based awards					(3)				39				36		—		36
Acquisition of business													—		111		111
Fair value adjustment of redeemable noncontrolling interests	(96)				96								96		—		96
Other shareholder transactions					14				5				19		17		36
BALANCE AT SEPTEMBER 30, 2022	$	252	$	556	$	1,658	$	17,628	$	(9,449)	$	(2,013)	$	8,380	$	978	$	9,358

BALANCE AT DECEMBER 31, 2020	$	282	$	556	$	1,617	$	15,419	$	(7,779)	$	(1,982)	$	7,831	$	876	$	8,707

Net income	(9)						1,737						1,737		36		1,773
Other comprehensive income (loss), net of tax (Note 15)											71		71		(5)		66
Issuance of common stock					1								1		—		1

Repurchases of common stock									(1,228)				(1,228)		—		(1,228)
Cash dividends on common stock, $4.15 per share							(601)						(601)		—		(601)
Distributions to noncontrolling interests													—		(28)		(28)
Share-based awards					(4)				31				27		—		27

Fair value adjustment of redeemable noncontrolling interests	28				(28)								(28)		—		(28)
Other shareholder transactions					11				2				13		—		13
BALANCE AT OCTOBER 3, 2021	$	301	$	556	$	1,597	$	16,555	$	(8,974)	$	(1,911)	$	7,823	$	879	$	8,702

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, axles, drivelines, brakes, suspension systems, electric power generation systems, batteries, electrified power systems, electric powertrains, 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.

Meritor Acquisition

On August 3, 2022, we completed the acquisition of Meritor, Inc. (Meritor) with a purchase price of $2.9 billion (including debt repaid concurrent with the acquisition). Our consolidated results and segment results include Meritor's activity since the date of acquisition. The results are included in our Components segment in the axles and brakes business while the electric powertrain portion is included in our New Power segment. See NOTE 16, "ACQUISITIONS," for additional information.

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 third quarters of 2022 and 2021 ended on September 30 and October 3, 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 nine 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.

Revisions

During the third quarter of 2022, we determined that a put right held by a minority shareholder in one of our subsidiaries, which became exercisable in September 2022, was incorrectly classified as noncontrolling interests (NCI) as opposed to mezzanine equity in our Condensed Consolidated Balance Sheets. Because the put right was exercisable at fair value (as defined in the governing documents of the subsidiary), the NCI should have also been reflected at fair value at each balance sheet date with an offset to additional paid-in-capital (APIC). As a result, we have revised our historical financial statements to reflect the NCI at its estimated fair value as redeemable noncontrolling interests in our Condensed Consolidated Balance Sheets with a corresponding offset in NCI and APIC. This error did not impact our Condensed Consolidated Statements of Net Income, Condensed Consolidated Statements of Comprehensive Income or Condensed Consolidated Statements of Cash Flows for any period. The amount reclassified from NCI and APIC was as follows:


In millions	Noncontrolling Interests		Additional Paid-in Capital		Total Correction to Mezzanine Equity
December 31, 2019	$	58	$	—	$	58
December 31, 2020	51		231		282
April 4, 2021	48		297		345
July 4, 2021	45		301		346
October 3, 2021	42		259		301
December 31, 2021	38		328		366
March 31, 2022	34		358		392
June 30, 2022	27		199		226

See NOTE 14, "REDEEMABLE NONCONTROLLING INTERESTS," for further information regarding the put right. We have concluded the correction of this error does not have a material impact to our previously issued annual and interim consolidated financial statements.

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		Nine months ended
	September 30, 2022	October 3, 2021	September 30, 2022	October 3, 2021
Options excluded	22,307	7,813	25,290	4,577

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 September 30, 2022, was $695 million. We expect to recognize the related revenue of $125 million over the next 12 months and $570 million over periods up to 10 years. See NOTE 12, "PRODUCT WARRANTY LIABILITY," for additional disclosures on extended warranty coverage arrangements. Our other contracts generally are for a duration of less than one year, include payment terms that correspond to the timing of costs incurred when providing goods and services to our customers or represent sales-based royalties.

Deferred and Unbilled Revenue

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


In millions	September 30, 2022		December 31, 2021
Unbilled revenue	$	244	$	100
Deferred revenue, primarily extended warranty	1,788		1,705

We recognized revenue of $123 million and $539 million for the three and nine months ended September 30, 2022, compared with $130 million and $432 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 nine months ended September 30, 2022 or October 3, 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				Nine months ended
In millions	September 30, 2022		October 3, 2021		September 30, 2022		October 3, 2021
United States	$	4,116	$	3,177	$	11,361	$	9,500

China	601		679		1,774		2,468


India	358		294		978		841

Other international	2,258		1,818		6,191		5,362
Total net sales	$	7,333	$	5,968	$	20,304	$	18,171

Segment Revenue

Engine segment external sales by market were as follows:


	Three months ended				Nine months ended
In millions	September 30, 2022		October 3, 2021		September 30, 2022		October 3, 2021
Heavy-duty truck	$	751	$	662	$	2,232	$	1,941
Medium-duty truck and bus	583		501		1,794		1,461
Light-duty automotive	465		492		1,377		1,432
Total on-highway	1,799		1,655		5,403		4,834
Off-highway	264		306		801		942
Total sales	$	2,063	$	1,961	$	6,204	$	5,776

Distribution segment external sales by region were as follows:


	Three months ended				Nine months ended
In millions	September 30, 2022		October 3, 2021		September 30, 2022		October 3, 2021
North America	$	1,512	$	1,237	$	4,374	$	3,631
Asia Pacific	258		236		744		675
Europe	174		143		494		467
China	89		80		270		239
Africa and Middle East	73		74		174		197
Latin America	58		48		155		136
India	55		48		155		138
Russia(1)	13		86		224		209
Total sales	$	2,232	$	1,952	$	6,590	$	5,692


(1) The Distribution segment is organized and managed by geographic regions. The Russia region contains sales to several countries in the geographic area.

Distribution segment external sales by product line were as follows:


	Three months ended				Nine months ended
In millions	September 30, 2022		October 3, 2021		September 30, 2022		October 3, 2021
Parts	$	942	$	796	$	2,855	$	2,313
Engines	449		376		1,315		1,058
Power generation	428		437		1,266		1,305
Service	413		343		1,154		1,016
Total sales	$	2,232	$	1,952	$	6,590	$	5,692

Components segment external sales by business were as follows:


	Three months ended				Nine months ended
In millions	September 30, 2022		October 3, 2021		September 30, 2022		October 3, 2021
Emission solutions	$	748	$	699	$	2,323	$	2,466
Axles and brakes	732		—		732		—
Filtration	322		288		949		892
Turbo technologies	205		177		597		609
Automated transmissions	159		112		436		374
Electronics and fuel systems	54		71		177		286
Total sales	$	2,220	$	1,347	$	5,214	$	4,627

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


	Three months ended				Nine months ended
In millions	September 30, 2022		October 3, 2021		September 30, 2022		October 3, 2021
Power generation	$	425	$	395	$	1,232	$	1,127
Industrial	226		209		627		621
Generator technologies	122		84		331		251
Total sales	$	773	$	688	$	2,190	$	1,999

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, 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. In the third quarter, we incurred $4 million of additional contract termination charges, and we recovered certain bad debt expenses and inventory amounts reserved in the first quarter for a net charge of $1 million. As of September 30, 2022, we had approximately $13 million of inventory and $15 million of receivables in Russia, all of which are fully reserved. In addition, we have cash balances of $71 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		Nine months ended
In millions	September 30, 2022		September 30, 2022		Statement of Net Income Location
Inventory write-downs	$	(2)	$	17	Cost of sales
Accounts receivable reserves	(1)		42		Other operating expense, net
Impairment and other joint venture costs	—		31		Equity, royalty and interest income from investees

Other	4		22		Other operating expense, net
Total	$	1	$	112

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. Prior to the acquisition, Meritor provided a range of benefits to its employees and retirees, including pension benefits and postretirement healthcare benefits. As part of the acquisition, we assumed the assets and liabilities associated with these plans. Accordingly, on August 3, 2022, we recorded assets of $147 million and liabilities of $105 million on our Condensed Consolidated Balance Sheets related to Meritor's postretirement benefit plans.

Contributions to these plans were as follows:


	Three months ended				Nine months ended
In millions	September 30, 2022		October 3, 2021		September 30, 2022		October 3, 2021



Defined benefit pension contributions	$	7	$	13	$	46	$	67


OPEB payments, net	9		5		25		19


Defined contribution pension plans	26		20		82		72

We anticipate making additional defined benefit pension contributions during the remainder of 2022 of $7 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 $20 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	September 30, 2022		October 3, 2021		September 30, 2022		October 3, 2021		September 30, 2022		October 3, 2021
Service cost	$	35	$	35	$	7	$	8	$	—	$	—
Interest cost	27		20		10		8		2		1
Expected return on plan assets	(60)		(49)		(22)		(22)		—		—
Amortization of prior service cost	1		—		—		1		—		—
Recognized net actuarial loss	5		11		1		8		—		—
Net periodic benefit cost (credit)	$	8	$	17	$	(4)	$	3	$	2	$	1



	Pension
	U.S. Plans				U.K. Plans				OPEB
	Nine months ended
In millions	September 30, 2022		October 3, 2021		September 30, 2022		October 3, 2021		September 30, 2022		October 3, 2021
Service cost	$	103	$	105	$	23	$	25	$	—	$	—
Interest cost	71		59		28		23		4		3
Expected return on plan assets	(164)		(149)		(62)		(65)		—		—
Amortization of prior service cost	1		—		—		2		—		—
Recognized net actuarial loss	17		35		2		24		—		—
Net periodic benefit cost (credit)	$	28	$	50	$	(9)	$	9	$	4	$	3

