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

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

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

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

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

GOVERNMENT REGULATION

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

BU****SINESS CONDITIONS / DISRUPTIONS

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

PRODUCTS AND TECHNOLOGY

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

GENERAL

failure to complete, adverse results from or failure to realize the expected benefits of the separation of our filtration business;
our plan to reposition our portfolio of product offerings through exploration of strategic acquisitions and divestitures and related uncertainties of entering such transactions;
challenging markets for talent and ability to attract, develop and retain key personnel;
climate change and global warming;
exposure to potential security breaches or other disruptions to our information technology environment and data security;
political, economic and other risks from operations in numerous countries including political, economic and social uncertainty and the evolving globalization of our business;
competitor activity;
increasing competition, including increased global competition among our customers in emerging markets;
labor relations or work stoppages;
foreign currency exchange rate changes;
the performance of our pension plan assets and volatility of discount rates;
the price and availability of energy;
continued availability of financing, financial instruments and financial resources in the amounts, at the times and on the terms required to support our future business; and
other risk factors described in Part II, Item 1A in this quarterly report and our 2021 Form 10-K, Part I, Item 1A, both under the caption "Risk Factors."

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

ORGANIZATION OF INFORMATION

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

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

EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS

Overview

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

Our reportable operating segments consist of Engine, Distribution, Components, Power Systems and New Power. This reporting structure is organized according to the products and markets each segment serves. The Engine segment produces engines (15 liters and smaller) and associated parts for sale to customers in on-highway and various off-highway markets. Our engines are used in trucks of all sizes, buses and recreational vehicles, as well as in various industrial applications, including construction, agriculture, power generation systems and other off-highway applications. The Distribution segment includes wholly-owned and partially-owned distributorships engaged in wholesaling engines, generator sets and service parts, as well as performing service and repair activities on our products and maintaining relationships with various OEMs throughout the world. The Components segment sells filtration products, aftertreatment systems, turbochargers, electronics, fuel systems, 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.

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

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," to the Condensed Consolidated Financial Statements for additional information.

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
Inventory write-downs	$	(2)	$	17
Accounts receivable reserves	(1)		42
Impairment and other joint venture costs	—		31

Other	4		22
Total	$	1	$	112

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

Supply Chain Disruptions

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

2022 Third Quarter and Year-to-Date Results

A summary of our results is as follows:


	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	$	7,333	$	5,968	$	20,304	$	18,171
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

Our industry's sales continue to be unfavorably impacted by supply chain constraints leading to shortages across multiple components categories and limiting our collective ability to meet end-user demand. Our customers are also experiencing other supply chain issues limiting full production capabilities.

Worldwide revenues increased 23 percent in the three months ended September 30, 2022, compared to the same period in 2021, due to Meritor sales of $737 million since the date of acquisition, favorable pricing and higher demand in all operating segments and most geographic regions except for Russia and China. Net sales in the U.S. and Canada improved 29 percent, primarily due to incremental sales of brakes and axles in North America since the acquisition of Meritor in addition to favorable pricing and increased demand in North American on-highway markets, which positively impacted most components businesses, and all distribution product lines. International demand (excludes the U.S. and Canada) improved 15 percent, with lower sales in Russia (due to suspension of our Russian operations) and China (due to a slowdown in construction markets, exacerbated by COVID lockdowns) more than offset by higher sales in most other geographic regions. The increase in international sales was principally due to incremental sales of brakes and axles in Western Europe and Latin America since the acquisition of Meritor. Unfavorable foreign currency fluctuations impacted international sales by 7 percent (primarily the Euro, British pound, Chinese renminbi and Indian rupee).

Worldwide revenues increased 12 percent in the nine months ended September 30, 2022, compared to the same period in 2021, due to Meritor sales of $737 million since the date of acquisition, favorable pricing and higher demand in most operating segments and most geographic regions except for China and Russia. Net sales in the U.S. and Canada improved 19 percent, primarily due to favorable pricing and increased demand in North American on-highway markets, which positively impacted all components businesses, and all distribution product lines, as well as incremental sales of brakes and axles in North America since the acquisition of Meritor. International demand (excludes the U.S. and Canada) improved by 3 percent, with lower sales in China (due to a sharp slowdown in truck and construction markets, exacerbated by COVID lockdowns) more than offset by higher sales in most other geographic regions. The increase in international sales was principally due to incremental sales of brakes and axles in Western Europe and Latin America since the acquisition of Meritor, favorable pricing and higher demand for power generation and industrial equipment (especially oil and gas) and most distribution product lines. Unfavorable foreign currency fluctuations impacted international sales by 4 percent (primarily the Euro, British pound and Indian rupee).

The following tables contain sales and EBITDA (defined as earnings or losses before interest expense, income taxes, depreciation and amortization and noncontrolling interests) by operating segment for the three and nine months ended September 30, 2022 and October 3, 2021. See NOTE 17, "OPERATING SEGMENTS," to the Condensed Consolidated Financial Statements for additional information and a reconciliation of our segment information to the corresponding amounts in our Condensed Consolidated Statements of Net Income.


	Three months ended
Operating Segments	September 30, 2022							October 3, 2021						Percent change
			Percent							Percent				2022 vs. 2021
In millions	Sales		of Total		EBITDA			Sales		of Total		EBITDA		Sales		EBITDA
Engine	$	2,779	38	%	$	363		$	2,578	43	%	$	391	8	%	(7)	%
Distribution	2,239		30	%	225			1,959		33	%	192		14	%	17	%
Components	2,703		37	%	297			1,793		30	%	253		51	%	17	%
Power Systems	1,349		18	%	193			1,164		20	%	134		16	%	44	%
New Power	50		1	%	(96)			23		—	%	(58)		NM		(66)	%
Intersegment eliminations	(1,787)		(24)	%	(98)			(1,549)		(26)	%	(50)		15	%	96	%

Total	$	7,333	100	%	$	884	(1)	$	5,968	100	%	$	862	23	%	3	%

"NM" - not meaningful information
(1) EBITDA includes $45 million of costs related to the acquisition and integration of Meritor, $16 million of costs associated with the planned separation of our Filtration business and $1 million of costs associated with the suspension of our Russian operations.

Net income attributable to Cummins Inc. was $0.4 billion, or $2.82 per diluted share, on sales of $7.3 billion for the three months ended September 30, 2022, versus the comparable prior year period net income attributable to Cummins Inc. of $0.53 billion, or $3.69 per diluted share, on sales of $6.0 billion. The decreases in net income attributable to Cummins Inc. and earnings per diluted share were driven by unfavorable discrete tax items, Meritor acquisition and integration costs, one-time employee recognition expenses, higher interest expense related to new borrowings, losses in corporate owned life insurance, lower equity, royalty and interest income from investees (principally in China) and a higher effective tax rate, partially offset by higher net sales and lower variable compensation. The increase in gross margin was primarily due to favorable pricing, higher volumes and lower variable compensation expenses, partially offset by higher material costs, increased freight costs and one-time employee recognition expenses. The 1.3 percentage point decrease in gross margin as a percentage of net sales was principally due to the addition of Meritor activity since the date of acquisition which had a lower gross margin percentage than our legacy business.



	Nine months ended
Operating Segments	September 30, 2022							October 3, 2021						Percent change
			Percent							Percent				2022 vs. 2021
In millions	Sales		of Total		EBITDA			Sales		of Total		EBITDA		Sales		EBITDA
Engine	$	8,307	41	%	$	1,177		$	7,528	41	%	$	1,147	10	%	3	%
Distribution	6,609		32	%	632			5,714		31	%	553		16	%	14	%
Components	6,641		33	%	969			5,939		33	%	975		12	%	(1)	%
Power Systems	3,712		18	%	411			3,329		18	%	399		12	%	3	%
New Power	123		1	%	(243)			82		1	%	(169)		50	%	(44)	%
Intersegment eliminations	(5,088)		(25)	%	(252)			(4,421)		(24)	%	(89)		15	%	NM

Total	$	20,304	100	%	$	2,694	(1)	$	18,171	100	%	$	2,816	12	%	(4)	%

"NM" - not meaningful information
(1) EBITDA includes $112 million of costs associated with the suspension of our Russian operations, $62 million of costs associated with the planned separation of our Filtration business and $56 million of costs related to the acquisition and integration of Meritor.

Net income attributable to Cummins Inc. was $1.52 billion, or $10.68 per diluted share, on sales of $20.3 billion for the nine months ended September 30, 2022, versus the comparable prior year period net income attributable to Cummins Inc. of $1.74 billion, or $11.86 per diluted share, on sales of $18.2 billion. The decreases in net income attributable to Cummins Inc. and earnings per diluted share were driven by lower equity, royalty and interest income from investees (primarily in China), losses in corporate owned life insurance, costs associated with the suspension of our Russian operations, costs associated with the planned separation of our filtration business, Meritor acquisition and integration costs, one-time employee recognition expenses, unfavorable discrete tax items, higher consulting expenses and increased interest expense related to new borrowings, partially offset by higher net sales and increased gross margin. See NOTE 3, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information. The increase in gross margin was primarily due to favorable pricing, increased volumes and lower variable compensation expenses, partially offset by higher material costs, increased freight costs due to supply chain constraints and one-time employee recognition expenses. Diluted earnings per common share for the nine months ended September 30, 2022, benefited $0.10 from fewer weighted-average shares outstanding due to the stock repurchase program.

We generated $1.15 billion of cash from operations for the nine months ended September 30, 2022, compared to $1.52 billion for the comparable period in 2021. See the section titled "Cash Flows" in the "LIQUIDITY AND CAPITAL RESOURCES" section for a discussion of items impacting cash flows.

Our debt to capital ratio (total capital defined as debt plus equity) at September 30, 2022, was 46.4 percent, compared to 31.5 percent at December 31, 2021. The increase was primarily due to higher debt balances since December 31, 2021, resulting from funding the acquisition of Meritor, Inc. (Meritor). At September 30, 2022, we had $3.0 billion in cash and marketable securities on hand and access to our $4.0 billion credit facilities, if necessary, to meet acquisition, working capital, investment and funding needs.

In the first nine months of 2022, we purchased $370 million, or 1.9 million shares, of our common stock.

On September 30, 2022, certain of our subsidiaries entered into a $1.0 billion credit agreement, consisting of a $400 million revolving credit facility and a $600 million term loan facility, in anticipation of the separation of our filtration business. See NOTE 11, "DEBT," to our Condensed Consolidated Financial Statements for additional information.

On August 17, 2022, we entered into an amended and restated 364-day credit agreement and an incremental 364-day credit agreement, which allow us to borrow up to $1.5 billion and $500 million, respectively, of unsecured funds at any time prior to August 16, 2023.

In July 2022, the Board authorized an increase to our quarterly dividend of approximately 8 percent from $1.45 per share to $1.57 per share.

In the first nine months of 2022, the investment loss on our U.S. pension trust was 5.1 percent while our U.K. pension trust loss was 21.7 percent. 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. We expect our 2022 annual net periodic pension cost to approximate $20 million.

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

RESULTS OF OPERATIONS



	Three months ended				Favorable/				Nine months ended				Favorable/
	September 30, 2022		October 3, 2021		(Unfavorable)				September 30, 2022		October 3, 2021		(Unfavorable)
In millions, except per share amounts			Amount		Percent				Amount		Percent
NET SALES	$	7,333	$	5,968	$	1,365	23	%	$	20,304	$	18,171	$	2,133	12	%
Cost of sales	5,691		4,554		(1,137)		(25)	%	15,404		13,793		(1,611)		(12)	%
GROSS MARGIN	1,642		1,414		228		16	%	4,900		4,378		522		12	%
OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses	708		571		(137)		(24)	%	1,945		1,745		(200)		(11)	%
Research, development and engineering expenses	348		266		(82)		(31)	%	945		802		(143)		(18)	%
Equity, royalty and interest income from investees	70		94		(24)		(26)	%	261		397		(136)		(34)	%

Other operating expense, net	30		5		(25)		NM		144		17		(127)		NM
OPERATING INCOME	626		666		(40)		(6)	%	2,127		2,211		(84)		(4)	%

Interest expense	61		28		(33)		NM		112		85		(27)		(32)	%
Other income, net	43		37		6		16	%	26		111		(85)		(77)	%
INCOME BEFORE INCOME TAXES	608		675		(67)		(10)	%	2,041		2,237		(196)		(9)	%
Income tax expense	199		134		(65)		(49)	%	502		473		(29)		(6)	%
CONSOLIDATED NET INCOME	409		541		(132)		(24)	%	1,539		1,764		(225)		(13)	%
Less: Net income attributable to noncontrolling interests	9		7		(2)		(29)	%	19		27		8		30	%
NET INCOME ATTRIBUTABLE TO CUMMINS INC.	$	400	$	534	$	(134)	(25)	%	$	1,520	$	1,737	$	(217)	(12)	%
Diluted Earnings Per Common Share Attributable to Cummins Inc.	$	2.82	$	3.69	$	(0.87)	(24)	%	$	10.68	$	11.86	$	(1.18)	(10)	%

"NM" - not meaningful information


	Three months ended				Favorable/ (Unfavorable)		Nine months ended					Favorable/ (Unfavorable)
	September 30, 2022		October 3, 2021			September 30, 2022			October 3, 2021
Percent of sales			Percentage Points				Percentage Points
Gross margin	22.4	%	23.7	%	(1.3)		24.1	%		24.1	%	—
Selling, general and administrative expenses	9.7	%	9.6	%	(0.1)		9.6	%		9.6	%	—
Research, development and engineering expenses	4.7	%	4.5	%	(0.2)		4.7	%		4.4	%	(0.3)

Meritor Acquisition

On August 3, 2022, we completed the acquisition of Meritor. Our results of operations include all activity of Meritor since the acquisition date.

Net Sales

Net sales for the three months ended September 30, 2022, increased by $1,365 million versus the comparable period in 2021. The primary drivers were as follows:

Components segment sales increased 51 percent largely due to axles and brakes sales since the completion of the Meritor acquisition.
Distribution segment sales increased 14 percent principally due to higher demand across most product lines in North America.
Engine segment sales increased 8 percent due to favorable pricing and stronger on-highway demand (including higher aftermarket sales) in North America.
Power Systems segment sales increased 16 percent primarily due to favorable pricing and higher demand in power generation markets and stronger demand in industrial markets with higher aftermarket sales and increased oil and gas demand in North America.

These increases were partially offset by unfavorable foreign currency fluctuations of 3 percent of total sales, primarily in the Euro, British pound, Chinese renminbi and Indian rupee.