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				Nine months ended
In millions	September 30, 2022		October 3, 2021		September 30, 2022			October 3, 2021
Manufacturing entities
Dongfeng Cummins Engine Company, Ltd.	$	8	$	11	$	35		$	63
Chongqing Cummins Engine Company, Ltd.	7		8		23			28
Beijing Foton Cummins Engine Co., Ltd.	6		23		34			108
Tata Cummins, Ltd.	5		6		19			13
All other manufacturers	11		21		14		(1)	104


Distribution entities
Komatsu Cummins Chile, Ltda.	13		8		32			23
All other distributors	3		2		8			6


Cummins share of net income	53		79		165			345
Royalty and interest income	17		15		96			52
Equity, royalty and interest income from investees	$	70	$	94	$	261		$	397


(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 16, "ACQUISITIONS," to our Condensed Consolidated Financial Statements for additional information.

NOTE 6. INCOME TAXES

Our effective tax rates for the three and nine months ended September 30, 2022, were 32.7 percent and 24.6 percent, respectively. Our effective tax rates for the three and nine months ended October 3, 2021, were 19.9 percent and 21.1 percent, respectively.

The three months ended September 30, 2022, contained unfavorable discrete tax items of $57 million, primarily due to $51 million of unfavorable tax costs associated with internal restructuring ahead of the planned separation of our filtration business and $10 million of unfavorable return to provision adjustments, partially offset by $4 million of net favorable other discrete tax items.

The nine months ended September 30, 2022, contained unfavorable net discrete tax items of $52 million, primarily due to $69 million of unfavorable tax costs associated with internal restructuring ahead of the planned separation of our filtration business and $10 million of unfavorable return to provision adjustments, partially offset by $27 million of favorable changes in tax reserves.

The three months ended October 3, 2021, contained favorable discrete items of $11 million, primarily due to a $16 million favorable release of tax reserves associated with the settlement of tax positions, partially offset by $5 million of unfavorable return to provision adjustments.

The nine months ended October 3, 2021, contained favorable discrete items of $8 million, primarily due to an $18 million favorable release of tax reserves associated with the settlement of tax positions, partially offset by $10 million of unfavorable statutory changes in tax rates (mostly in the U.K.).

NOTE 7. MARKETABLE SECURITIES

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


	September 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	$	229	$	—	$	229	$	299	$	—	$	299

Debt mutual funds	215		(7)		208		254		2		256
Equity mutual funds	28		1		29		29		10		39

Debt securities	—		—		—		1		—		1







Total marketable securities	$	472	$	(6)	$	466	$	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 nine months ended September 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:


	Nine months ended
In millions		September 30, 2022		October 3, 2021
Proceeds from sales of marketable securities		$	576	$	428
Proceeds from maturities of marketable securities		243		174
Investments in marketable securities - liquidations		$	819	$	602

NOTE 8. INVENTORIES

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


In millions	September 30, 2022		December 31, 2021
Finished products	$	2,914	$	2,538
Work-in-process and raw materials	2,860		2,009
Inventories at FIFO cost	5,774		4,547
Excess of FIFO over LIFO	(231)		(192)
Total inventories	$	5,543	$	4,355

NOTE 9. GOODWILL AND OTHER INTANGIBLE ASSETS

The following table summarizes the changes in the carrying amount of goodwill for the nine months ended September 30, 2022:


In millions	Components		New Power		Distribution		Power Systems		Engine		Total




Balance at December 31, 2021	$	934	$	257	$	79	$	11	$	6	$	1,287

Acquisitions(1)	799		159		—		—		—		958
Translation and other	(15)		—		—		(1)		—		(16)

Balance at September 30, 2022	$	1,718	$	416	$	79	$	10	$	6	$	2,229



(1)See NOTE 16, "ACQUISITIONS," for additional information on acquisition goodwill.

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



In millions	September 30, 2022		December 31, 2021
Software	$	652	$	586
Less: Accumulated amortization	(378)		(314)
Software, net	274		272

Trademarks, patents, customer relationships and other(1)	2,711		957
Less: Accumulated amortization	(383)		(329)
Trademarks, patents, customer relationships and other, net	2,328		628
Total other intangible assets, net	$	2,602	$	900

(1)See NOTE 16, "ACQUISITIONS," for additional information on acquired intangible assets.