Net sales for the nine months ended September 30, 2022, increased $2,133 million versus the comparable period in 2021. The primary drivers were as follows:

Distribution segment sales increased 16 percent principally due to higher demand across most product lines in North America.
Engine segment sales increased 10 percent due to favorable pricing and stronger on-highway demand (including higher aftermarket sales) in North America.
Components segment sales increased 12 percent largely due to axles and brakes sales since the completion of the Meritor acquisition.
Power Systems segment sales increased 12 percent primarily due to stronger demand in industrial markets with higher aftermarket sales and increased oil and gas demand in North America and China and favorable pricing and higher demand in power generation markets in Latin America, India and China.

These increases were partially offset by unfavorable foreign currency fluctuations of 2 percent of total sales, primarily in the Euro, British pound and Indian rupee.

Sales to international markets (excluding the U.S. and Canada), based on location of customers, for the three and nine months ended September 30, 2022, were 40 percent and 40 percent of total net sales compared with 43 percent and 44 percent of total net sales for the comparable periods in 2021. A more detailed discussion of sales by segment is presented in the “OPERATING SEGMENT RESULTS” section.

Cost of Sales

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

Gross Margin

Gross margin increased $228 million for the three months ended September 30, 2022 and decreased 1.3 points as a percentage of net sales versus the comparable period in 2021. The increase in gross margin was primarily due to favorable pricing, higher volumes and lower variable compensation expenses, partially offset by higher material costs, increased freight costs and one-time employee recognition expenses. The 1.3 percentage point decrease in gross margin as a percentage of net sales was principally due to the addition of Meritor activity since the date of acquisition which had a lower gross margin percentage than our legacy business.

Gross margin increased $522 million for the nine months ended September 30, 2022 and remained flat at 24.1 points as a percentage of sales versus the comparable period in 2021. The increase in gross margin was primarily due to favorable pricing, increased volumes and lower variable compensation expenses, partially offset by higher material costs, increased freight costs due to supply chain constraints and one-time employee recognition expenses.

The provision for base warranties issued as a percent of sales for the three and nine months ended September 30, 2022, was 1.7 percent and 1.9 percent, respectively, compared to 2.2 percent and 2.4 percent for the comparable periods in 2021.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $137 million for the three months ended September 30, 2022, versus the comparable period in 2021, primarily due to Meritor acquisition and integration costs, higher consulting expenses driven by acquisitions and the work towards separation of the filtration business, increased travel expenses and one-time employee recognition expenses, partially offset by lower variable compensation expenses. Overall, selling, general and administrative expenses as a percentage of net sales increased to 9.7 percent in the three months ended September 30, 2022, from 9.6 percent in the comparable period in 2021.

Selling, general and administrative expenses increased $200 million for the nine months ended September 30, 2022, versus the comparable period in 2021, primarily due to higher consulting expenses driven by acquisitions, integration and the work towards the separation of the filtration business, increased travel expenses and one-time employee recognition expenses, partially offset by lower variable compensation expenses. Overall, selling, general and administrative expenses, as a percentage of sales, remained flat at 9.6 percent versus the comparable period in 2021.

Research, Development and Engineering Expenses

Research, development and engineering expenses increased $82 million for the three months ended September 30, 2022, versus the comparable period in 2021, primarily due to increased compensation costs including one-time employee recognition expenses, Meritor expenses since the date of acquisition, higher spending on prototypes and testing, and increased consulting expenses. Overall, research, development and engineering expenses as a percentage of net sales increased to 4.7 percent in the three months ended September 30, 2022, from 4.5 percent in the comparable period in 2021.

Research, development and engineering expenses increased $143 million for the nine months ended September 30, 2022, versus the comparable period in 2021, primarily due to higher compensation costs including one-time employee recognition expenses, increased consulting expenses, Meritor expenses since the date of acquisition and higher spending on prototypes, testing and supplies. Overall, research, development and engineering expenses as a percentage of sales increased to 4.7 percent in the nine months ended September 30, 2022, from 4.4 percent in the comparable period in 2021.

Research activities continue to focus on development of new products to meet future emission standards around the world, improvements in fuel economy performance of diesel and natural gas powered engines and related components as well as development activities around battery electric, fuel cell electric and hydrogen engine solutions.

Equity, Royalty and Interest Income from Investees

Equity, royalty and interest income from investees decreased $24 million for the three months ended September 30, 2022, versus the comparable period in 2021, primarily due to decreased earnings at Beijing Foton Cummins Engine Co., Ltd. and the February 7, 2022, purchase of Westport Fuel System Inc.'s stake in Cummins Westport Joint Venture. See NOTE 16, "ACQUISITIONS," to our Condensed Consolidated Financial Statements for additional information.

Equity, royalty and interest income from investees decreased $136 million for the nine months ended September 30, 2022, versus the comparable period in 2021, mainly due to decreased earnings at Beijing Foton Cummins Engine Co., Ltd., the $28 million impairment of our Russian joint venture with KAMAZ, lower earnings at Dongfeng Cummins Engine Co., Ltd. and the February 7, 2022 purchase of Westport Fuel System Inc.'s stake in Cummins Westport Joint Venture. See NOTE 3, "RUSSIAN OPERATIONS," and NOTE 16, "ACQUISITIONS," to our Condensed Consolidated Financial Statements for additional information.

Other Operating Expense, Net

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


	Three months ended					Nine months ended
In millions	September 30, 2022			October 3, 2021		September 30, 2022			October 3, 2021
Amortization of intangible assets	$	(25)		$	(6)	$	(39)		$	(17)
Russian suspension costs	(3)		(1)	—		(64)		(1)	—
Asset impairments and other charges	—			—		(36)			—
Loss on write-off of assets	—			(3)		(8)			(7)
Gain on sale of assets, net	—			2		1			1
Royalty income, net	1			2		6			7
Other, net	(3)			—		(4)			(1)
Total other operating expense, net	$	(30)		$	(5)	$	(144)		$	(17)



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

Interest Expense

Interest expense increased $33 million and $27 million for the three and nine months ended September 30, 2022, versus the comparable periods in 2021. The overall increase in debt in the third quarter was primarily related to the Meritor acquisition. The three and nine month increases were primarily due to the overall increase in floating interest rates, new term loan borrowings and higher short-term borrowings, including commercial paper.

Other Income, Net

Other (expense) income, net was as follows:


	Three months ended				Nine months ended
In millions	September 30, 2022		October 3, 2021			September 30, 2022		October 3, 2021
Non-service pension and OPEB credit	$	37	$	23		$	102	$	72
Foreign currency gain, net	20		7			7		5
Interest income	14		7			29		18
(Loss) gain on marketable securities, net	(3)		2			(12)		5
(Loss) gain on corporate owned life insurance	(29)		1			(114)		(11)




Other, net	4		(3)			14		22
Total other income, net	$	43	$	37		$	26	$	111

Income Tax Expense

Our effective tax rate for 2022 is expected to approximate 22.0 percent (increased 0.5 percent from prior quarter), excluding any discrete items that may arise.

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.).

On August 16, 2022, the U.S. federal government enacted the Inflation Reduction Act of 2022 into law effective beginning in 2023. The bill includes numerous tax provisions, including a 15 percent corporate minimum tax as well as a one percent excise tax on share repurchases. We are evaluating the potential impacts of the Act on our financial results but do not currently expect the legislation will have a material effect on our results of operations or liquidity.

Noncontrolling Interests

Noncontrolling interests eliminate the income or loss attributable to non-Cummins ownership interests in our consolidated entities. Noncontrolling interests in income of consolidated subsidiaries for the three and nine months ended September 30, 2022, increased $2 million and decreased $8 million, respectively, versus the comparable periods in 2021. The increase for the three months ended September 30, 2022, was primarily due to higher earnings at Eaton Cummins Joint Venture. The decrease for the nine months ended September 30, 2022, was principally due to lower earnings at Hydrogenics Corporation.

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

Net income and diluted earnings per common share attributable to Cummins Inc. for the three months ended September 30, 2022, decreased $134 million and $0.87 per diluted share versus the comparable period in 2021, primarily due to unfavorable discrete tax items, Meritor acquisition and integration costs, one-time employee recognition expenses, higher interest expense related to new borrowings, losses in corporate owned life insurance, lower equity, royalty and interest income from investees (principally in China) and a higher effective tax rate, partially offset by higher net sales and lower variable compensation.

Net income and diluted earnings per common share attributable to Cummins Inc. for the nine months ended September 30, 2022, decreased $217 million and $1.18 per diluted share versus the comparable period in 2021, primarily due to lower equity, royalty and interest income from investees (primarily in China), losses in corporate owned life insurance, costs associated with the suspension of our Russian operations, costs associated with the planned separation of our filtration business, Meritor acquisition and integration costs, one-time employee recognition expenses, unfavorable discrete tax items, higher consulting expenses and increased interest expense related to new borrowings, partially offset by higher net sales and increased gross margin. See NOTE 3, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information. Diluted earnings per common share for the nine months ended September 30, 2022, benefited $0.10 from fewer weighted-average shares outstanding due to the stock repurchase program.

Comprehensive Income - Foreign Currency Translation Adjustment

The foreign currency translation adjustment was a net loss of $379 million and $620 million, respectively, for the three and nine months ended September 30, 2022, compared to flat and net loss of $34 million, respectively, for the three and nine months ended October 3, 2021, driven by the following:


	Three months ended
	September 30, 2022			October 3, 2021
In millions	Translation adjustment		Primary currency driver vs. U.S. dollar	Translation adjustment		Primary currency driver vs. U.S. dollar
Wholly-owned subsidiaries	$	(306)	Chinese renminbi, British pound, Indian rupee	$	(8)	Brazilian real, partially offset by Indian rupee, Chinese renminbi
Equity method investments	(58)		Chinese renminbi	6		Chinese renminbi, Indian rupee
Consolidated subsidiaries with a noncontrolling interest	(15)		Indian rupee	2		Indian rupee
Total	$	(379)		$	—


	Nine months ended
	September 30, 2022			October 3, 2021
In millions	Translation adjustment		Primary currency driver vs. U.S. dollar	Translation adjustment		Primary currency driver vs. U.S. dollar
Wholly-owned subsidiaries	$	(465)	Chinese renminbi, British pound, Indian rupee	$	(36)	British pound, Brazilian real, Indian rupee, Euro, partially offset by Chinese renminbi
Equity method investments	(117)		Chinese renminbi	7		Chinese renminbi, partially offset by Indian rupee
Consolidated subsidiaries with a noncontrolling interest	(38)		Indian rupee	(5)		Indian rupee
Total	$	(620)		$	(34)

OPERATING SEGMENT RESULTS

Our reportable operating segments consist of the Engine, Distribution, Components, Power Systems and New Power segments. This reporting structure is organized according to the products and markets each segment serves. We use segment EBITDA as a primary basis for the Chief Operating Decision Maker to evaluate the performance of each of our reportable operating segments. We believe EBITDA is a useful measure of our operating performance as it assists investors and debt holders in comparing our performance on a consistent basis without regard to financing methods, capital structure, income taxes or depreciation and amortization methods, which can vary significantly depending upon many factors. Segment amounts exclude certain expenses not specifically identifiable to segments. See NOTE 17, "OPERATING SEGMENTS," to the Condensed Consolidated Financial Statements for additional information and a reconciliation of our segment information to the corresponding amounts in our Condensed Consolidated Statements of Net Income.

On August 3, 2022, we completed the acquisition of Meritor. 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.

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

Engine Segment Results

Financial data for the Engine segment was as follows:


	Three months ended						Favorable/				Nine months ended							Favorable/
	September 30,			October 3,			(Unfavorable)				September 30,				October 3,			(Unfavorable)
In millions	2022			2021			Amount		Percent		2022				2021			Amount		Percent
External sales	$	2,063		$	1,961		$	102	5	%	$	6,204			$	5,776		$	428	7	%
Intersegment sales	716			617			99		16	%	2,103				1,752			351		20	%
Total sales	2,779			2,578			201		8	%	8,307				7,528			779		10	%

Research, development and engineering expenses	140			97			(43)		(44)	%	365				288			(77)		(27)	%
Equity, royalty and interest income from investees	28			61			(33)		(54)	%	131			(1)	278			(147)		(53)	%

Interest income	3			3			—		—	%	8				7			1		14	%

Russian suspension costs(2)	—			—			—		—	%	33			(3)	—			(33)		NM

Segment EBITDA	363			391			(28)		(7)	%	1,177				1,147			30		3	%

							Percentage Points											Percentage Points
Segment EBITDA as a percentage of total sales	13.1		%	15.2		%			(2.1)		14.2		%		15.2		%			(1.0)


"NM" - not meaningful information

(1) Includes a $28 million impairment of our joint venture with KAMAZ and $3 million of royalty charges as part of our costs associated with the suspension of our Russian operations. In addition, on February 7, 2022, we purchased Westport Fuel System Inc.'s stake in Cummins Westport Joint Venture. See NOTE 3, "RUSSIAN OPERATIONS," and NOTE 16, "ACQUISITIONS," 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 from investees line above.

Sales for our Engine segment by market were as follows:


	Three months ended						Favorable/				Nine months ended						Favorable/
	September 30,			October 3,			(Unfavorable)				September 30,			October 3,			(Unfavorable)
In millions	2022			2021			Amount		Percent		2022			2021			Amount		Percent
Heavy-duty truck	$	972		$	861		$	111	13	%	$	2,881		$	2,527		$	354	14	%
Medium-duty truck and bus	868			713			155		22	%	2,591			2,075			516		25	%
Light-duty automotive	466			515			(49)		(10)	%	1,420			1,480			(60)		(4)	%
Total on-highway	2,306			2,089			217		10	%	6,892			6,082			810		13	%
Off-highway	473			489			(16)		(3)	%	1,415			1,446			(31)		(2)	%
Total sales	$	2,779		$	2,578		$	201	8	%	$	8,307		$	7,528		$	779	10	%

							Percentage Points										Percentage Points
On-highway sales as percentage of total sales	83		%	81		%			2		83		%	81		%			2

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


	Three months ended		Favorable/			Nine months ended		Favorable/
	September 30,	October 3,	(Unfavorable)			September 30,	October 3,	(Unfavorable)
	2022	2021	Amount	Percent		2022	2021	Amount	Percent
Heavy-duty	30,200	29,200	1,000	3	%	89,700	89,300	400	—	%
Medium-duty	69,800	65,200	4,600	7	%	211,200	205,800	5,400	3	%
Light-duty	58,300	73,900	(15,600)	(21)	%	185,200	210,500	(25,300)	(12)	%
Total unit shipments	158,300	168,300	(10,000)	(6)	%	486,100	505,600	(19,500)	(4)	%

Sales

Engine segment sales for the three months ended September 30, 2022, increased $201 million versus the comparable period in 2021. The following were the primary drivers by market:

Medium-duty truck and bus sales increased $155 million mainly due to favorable pricing and higher demand (including higher aftermarket sales), especially in North America.
Heavy-duty truck sales increased $111 million principally due to favorable pricing and stronger demand (including higher aftermarket sales) in North America with higher shipments of 16 percent.