NOTE 10. SUPPLEMENTAL BALANCE SHEET DATA

Other assets included the following:



In millions	September 30, 2022		December 31, 2021
Deferred income taxes	$	472	$	428
Operating lease assets	471		444
Corporate owned life insurance	378		492

Other	656		402
Other assets	$	1,977	$	1,766

Other accrued expenses included the following:



In millions	September 30, 2022		December 31, 2021
Marketing accruals	$	307	$	303
Income taxes payable	231		107
Other taxes payable	210		234
Current portion of operating lease liabilities	126		128
Other	694		418
Other accrued expenses	$	1,568	$	1,190

Other liabilities included the following:



In millions	September 30, 2022		December 31, 2021

Deferred income taxes	$	570	$	403
Operating lease liabilities	347		326
Accrued compensation	201		177
Long-term income taxes	192		263
Mark-to-market valuation on interest rate derivatives	161		19
Other long-term liabilities	421		320
Other liabilities	$	1,892	$	1,508

NOTE 11. DEBT

Loans Payable and Commercial Paper

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


In millions	September 30, 2022			December 31, 2021


Loans payable (1)	$	217		$	208

Commercial paper	2,393		(2)(3)	313		(4)




(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 2.82 percent at September 30, 2022. This included $97 million of borrowings under the Europe program at a weighted-average interest rate of 0.87 percent and $2,296 million of borrowings under the U.S. program at a weighted-average interest rate of 2.91 percent.
(3) Additional commercial paper borrowings were primarily used for the Meritor acquisition. See NOTE 16, "ACQUISITIONS," for additional information.
(4) 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 $4.0 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 use the net proceeds from the commercial paper borrowings for acquisitions and general corporate purposes.

Revolving Credit Facilities

On August 17, 2022, we entered into an amended and restated 364-day credit agreement, which allows us to borrow up to $1.5 billion of unsecured funds at any time prior to August 16, 2023. This credit agreement amended and restated the prior $1.5 billion 364-day credit facility that matured on August 17, 2022.

On August 17, 2022, we also entered into an incremental 364-day credit agreement, which allows us to borrow up to $500 million of unsecured funds at any time prior to August 16, 2023.

We have access to committed credit facilities totaling $4.0 billion, including the $1.5 billion 364-day facility that expires August 16, 2023, $500 million incremental 364-day facility that expires August 16, 2023, 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 September 30, 2022 and December 31, 2021. At September 30, 2022, the $2,393 million of outstanding commercial paper effectively reduced the $4.0 billion of revolving credit capacity to $1.6 billion.

At September 30, 2022, we also had an additional $230 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	September 30, 2022		December 31, 2021
Long-term debt
Senior notes, due 2023	3.65%	$	500	$	500
Term loan, due 2025	Variable	2,000		—
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		121		110

Unamortized discount and deferred issuance costs		(65)		(68)
Fair value adjustments due to hedge on indebtedness		(133)		34
Finance leases		109		89
Total long-term debt		5,505		3,638
Less: Current maturities of long-term debt		55		59
Long-term debt		$	5,450	$	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.

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

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



In millions	2022		2023		2024		2025		2026
Principal payments	$	13	$	563	$	43	$	2,509	$	55

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								Nine months ended
In millions	September 30, 2022				October 3, 2021				September 30, 2022				October 3, 2021
Type of Swap	Gain (Loss) on Swaps		Gain (Loss) on Borrowings		Gain (Loss) on Swaps		Gain (Loss) on Borrowings		Gain (Loss) on Swaps		Gain (Loss) on Borrowings		Gain (Loss) on Swaps		Gain (Loss) on Borrowings
Interest rate swaps(1)	$	(47)	$	45	$	—	$	—	$	(158)	$	159	$	—	$	—

(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, net of tax, recognized in other comprehensive income:


In millions	Three months ended				Nine months ended
Type of Swap	September 30, 2022		October 3, 2021		September 30, 2022		October 3, 2021
Interest rate locks	$	21	$	—	$	103	$	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	September 30, 2022		December 31, 2021
Fair value of total debt (1)	$	7,635	$	4,461
Carrying value of total debt	8,115		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.

Filtration Contingent Debt Agreement

On September 30, 2022, certain of our subsidiaries entered into a $1.0 billion credit agreement (Credit Agreement), consisting of a $400 million revolving credit facility and a $600 million term loan facility (Facilities), in anticipation of the separation of our filtration business. Borrowings under the Credit Agreement will not become available under the Credit Agreement unless and until, among other things, there is a sale to the public of shares in our subsidiary that holds the filtration business (Parent Borrower). The Credit Agreement will automatically terminate if no such public sale of shares of Parent Borrower occurs on or prior to March 30, 2023. Borrowings under the Credit Agreement would be available to Parent Borrower and one or more of its subsidiaries (Borrower). If borrowings become available under the Credit Agreement, the Facilities would mature on September 30, 2027.

Borrowings under the Credit Agreement would bear interest at varying rates, depending on the type of loan and, in some cases, the rates of designated benchmarks and the applicable Borrower’s election. Generally, U.S. dollar-denominated loans would bear interest at adjusted term SOFR (which includes a 0.10 percent credit spread adjustment to term SOFR) for the applicable interest period plus a rate ranging from 1.125 percent to 1.75 percent depending on Parent Borrower's net leverage ratio.