These increases were partially offset by decreased light-duty automotive sales of $49 million primarily due to our indefinite suspension of operations in Russia and lower sales to Stellantis.

Engine segment sales for the nine months ended September 30, 2022, increased $779 million versus the comparable period in 2021. The following were the primary drivers by market:

Medium-duty truck and bus sales increased $516 million mainly due to favorable pricing and higher demand (including higher aftermarket sales), especially in North America.
Heavy-duty truck sales increased $354 million principally due to favorable pricing and stronger demand (including higher aftermarket sales), especially in North America with higher shipments of 9 percent.

Segment EBITDA

Engine segment EBITDA for the three months ended September 30, 2022, decreased $28 million versus the comparable period in 2021, primarily due to higher material costs, increased research, development and engineering expenses, increased product coverage, lower equity, royalty and interest income from investees (principally Beijing Foton Cummins Engine Co., Ltd. and the February 7, 2022, purchase of Westport Fuel System Inc.'s stake in Cummins Westport Joint Venture) and manufacturing inefficiencies, partially offset by favorable pricing. See NOTE 16, "ACQUISITIONS," to our Condensed Consolidated Financial Statements for additional information.

Engine segment EBITDA for the nine months ended September 30, 2022, increased $30 million versus the comparable period in 2021, mainly due to favorable pricing, partially offset by higher material costs, lower equity, royalty and interest income from investees (principally decreased earnings at Beijing Foton Cummins Engine Co., Ltd., the $28 million impairment of our Russian joint venture with KAMAZ, lower earnings at Dongfeng Cummins Engine Co., Ltd. and the February 7, 2022, purchase of Westport Fuel System Inc.'s stake in Cummins Westport Joint Venture) and increased research, development and engineering expenses. See NOTE 3, "RUSSIAN OPERATIONS," and NOTE 16, "ACQUISITIONS," to our Condensed Consolidated Financial Statements for additional information.

Distribution Segment Results

Financial data for the Distribution segment was as follows:


	Three months ended						Favorable/				Nine months ended						Favorable/
	September 30,			October 3,			(Unfavorable)				September 30,			October 3,			(Unfavorable)
In millions	2022			2021			Amount		Percent		2022			2021			Amount		Percent
External sales	$	2,232		$	1,952		$	280	14	%	$	6,590		$	5,692		$	898	16	%
Intersegment sales	7			7			—		—	%	19			22			(3)		(14)	%
Total sales	2,239			1,959			280		14	%	6,609			5,714			895		16	%

Research, development and engineering expenses	13			10			(3)		(30)	%	39			35			(4)		(11)	%
Equity, royalty and interest income from investees	20			15			5		33	%	57			47			10		21	%
Interest income	4			2			2		100	%	9			5			4		80	%

Russian suspension costs(1)	—			—			—		—	%	55			—			(55)		NM
Segment EBITDA	225			192			33		17	%	632			553			79		14	%

							Percentage Points										Percentage Points
Segment EBITDA as a percentage of total sales	10.0		%	9.8		%			0.2		9.6		%	9.7		%			(0.1)

"NM" - not meaningful information

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

Sales for our Distribution segment by region were as follows:


	Three months ended				Favorable/				Nine months ended				Favorable/
	September 30,		October 3,		(Unfavorable)				September 30,		October 3,		(Unfavorable)
In millions	2022		2021		Amount		Percent		2022		2021		Amount		Percent
North America	$	1,512	$	1,236	$	276	22	%	$	4,373	$	3,637	$	736	20	%
Asia Pacific	260		238		22		9	%	748		679		69		10	%
Europe	175		144		31		22	%	503		468		35		7	%
China	92		81		11		14	%	274		245		29		12	%
Africa and Middle East	73		74		(1)		(1)	%	174		197		(23)		(12)	%
Latin America	58		48		10		21	%	155		136		19		14	%
India	56		51		5		10	%	158		142		16		11	%
Russia(1)	13		87		(74)		(85)	%	224		210		14		7	%
Total sales	$	2,239	$	1,959	$	280	14	%	$	6,609	$	5,714	$	895	16	%


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

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


	Three months ended				Favorable/				Nine months ended				Favorable/
	September 30,		October 3,		(Unfavorable)				September 30,		October 3,		(Unfavorable)
In millions	2022		2021		Amount		Percent		2022		2021		Amount		Percent
Parts	$	945	$	800	$	145	18	%	$	2,859	$	2,322	$	537	23	%
Engines	449		377		72		19	%	1,319		1,062		257		24	%
Power generation	431		438		(7)		(2)	%	1,273		1,310		(37)		(3)	%
Service	414		344		70		20	%	1,158		1,020		138		14	%
Total sales	$	2,239	$	1,959	$	280	14	%	$	6,609	$	5,714	$	895	16	%

Sales

Distribution segment sales for the three months ended September 30, 2022, increased $280 million versus the comparable period in 2021. The following were the primary drivers by region:

North American sales increased $276 million, representing 99 percent of the total change in Distribution segment sales, mainly due to higher demand for parts and vocational engines.

The increase was partially offset by the following:

Russian sales decreased $74 million as a result of our indefinite suspension of operations in Russia.
Unfavorable foreign currency fluctuations, primarily in the Euro, Australian dollar, South African rand, Indian rupee and Japanese yen.

Distribution segment sales for the nine months ended September 30, 2022, increased $895 million versus the comparable period in 2021. The following were the primary drivers by region:

North American sales increased $736 million, representing 82 percent of the total change in Distribution segment sales, largely due to higher demand for parts and vocational engines.

The increase was partially offset by unfavorable foreign currency fluctuations, mainly in the Euro, Australian dollar, Japanese yen and Indian rupee.

Segment EBITDA

Distribution segment EBITDA for the three months ended September 30, 2022, increased $33 million versus the comparable period in 2021, primarily due to higher volumes, partially offset by higher compensation expenses, unfavorable foreign currency fluctuations (principally in the South African rand, Japanese yen, Euro, Australian dollar and Indian rupee) and an inventory write-off.

Distribution segment EBITDA for the nine months ended September 30, 2022, increased $79 million versus the comparable period in 2021, mainly due to higher volumes, partially offset by unfavorable foreign currency fluctuations (principally in emerging market currencies, South African rand, Australian dollar and Japanese yen), costs associated with the suspension of our Russian operations, increased freight costs due to supply chain constraints, an inventory write-off and higher compensation expenses. See NOTE 3, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information.