NOTE 12. PRODUCT WARRANTY LIABILITY

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


	Nine months ended
In millions	September 30, 2022		October 3, 2021
Balance, beginning of year	$	2,425	$	2,307
Provision for base warranties issued	395		431
Deferred revenue on extended warranty contracts sold	215		210
Provision for product campaigns issued	132		162
Payments made during period	(476)		(409)

Amortization of deferred revenue on extended warranty contracts	(220)		(191)
Changes in estimates for pre-existing product warranties	(80)		(131)
Acquisitions(1)	144		—
Foreign currency translation and other	19		(4)

Balance, end of period	$	2,554	$	2,375

(1) See NOTE 16, "ACQUISITIONS," to our Condensed Consolidated Financial Statements for additional information.

We recognized supplier recoveries of $10 million and $33 million for the three and nine months ended September 30, 2022, compared with $88 million and $97 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	September 30, 2022		December 31, 2021		Balance Sheet Location
Deferred revenue related to extended coverage programs
Current portion	$	295	$	286	Current portion of deferred revenue
Long-term portion	716		700		Deferred revenue
Total	$	1,011	$	986

Product warranty
Current portion	$	801	$	755	Current portion of accrued product warranty
Long-term portion	742		684		Accrued product warranty
Total	$	1,543	$	1,439

Total warranty accrual	$	2,554	$	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 September 30, 2022, the remaining accrual balance was $54 million.

NOTE 13. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

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

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

On June 28, 2022, KAMAZ 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 and Titan trucks for model years 2016 through 2019. 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 RAM recall during the first quarter of 2022, an amount that reflected our current estimate of the cost of that recall. We are also developing a new software calibration and hardware fix and will recall model years 2016 through 2019 Titan trucks. We accrued $29 million for the Titan recall during the third quarter of 2022, an amount that reflected our current estimate of the cost of that 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 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 September 30, 2022, the maximum potential loss related to these guarantees was $48 million.

We have arrangements with certain suppliers that require us to purchase minimum volumes or be subject to monetary penalties. At September 30, 2022, if we were to stop purchasing from each of these suppliers, the aggregate amount of the penalty would be approximately $138 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 September 30, 2022, the total commitments under these contracts were $42 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 $118 million at September 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.

Accounts Receivable Factoring

We assumed an accounts receivable factoring program from the acquisition of Meritor for trade receivables as follows:


	Current Expiration		Total Facility Size at September 30, 2022						Utilized at September 30, 2022
In millions		EUR			USD			EUR			USD



Off-balance sheet arrangements
Committed Swedish factoring facility(1)(2)	March 2024		€	155		$	151		€	144		$	139
Committed U.S. factoring facility(1)	February 2023		N/A			75			—			76
Uncommitted U.K. factoring facility(3)	February 2025		25			24			2			2
Uncommitted Italy factoring facility	June 2025		30			29			11			11
Other uncommitted factoring facilities(4)	None		N/A			N/A			7			7
Total off-balance sheet arrangements			€	210		$	279		€	164		$	235


(1) Actual amounts may exceed the bank's commitment at the bank's discretion.
(2) The factoring program is supported by a 364-day committed credit facility through June 22, 2023.
(3) The U.K. factoring facility enables the factoring of British pound and Euro denominated accounts receivable.
(4) There is no explicit facility size under the agreement, but the counterparty approves the purchase of receivable tranches as its discretion.

We received $108 million of proceeds from receivables sold, and costs associated with all of the off-balance sheet arrangements described above were $1 million since the August 3, 2022, acquisition date.

NOTE 14. REDEEMABLE NONCONTROLLING INTERESTS

A 19 percent minority shareholder in one of our businesses, Hydrogenics Corporation (Hydrogenics), has, among other rights and subject to related obligations and restrictive covenants, rights that are exercisable between September 2022 and September 2026 to require us to (1) purchase such shareholder's shares (Put Option) at an amount up to the fair market value (calculated pursuant to a process outlined in the shareholders' agreement) and (2) sell to such shareholder Hydrogenics' electrolyzer business at an amount up to the fair market value of the electrolyzer business (calculated pursuant to a process outlined in the shareholders’ agreement). We recorded the estimated fair value of the Put Option as redeemable noncontrolling interests in our Condensed Consolidated Financial Statements with an offset to additional paid-in capital. At September 30, 2022, the redeemable noncontrolling interest balance was $252 million.

NOTE 15. 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 June 30, 2022	$	(324)	$	(1,426)	$	54	$	(1,696)
Other comprehensive income (loss) before reclassifications
Before-tax amount	—		(365)		51		(314)		$	(15)	$	(329)
Tax benefit (expense)			1		(13)		(12)		—		(12)
After-tax amount	—		(364)		38		(326)		(15)		(341)
Amounts reclassified from accumulated other comprehensive income (loss)(1)	6		—		3		9		—		9

Net current period other comprehensive income (loss)	6		(364)		41		(317)		$	(15)	$	(332)
Balance at September 30, 2022	$	(318)	$	(1,790)	$	95	$	(2,013)

Balance at July 4, 2021	$	(689)	$	(1,231)	$	(9)	$	(1,929)
Other comprehensive income (loss) before reclassifications
Before-tax amount	1		(2)		5		4		$	2	$	6
Tax expense	(1)		—		(3)		(4)		—		(4)
After-tax amount	—		(2)		2		—		2		2
Amounts reclassified from accumulated other comprehensive income (loss)(1)	17		—		1		18		—		18
Net current period other comprehensive income (loss)	17		(2)		3		18		$	2	$	20
Balance at October 3, 2021	$	(672)	$	(1,233)	$	(6)	$	(1,911)

(1) Amounts are net of tax. Reclassifications out of accumulated other comprehensive income (loss) and the related tax effects are immaterial for separate disclosure.

Following are the changes in accumulated other comprehensive income (loss) by component for the nine 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 (loss) before reclassifications
Before-tax amount	14		(589)		146		(429)		$	(38)	$	(467)
Tax (expense) benefit	(3)		7		(35)		(31)		—		(31)
After-tax amount	11		(582)		111		(460)		(38)		(498)
Amounts reclassified from accumulated other comprehensive income (loss)(1)	17		—		1		18		—		18
Net current period other comprehensive income (loss)	28		(582)		112		(442)		$	(38)	$	(480)
Balance at September 30, 2022	$	(318)	$	(1,790)	$	95	$	(2,013)

Balance at December 31, 2020	$	(735)	$	(1,204)	$	(43)	$	(1,982)
Other comprehensive income (loss) before reclassifications
Before-tax amount	16		(33)		53		36		$	(5)	$	31
Tax (expense) benefit	(3)		4		(16)		(15)		—		(15)
After-tax amount	13		(29)		37		21		(5)		16
Amounts reclassified from accumulated other comprehensive income (loss)(1)	50		—		—		50		—		50
Net current period other comprehensive income (loss)	63		(29)		37		71		$	(5)	$	66
Balance at October 3, 2021	$	(672)	$	(1,233)	$	(6)	$	(1,911)










(1) Amounts are net of tax. Reclassifications out of accumulated other comprehensive income (loss) and the related tax effects are immaterial for separate disclosure.

NOTE 16. ACQUISITIONS

Acquisitions for the nine months ended September 30, 2022, were as follows.


Entity Acquired (Dollars in millions)	Date of Acquisition	Additional Percent Interest Acquired	Payments to Former Owners		Acquisition Related Debt Retirements		Total Purchase Consideration(1)		Goodwill Acquired		Intangibles Recognized(2)

Meritor, Inc.	08/03/22	100%	$	2,613	$	248	$	2,861	$	850	$	1,610
Jacobs Vehicle Systems	04/08/22	100%	346		—		346		108		164
Cummins Westport Joint Venture	02/07/22	50%	42		—		42		—		20














(1) The newly consolidated entities were accounted for as business combinations. On the date of acquisition, Meritor, Inc. was included in the Components and New Power segments, Jacobs Vehicle Systems was included in the Components segment and Cummins Westport Joint Venture was included in the Engine segment.
(2) Intangible assets acquired in the business combination were mostly technology and customer related.

Meritor, Inc.

On August 3, 2022, we completed the acquisition of Meritor whereby we paid $36.50 per share for each outstanding share of Meritor, a global leader of drivetrain, mobility, braking, aftermarket and electric powertrain solutions for commercial vehicle and industrial markets. The total purchase price, including debt that was retired on the closing date of $248 million, was $2.9 billion. In addition, we assumed $1.0 billion of additional debt, of which $0.9 billion was retired prior to the end of the third quarter. The acquisition was funded with a combination of $2.0 billion in new debt (see NOTE 11, "DEBT" for additional details), cash on hand and additional commercial paper borrowings. The integration of Meritor’s people, technology and capabilities position us as one of the few companies able to provide integrated powertrain solutions across combustion and electric power applications at a time when demand for decarbonized solutions is continuing to accelerate. The majority of this business will be included within our Components segment with the exception of the electric powertrain business, which will be included in our New Power segment. The values assigned to individual assets acquired and liabilities assumed are preliminary based on management’s current best estimate and subject to change as certain matters are finalized. The primary areas that are preliminary include, but are not limited to, valuation of intangibles, legal and other contingent liabilities and deferred taxes. The preliminary purchase price allocation was as follows:


In millions
Cash and cash equivalents	$	98
Accounts and notes receivable, net	640
Inventories	752
Property, plant and equipment	846
Intangible assets	1,610