Components Segment Results

Financial data for the Components segment was as follows:


	Three months ended							Favorable/				Nine months ended							Favorable/
	September 30,				October 3,			(Unfavorable)				September 30,				October 3,			(Unfavorable)
In millions	2022				2021			Amount		Percent		2022				2021			Amount		Percent
External sales	$	2,220			$	1,347		$	873	65	%	$	5,214			$	4,627		$	587	13	%
Intersegment sales	483				446			37		8	%	1,427				1,312			115		9	%
Total sales	2,703				1,793			910		51	%	6,641				5,939			702		12	%

Research, development and engineering expenses	87				78			(9)		(12)	%	236				232			(4)		(2)	%
Equity, royalty and interest income from investees	17				10			7		70	%	54				41			13		32	%
Interest income	4				1			3		NM		7				3			4		NM

Russian suspension costs(1)	1				—			(1)		NM		5				—			(5)		NM
Segment EBITDA	297			(2)	253			44		17	%	969			(3)	975			(6)		(1)	%

								Percentage Points											Percentage Points
Segment EBITDA as a percentage of total sales	11.0		%		14.1		%			(3.1)		14.6		%		16.4		%			(1.8)

"NM" - not meaningful information

(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) 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.

Sales for our Components segment by business were as follows:


	Three months ended					Favorable/				Nine months ended					Favorable/
	September 30,			October 3,		(Unfavorable)				September 30,			October 3,		(Unfavorable)
In millions	2022			2021		Amount		Percent		2022			2021		Amount		Percent
Emission solutions	$	853		$	793	$	60	8	%	$	2,626		$	2,710	$	(84)	(3)	%
Axles and brakes	732			—		732		NM		732			—		732		NM
Filtration	399			354		45		13	%	1,172			1,100		72		7	%
Turbo technologies	367		(1)	325		42		13	%	1,068		(1)	1,043		25		2	%
Electronics and fuel systems	193			210		(17)		(8)	%	607			714		(107)		(15)	%
Automated transmissions	159			111		48		43	%	436			372		64		17	%
Total sales	$	2,703		$	1,793	$	910	51	%	$	6,641		$	5,939	$	702	12	%

"NM" - not meaningful information
(1) The three and nine months ended September 30, 2022, included sales of $43 million and $80 million, respectively, related to the newly acquired Jacobs Vehicle Systems business. See NOTE 16, "ACQUISITIONS," to our Condensed Consolidated Financial Statements for additional information.

Sales

Components segment sales for the three months ended September 30, 2022, increased $910 million versus the comparable period in 2021. The following were the primary drivers by business:

Axles and brakes sales added $732 million in sales since the completion of the Meritor acquisition.
Emission solutions sales increased $60 million primarily due to stronger demand in North America.
Automated transmissions sales increased $48 million principally due to higher demand in North America.
Filtration sales increased $45 million mainly due to stronger demand in North America and Latin America.
Turbo technologies sales increased $42 million largely due to higher demand in North America, partially offset by weaker demand in China.

These increases were partially offset by unfavorable foreign currency fluctuations primarily in the Euro, Indian rupee and Chinese renminbi.

Components segment sales for the nine months ended September 30, 2022, increased $702 million versus the comparable period in 2021. The following were the primary drivers by business:

Axles and brakes sales added $732 million in sales since the completion of the Meritor acquisition.
Filtration sales increased $72 million mainly due to stronger demand in North America and Latin America, partially offset by lower demand in China.

These increases were partially offset by the following:

Electronics and fuel systems sales decreased $107 million principally due to weaker demand in China, partially offset by higher demand in North America.
Unfavorable foreign currency fluctuations, primarily in the Euro, Indian rupee and British pound.

Segment EBITDA

Components segment EBITDA for the three months ended September 30, 2022, increased $44 million versus the comparable period in 2021, mainly due to favorable pricing and higher volumes, partially offset by Meritor acquisition and integration costs.

Components segment EBITDA for the nine months ended September 30, 2022, decreased $6 million versus the comparable period in 2021, primarily due to higher material costs and Meritor acquisition and integration costs, partially offset by favorable pricing.

Power Systems Segment Results

Financial data for the Power Systems segment was as follows:


	Three months ended						Favorable/				Nine months ended						Favorable/
	September 30,			October 3,			(Unfavorable)				September 30,			October 3,			(Unfavorable)
In millions	2022			2021			Amount		Percent		2022			2021			Amount		Percent
External sales	$	773		$	688		$	85	12	%	$	2,190		$	1,999		$	191	10	%
Intersegment sales	576			476			100		21	%	1,522			1,330			192		14	%
Total sales	1,349			1,164			185		16	%	3,712			3,329			383		12	%

Research, development and engineering expenses	62			55			(7)		(13)	%	184			172			(12)		(7)	%
Equity, royalty and interest income from investees	10			11			(1)		(9)	%	31			32			(1)		(3)	%
Interest income	3			1			2		NM		5			3			2		67	%

Russian suspension costs(1)	—			—			—		—	%	19			—			(19)		NM
Segment EBITDA	193			134			59		44	%	411			399			12		3	%

							Percentage Points										Percentage Points
Segment EBITDA as a percentage of total sales	14.3		%	11.5		%			2.8		11.1		%	12.0		%			(0.9)

"NM" - not meaningful information



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

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


	Three months ended				Favorable/				Nine months ended				Favorable/
	September 30,		October 3,		(Unfavorable)				September 30,		October 3,		(Unfavorable)
In millions	2022		2021		Amount		Percent		2022		2021		Amount		Percent
Power generation	$	739	$	664	$	75	11	%	$	2,060	$	1,930	$	130	7	%
Industrial	483		412		71		17	%	1,304		1,135		169		15	%
Generator technologies	127		88		39		44	%	348		264		84		32	%
Total sales	$	1,349	$	1,164	$	185	16	%	$	3,712	$	3,329	$	383	12	%

Sales

Power Systems segment sales for the three months ended September 30, 2022, increased $185 million versus the comparable period in 2021. The following were the primary drivers by product line:

Power generation sales increased $75 million primarily due to higher demand in North America, Latin America, the Middle East and Asia Pacific and favorable pricing, partially offset by weaker demand in China.
Industrial sales increased $71 million principally due to stronger aftermarket demand and improved oil and gas sales in North America.
Generator technologies sales increased $39 million mainly due to higher demand in Europe, China, India and North America.

These increases were partially offset by unfavorable foreign currency fluctuations, primarily in the Euro, British pound and Indian rupee.

Power Systems segment sales for the nine months ended September 30, 2022, increased $383 million versus the comparable period in 2021. The following were the primary drivers by product line:

Industrial sales increased $169 million due to stronger aftermarket demand and improved oil and gas sales in North America and China.
Power generation sales increased $130 million due to improved pricing and higher demand in Latin America, India and the Middle East.
Generator technologies sales increased $84 million due to higher demand in Europe and India.

These increases were partially offset by unfavorable foreign currency fluctuations, primarily in the Euro, British pound and Indian rupee.

Segment EBITDA

Power Systems segment EBITDA for the three months ended September 30, 2022, increased $59 million versus the comparable period in 2021, mainly due to favorable pricing, partially offset by higher material costs.

Power Systems segment EBITDA for the nine months ended September 30, 2022, increased $12 million versus the comparable period in 2021, primarily due to favorable pricing, partially offset by higher material costs, increased freight costs due to supply chain constraints and costs associated with the suspension of our Russian operations.

New Power Segment Results

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.