Investments and advances related to equity method investees	382
Goodwill	850
Pension assets	147
Other current and long-term assets	364
Accounts payable (principally trade)	(711)
Net deferred taxes	(325)
Pensions and other postretirement benefits	(129)
Long-term debt	(962)
Other current and long-term liabilities	(590)
Noncontrolling interests	(111)
Total purchase price	$	2,861

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


	Fair Value (in millions)		Weighted-Average Useful Life (in years)	Valuation Methodology	Key Assumptions
Customer relationships	$	960	12	Multi-period excess earnings	Revenue, EBITDA, rate of return, renewal rates
Technology	345		8	Relief-from-royalty	Royalty rate, rate of return, obsolescence factor
Trade name	305		21	Relief-from-royalty	Royalty rate, rate of return

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

Goodwill was determined based on the residual difference between the fair value of consideration transferred and the value assigned to tangible and intangible assets and liabilities. Goodwill was allocated to the Components segment ($691 million) and the New Power segment ($159 million) based on the relative value of those businesses compared to the assets and liabilities assigned to them. We do not expect any of the goodwill to be deductible for tax purposes. Among the factors contributing to a purchase price resulting in the recognition of goodwill are Meritor’s expected future customers, new versions of technologies, an acquired workforce, other economic benefits that are anticipated to arise from future product sales and operational synergies from combining the business with Cummins.

Included in our third quarter results were revenues of $737 million and net loss of $37 million related to this business. In addition, on a year-to-date basis we have incurred acquisition related costs of $30 million included in selling, general and administrative expenses in our Condensed Consolidated Statements of Net Income.

The following table presents the supplemental consolidated results of the Company for the three and nine months ended September 30, 2022 and October 3, 2021, on an unaudited pro-forma basis as if the acquisition had been consummated on January 1, 2021. The primary adjustments reflected in the pro-forma results related to (1) increase in interest expense for debt used to fund the acquisition, (2) removal of acquisition related costs from 2022 (and included in 2021) and (3) changes related to purchase accounting primarily related to amortization of intangibles, fixed assets and joint ventures. The unaudited pro forma financial information presented below does not purport to represent the actual results of operations that Cummins and Meritor would have achieved had the companies been combined during the periods presented and was not intended to project the future results of operations that the combined company could achieve after the acquisition. The unaudited pro forma financial information does not reflect any potential cost savings, operating efficiencies, long-term debt pay down estimates, financial synergies or other strategic benefits as a result of the acquisition or any restructuring costs to achieve those benefits.


(Unaudited)	Three months ended				Nine months ended
In millions	September 30, 2022		October 3, 2021		September 30, 2022		October 3, 2021
Net sales	$	7,734	$	6,913	$	23,071	$	21,115
Net income	397		544		1,565		1,662

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

Jacobs Vehicle Systems

On April 8, 2022, we completed the acquisition of Jacobs Vehicle Systems business (Jacobs) from Altra Industrial Motion Corp. The purchase price was $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 and cash equivalents	$	18
Accounts and notes receivable, net	24
Inventories	15
Property, plant and equipment	70
Intangible assets	164



Goodwill	108
Accounts payable (principally trade)	(21)
Net deferred taxes	(27)
Other, net	(5)
Total purchase price	$	346


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

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

Goodwill was determined based on the residual difference between the fair value of consideration transferred and the value assigned to tangible and intangible assets and liabilities. Approximately $9 million of the goodwill is deductible for tax purposes. Among the factors contributing to a purchase price resulting in the recognition of goodwill are 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 results for the three and nine months ended September 30, 2022, were revenues of $43 million and $80 million, respectively, and loss of $2 million and break-even, respectively, 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.

Cummins Westport Joint Venture

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.

Pending Acquisition

Prior to our acquisition of Meritor, Meritor signed an agreement with Siemens to purchase its Commercial Vehicles business for approximately €190 million, subject to working capital and other customary adjustments. This business develops, designs and produces electric drive systems including electric motors, inverters, software and related services for the transit, off-highway and specialty markets. We expect the acquisition to close in the fourth quarter of 2022. This acquisition will be included in our New Power segment.

NOTE 17. 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, automated transmissions, axles, drivelines, brakes and suspension systems. 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, fuel cell and electric powertrain technologies. The New Power segment is currently in the early stages of commercializing these technologies with efforts primarily focused on the development of our electroloyzers for hydrogen production and electrified power systems and related components and subsystems. We continue to serve all our markets as they adopt electrification and alternative power technologies, meeting the needs of our OEM partners and end customers.

We use segment earnings or losses before interest expense, income taxes, depreciation and amortization and noncontrolling interests (EBITDA) as the 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 and certain filtration separation costs 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 September 30, 2022
External sales	$	2,063	$	2,232	$	2,220		$	773	$	45	$	7,333
Intersegment sales	716		7		483			576		5		1,787
Total sales	2,779		2,239		2,703			1,349		50		9,120



Research, development and engineering expenses	140		13		87			62		46		348
Equity, royalty and interest income (loss) from investees	28		20		17			10		(5)		70

Interest income	3		4		4			3		—		14

Russian suspension costs(1)	—		—		1			—		—		1

Segment EBITDA	363		225		297		(2)	193		(96)		982
Depreciation and amortization(3)	51		29		95			30		10		215



Three months ended October 3, 2021
External sales	$	1,961	$	1,952	$	1,347		$	688	$	20	$	5,968
Intersegment sales	617		7		446			476		3		1,549
Total sales	2,578		1,959		1,793			1,164		23		7,517



Research, development and engineering expenses	97		10		78			55		26		266
Equity, royalty and interest income (loss) from investees	61		15		10			11		(3)		94

Interest income	3		2		1			1		—		7
Segment EBITDA	391		192		253			134		(58)		912
Depreciation and amortization(3)	53		28		44			29		5		159










(1) See NOTE 3, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information.
(2) Includes $45 million of costs related to the acquisition and integration of Meritor and $10 million of costs associated with the planned separation of our filtration business.
(3) 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 nine months ended is shown in the table below:



In millions	Engine			Distribution		Components			Power Systems		New Power		Total Segments
Nine months ended September 30, 2022
External sales	$	6,204		$	6,590	$	5,214		$	2,190	$	106	$	20,304
Intersegment sales	2,103			19		1,427			1,522		17		5,088
Total sales	8,307			6,609		6,641			3,712		123		25,392



Research, development and engineering expenses	365			39		236			184		121		945
Equity, royalty and interest income (loss) from investees	131		(1)	57		54			31		(12)		261

Interest income	8			9		7			5		—		29
Russian suspension costs(2)	33		(3)	55		5			19		—		112
Segment EBITDA	1,177			632		969		(4)	411		(243)		2,946
Depreciation and amortization(5)	151			86		187			92		25		541


Nine months ended October 3, 2021
External sales	$	5,776		$	5,692	$	4,627		$	1,999	$	77	$	18,171
Intersegment sales	1,752			22		1,312			1,330		5		4,421
Total sales	7,528			5,714		5,939			3,329		82		22,592



Research, development and engineering expenses	288			35		232			172		75		802
Equity, royalty and interest income (loss) from investees	278			47		41			32		(1)		397

Interest income	7			5		3			3		—		18
Segment EBITDA	1,147			553		975			399		(169)		2,905
Depreciation and amortization(5)	154			88		138			97		17		494


(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) Includes $56 million of costs related to the acquisition and integration of Meritor and $15 million of costs associated with the planned separation of our filtration business.
(5) 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 $3 million and $3 million for the nine months ended September 30, 2022 and October 3, 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				Nine months ended
In millions	September 30, 2022		October 3, 2021		September 30, 2022		October 3, 2021
Total segment sales	$	9,120	$	7,517	$	25,392	$	22,592
Elimination of intersegment sales	(1,787)		(1,549)		(5,088)		(4,421)
Total net sales	$	7,333	$	5,968	$	20,304	$	18,171

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				Nine months ended
In millions	September 30, 2022		October 3, 2021		September 30, 2022		October 3, 2021
TOTAL SEGMENT EBITDA	$	982	$	912	$	2,946	$	2,905

Intersegment eliminations and other(1)	(98)		(50)		(252)		(89)

Less:
Interest expense	61		28		112		85
Depreciation and amortization	215		159		541		494
INCOME BEFORE INCOME TAXES	608		675		2,041		2,237
Less: Income tax expense	199		134		502		473
CONSOLIDATED NET INCOME	409		541		1,539		1,764
Less: Net income attributable to noncontrolling interests	9		7		19		27
NET INCOME ATTRIBUTABLE TO CUMMINS INC.	$	400	$	534	$	1,520	$	1,737

(1)Intersegment eliminations and other included $6 million and $47 million of costs associated with the planned separation of our Filtration business for the three and nine months ended September 30, 2022.

NOTE 18. SUBSEQUENT EVENT

In October 2022, we signed an agreement to purchase all of the equity ownership interest of Teksid Hierro de Mexico, S.A. de C.V. (Teksid MX) and Teksid, Inc. from Stellantis N.V. for approximately €115 million, subject to certain adjustments set forth in the agreement. Teksid MX operates a cast iron foundry located in Monclova, Mexico, which primarily forges blocks and heads used in Cummins and other manufacturers’ engines. Teksid, Inc. facilitates the commercialization of Teksid MX products in North America. The transaction, which is subject to customary closing conditions and receipt of applicable regulatory approvals, is expected to close as soon as December 2022. Since Cummins is the primary customer of the foundry, the acquisition is not expected to result in material incremental sales to our business. This business will be included in our Engine segment.

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