Financial data for the New Power segment was as follows:



	Three months ended				Favorable/				Nine months ended				Favorable/
	September 30,		October 3,		(Unfavorable)				September 30,		October 3,		(Unfavorable)
In millions	2022		2021		Amount		Percent		2022		2021		Amount		Percent
External sales	$	45	$	20	$	25	NM		$	106	$	77	$	29	38	%
Intersegment sales	5		3		2		67	%	17		5		12		NM
Total sales	50		23		27		NM		123		82		41		50	%

Research, development and engineering expenses	46		26		(20)		(77)	%	121		75		(46)		(61)	%
Equity, royalty and interest loss from investees	(5)		(3)		(2)		(67)	%	(12)		(1)		(11)		NM

Segment EBITDA	(96)		(58)		(38)		(66)	%	(243)		(169)		(74)		(44)	%




"NM" - not meaningful information

OUTLOOK

Supply Chain Disruptions

Business Outlook

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

Positive Trends

We expect demand for pick-up, medium-duty and heavy-duty trucks in North America to remain strong.
We believe market demand for trucks in India will continue to be strong.
We anticipate demand in our aftermarket business will continue to be robust, driven primarily by increased truck utilization in North America and improved demand in our Power Systems business.

Challenges

Supply constraints driven by strong demand in multiple end markets and regions may lead to increased costs, including higher freight and conversion costs.
Continued increases in material costs, as well as other inflationary pressures, could negatively impact earnings.
Our industry's sales continue to be unfavorably impacted by supply chain constraints leading to shortages across multiple components categories and limiting our collective ability to meet end-user demand. Our customers are also experiencing other supply chain issues limiting full production capabilities.
Resurgence of COVID-19 lockdowns in several cities in China negatively impacted the economy and our end markets. Future lockdowns will contribute to further disruptions in the global supply chain, reducing both our revenues and profitability.
We expect market demand in truck and construction markets in China to remain at low levels through the remainder of 2022, impacting our revenues, joint venture earnings and net income.
The indefinite suspension of our operations in Russia is expected to impact our revenue and profitability. The 2021 sales through our wholly-owned distributor in Russia and direct sales into Russia were 2.7 percent of net sales.
We expect to continue to incur incremental expenses as a result of the completion of the Meritor, Inc. acquisition and its integration into our business.
The completion of the Meritor, Inc. acquisition impacted our liquidity and resulted in incremental interest expense for debt utilized in funding the transaction, which will negatively impact future net income.
We expect the planned separation of our filtration business, into a stand-alone company, will result in incremental expenses.

LIQUIDITY AND CAPITAL RESOURCES

Key Working Capital and Balance Sheet Data

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


Dollars in millions	September 30, 2022			December 31, 2021
Working capital (1)	$	3,868		$	5,225
Current ratio	1.37			1.74
Accounts and notes receivable, net	$	4,799		$	3,990
Days' sales in receivables	59			59
Inventories	$	5,543		$	4,355
Inventory turnover	4.0			4.6
Accounts payable (principally trade)	$	4,000		$	3,021
Days' payable outstanding	59			57
Total debt	$	8,115		$	4,159
Total debt as a percent of total capital	46.4		%	31.5		%

(1) Working capital includes cash and cash equivalents.

Cash Flows

Cash and cash equivalents were impacted as follows:


	Nine months ended
In millions	September 30, 2022		October 3, 2021		Change
Net cash provided by operating activities	$	1,145	$	1,524	$	(379)
Net cash used in investing activities	(3,496)		(278)		(3,218)
Net cash provided by (used in) financing activities	2,111		(2,079)		4,190
Effect of exchange rate changes on cash and cash equivalents	147		20		127
Net decrease in cash and cash equivalents	$	(93)	$	(813)	$	720

Net cash provided by operating activities decreased $379 million for the nine months ended September 30, 2022, versus the comparable period in 2021, primarily due to higher working capital requirements of $253 million and lower net income of $225 million, partially offset by $107 million of increases in other miscellaneous items. The higher working capital requirements resulted in a cash outflow of $719 million compared to a cash outflow of $466 million in the comparable period in 2021, mainly due to decreased accrued expenses as a result of lower variable compensation accruals in 2022, partially offset by a lower spend in inventories.

Net cash used in investing activities increased $3.2 billion for the nine months ended September 30, 2022, versus the comparable period in 2021, primarily due to the acquisitions of Meritor, Jacobs Vehicle Systems and Cummins Westport Joint Venture, net of cash acquired, of $3.0 billion.

Net cash provided by financing activities decreased $4.2 billion for the nine months ended September 30, 2022, versus the comparable period in 2021, primarily due to higher net borrowings of commercial paper of $2.2 billion, increased proceeds from borrowings of $2.0 billion (principally our $2.0 billion term loan) and lower repurchases of common stock of $0.9 billion, partially offset by higher payments on borrowings and finance lease obligations of $1.0 billion ($0.9 billion of which relates to debt assumed in the Meritor acquisition that was retired during the third quarter of 2022).

The effect of exchange rate changes on cash and cash equivalents for the nine months ended September 30, 2022, versus the comparable period in 2021, increased $127 million primarily due to favorable fluctuations in the British pound, partially offset by unfavorable fluctuations in the Chinese renminbi.

Sources of Liquidity

We generate significant ongoing cash flow. Cash provided by operations is our principal source of liquidity with $1,145 million generated in the nine months ended September 30, 2022. Our sources of liquidity include:


	September 30, 2022
In millions	Total		U.S.		International		Primary location of international balances
Cash and cash equivalents	$	2,499	$	866	$	1,633	China, Singapore, Belgium, Australia, Mexico, Canada

Marketable securities (1)	466		96		370		India
Total	$	2,965	$	962	$	2,003
Available credit capacity
Revolving credit facilities (2)	$	1,607
International and other uncommitted domestic credit facilities	$	230




(1) The majority of marketable securities could be liquidated into cash within a few days.
(2) The five-year credit facility for $2.0 billion, the 364-day credit facility for $1.5 billion and the $500 million incremental 364-day credit facility, maturing August 2026 and August 2023, respectively, are maintained primarily to provide backup liquidity for our commercial paper borrowings and general corporate purposes. At September 30, 2022, we had $2,393 million of commercial paper outstanding, which effectively reduced our available capacity under our revolving credit facilities to $1.6 billion.

Cash, Cash Equivalents and Marketable Securities

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

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

Debt Facilities and Other Sources of Liquidity

On July 13, 2022, we entered into a loan agreement under which we may obtain delayed-draw loans in an amount up to $2.0 billion in the aggregate prior to October 13, 2022. We drew down the entire $2.0 billion balance on August 2, 2022, to help fund the acquisition of Meritor. The interest rate is based on SOFR for the one-month interest period plus the relevant spread. The loan will mature on August 1, 2025. 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.

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.

In connection with the new credit agreements, on August 17, 2022, we entered into an amendment to our $2.0 billion five-year facility to replace LIBOR with SOFR as an interest rate benchmark and to make other conforming changes to interest rate determinations.

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. These revolving credit facilities are maintained primarily to provide backup liquidity for our commercial paper borrowings and general corporate purposes. We intend to maintain credit facilities at the current or higher aggregate amounts by renewing or replacing these facilities at or before expiration. There were no outstanding borrowings under these facilities at September 30, 2022.

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. The total combined borrowing capacity under the revolving credit facilities and commercial programs should not exceed $4.0 billion. At September 30, 2022, we had $2.4 billion of commercial paper outstanding, which effectively reduced our available capacity under our revolving credit facilities to $1.6 billion.

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

In July 2017, the U.K.'s Financial Conduct Authority, which regulates the London Interbank Offered Rate (LIBOR), announced it intends to phase out LIBOR by the end of 2021. The cessation date for submission and publication of rates for certain tenors of LIBOR has since been extended until mid-2023. Various central bank committees and working groups continue to discuss replacement of benchmark rates, the process for amending existing LIBOR-based contracts and the potential economic impacts of different alternatives. The Alternative Reference Rates Committee has identified the SOFR as its preferred alternative rate for U.S. dollar LIBOR. SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions. We have evaluated the potential impact of the replacement of the LIBOR benchmark interest rate including risk management, internal operational readiness and monitoring the Financial Accounting Standards Board standard-setting process to address financial reporting issues that might arise in connection with transition from LIBOR to a new benchmark rate. While we do not believe the change will materially impact us due to our operational and system readiness coupled with relevant contractual fallback language, we continue to evaluate all eventual transition risks. In anticipation of LIBOR's phase out, our most recent revolving credit agreements include a well-documented transition mechanism for selecting a benchmark replacement rate for LIBOR, subject to our agreement. Additionally, with respect to our $1.3 billion in LIBOR-based fixed to variable rate swaps maturing in 2025 and 2030, we reviewed and believe our adherence to the 2020 LIBOR fallback protocol will allow for a smooth transition to the designated replacement rate when that transition occurs.

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.

Supply Chain Financing

We currently have supply chain financing programs with financial intermediaries, which provide certain vendors the option to be paid by financial intermediaries earlier than the due date on the applicable invoice. When a vendor utilizes the program and receives an early payment from a financial intermediary, they take a discount on the invoice. We then pay the financial intermediary the face amount of the invoice on the regularly scheduled due date. The maximum amount that we may have outstanding under the program is $495 million. We do not reimburse vendors for any costs they incur for participation in the program and their participation is completely voluntary. As a result, all amounts owed to the financial intermediaries are presented as Accounts payable in our Condensed Consolidated Balance Sheets. Amounts due to the financial intermediaries reflected in accounts payable at September 30, 2022, were $227 million.

Accounts Receivable Factoring Arrangements

We assumed an accounts receivable factoring program from the acquisition of Meritor with a total amount utilized at September 30, 2022, of $235 million, of which $215 million was attributable to committed factoring facilities. The remaining amount of $20 million was related to factoring by certain of Meritor's European subsidiaries under uncommitted factoring facilities with financial institutions. The receivables under all of these programs are sold at face value and are excluded from the Condensed Consolidated Balance Sheets. Total facility size, utilized amounts, readily available amounts and expiration dates for each of these programs are shown in the table below.


	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.

The Swedish facility is backed by a 364-day liquidity commitment, which was renewed through June 22, 2023. Commitments under all of Meritor's factoring facilities are subject to standard terms and conditions for these types of arrangements (including, in the case of the U.K. and Italy commitments, a sole discretion clause whereby the bank retains the right to not purchase receivables, which has not been invoked since the inception of the respective programs).

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.

We intend to wind down existing Meritor factoring programs into 2023.

Uses of Cash

Meritor Acquisition

On August 3, 2022, we completed the acquisition of Meritor, Inc. (Meritor). The total purchase price, including debt that was retired on the closing date, 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. See NOTE 16, "ACQUISITIONS," to our Condensed Consolidated Financial Statements for additional information.

Dividends

We paid dividends of $633 million during the nine months ended September 30, 2022. In July 2022, the Board authorized an increase to our quarterly dividend of approximately 8 percent from $1.45 per share to $1.57 per share.

Stock Repurchases

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


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

March 31	1.6	$	199.27	$	311	$	2,281
June 30	0.1	194.00		36		2,245
September 30	0.2	197.72		23		2,222

Total	1.9	198.65		$	370

(1) The remaining $222 million authorized capacity under the 2019 plan was calculated based on the cost to purchase the shares, but excludes commission expenses in accordance with the authorized plan.

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

Capital Expenditures

Capital expenditures, including spending on internal use software, for the nine months ended September 30, 2022, were $497 million versus $398 million in the comparable period in 2021. We plan to spend an estimated $850 million to $900 million in 2022 on capital expenditures related to our legacy Cummins businesses and an additional $40 million to $50 million for Meritor, excluding internal use software, with over 60 percent of these expenditures expected to be invested in North America. In addition, we plan to spend an estimated $55 million to $65 million on internal use software in 2022.

Current Maturities of Short and Long-Term Debt

We had $2.4 billion of commercial paper outstanding at September 30, 2022, that matures in less than one year. The maturity schedule of our existing long-term debt does not require significant cash outflows until 2023 when our 3.65 percent senior notes and 2025 when our term loan and 0.75 percent senior notes are due. Required annual long-term debt principal payments range from $13 million to $2.5 billion over the next five years (including the remainder of 2022). See NOTE 11, "DEBT," to the Condensed Consolidated Financial Statements for additional information.

Pensions

Our global pension plans, including our unfunded and non-qualified plans, were 121 percent funded at December 31, 2021. Our U.S. defined benefit plan, which represented approximately 52 percent of the worldwide pension obligation, was 138 percent funded, and our U.K. defined benefit plan was 127 percent funded at December 31, 2021. As part of the Meritor acquisition, we recorded assets of $147 million and liabilities of $105 million on our Condensed Consolidated Balance Sheets related to Meritor's postretirement benefit plans. The funded status of our pension plans is dependent upon a variety of variables and assumptions including return on invested assets, market interest rates and levels of voluntary contributions to the plans. In the first nine months of 2022, the investment loss on our U.S. pension trust was 5.1 percent while our U.K. pension trust loss was 21.7 percent. 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.

Redeemable Noncontrolling Interests

A .19 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.

Credit Ratings

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



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

Moody’s Investors Service, Inc.	A2	P1	Stable

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

Management's Assessment of Liquidity

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

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

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

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

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

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

Fair Value of Intangible Assets

We make strategic acquisitions that may have a material impact on our consolidated results of operations or financial position. We allocate the purchase price of acquired businesses to the assets acquired and liabilities assumed in the transaction at their estimated fair values. The determination of the fair value of intangible assets, which represent a significant portion of the purchase price in many of our acquisitions can be complex and requires the use of significant judgment with regard to (i) the fair value and (ii) the period and the method by which the intangible asset will be amortized. We use information available to us to make fair value determinations and engage independent valuation specialists, when necessary, to assist in the fair value determination of significant acquired intangibles. We estimate the fair value of acquisition-related intangible assets principally based on projections of cash flows that will arise from identifiable intangible assets of acquired businesses, which includes estimates of discount rates, revenue growth rates, EBITDA, royalty rates, customer attrition rates and technology obsolesce rates. The projected cash flows are discounted to determine the present value of the assets at the dates of acquisition. Although we believe the projections, assumptions and estimates made were reasonable and appropriate, these estimates require significant judgment by management, are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Any adjustments subsequent to the measurement period are recorded to our consolidated statements of income. See NOTE 16, "ACQUISITIONS," to our Condensed Consolidated Financial Statements for additional information about our recent business combinations.

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