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;
changes in taxation;
global legal and ethical compliance costs and risks;
evolving environmental and climate change legislation and regulatory initiatives;
future bans or limitations on the use of diesel-powered products;

BUSINESS CONDITIONS / DISRUPTIONS

failure to successfully integrate and / or failure to fully realize all of the anticipated benefits of the acquisition of Meritor, Inc. (Meritor);
raw material, transportation and labor price fluctuations and supply shortages;
any adverse effects of the conflict between Russia and Ukraine and the global response (including government bans or restrictions on doing business in Russia);
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, 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;
increasing interest rates;
challenging markets for talent and ability to attract, develop and retain key personnel;
climate change, global warming, more stringent climate change regulations, accords, mitigation efforts, greenhouse gas regulations or other legislation designed to address climate change;
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;
failure to meet environmental, social and governance (ESG) expectations or standards, or achieve our ESG goals;
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 2022 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 2022 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
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

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, Daimler Trucks North America and Stellantis N.V. We serve our customers through a service network of approximately 460 wholly-owned, joint venture and independent distributor locations and more than 10,000 Cummins certified dealer locations in approximately 190 countries and territories.

As previously announced, beginning in the first quarter of 2023, we realigned certain businesses and regions within our reportable segments to be consistent with how our segment managers monitor the performance of our segments. We reorganized the businesses within our Components segment to carve out the electronics business into the newly formed software and electronics business and combined the turbo technologies and fuel systems businesses into the newly formed engine components business. Our Components segment now consists of the following businesses: axles and brakes, emission solutions, engine components, filtration, automated transmissions and software and electronics. As a result of the indefinite suspension of operations in Russia, we reorganized the regional management structure of our Distribution segment and moved all Commonwealth of Independent States (CIS) sales into the Europe and Africa and Middle East regions. The Russian portion of prior period CIS sales moved to the Europe region. In March 2023, we rebranded our New Power segment as "Accelera" to better represent our commitment to zero-emission technologies. In addition, we moved our NPROXX joint venture from the Accelera segment to the Engine segment, which adjusted both the equity, royalty and interest income from investees and segment EBITDA line items for the current and prior year. We started to report results for the changes within our operating segments effective January 1, 2023, and reflected these changes in the historical periods presented.

Our reportable operating segments consist of Components, Engine, Distribution, Power Systems and Accelera. This reporting structure is organized according to the products and markets each segment serves. The Components segment sells filtration products, aftertreatment systems, turbochargers, electronics, fuel systems, automated transmissions, axles, drivelines, brakes and suspension systems. The Engine segment produces engines (15 liters and smaller) and associated parts for sale to customers in on-highway and various off-highway markets. Our engines are used in trucks of all sizes, buses and recreational vehicles, as well as in various industrial applications, including construction, agriculture, power generation systems and other off-highway applications. The Distribution segment includes wholly-owned and partially-owned distributorships engaged in wholesaling engines, generator sets and service parts, as well as performing service and repair activities on our products and maintaining relationships with various OEMs throughout the world. The Power Systems segment is an integrated power provider, which designs, manufactures and sells engines (16 liters and larger) for industrial applications (including mining, oil and gas, marine and rail), standby and prime power generator sets, alternators and other power components. The Accelera segment designs, manufactures, sells and supports hydrogen production solutions as well as electrified power systems with innovative components and subsystems, including battery, fuel cell and electric powertrain technologies. The Accelera segment is currently in the early stages of commercializing these technologies with efforts primarily focused on the development of our electrolyzers for hydrogen production and electrified power systems and related

components and subsystems. We continue to serve all our markets as they adopt electrification and alternative power technologies, meeting the needs of our OEM partners and end customers.

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 fluctuations, political and economic uncertainty, 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, region, the economy of any single country or customer on our consolidated results.

Supply Chain Disruptions

We continue to experience supply chain disruptions, increased price levels and related financial impacts reflected as increased cost of sales and inventory holdings. Our industry continues to be unfavorably impacted by supply chain constraints leading to shortages and price increases across multiple component categories and limiting our collective ability to meet end-user demand. Our customers are also experiencing supply chain issues. 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.

2023 First Quarter Results

A summary of our results is as follows:


	Three months ended
	March 31,
In millions, except per share amounts	2023		2022
Net sales	$	8,453	$	6,385
Net income attributable to Cummins Inc.	790		418
Earnings per common share attributable to Cummins Inc.
Basic	$	5.58	$	2.94
Diluted	5.55		2.92

Worldwide revenues increased 32 percent in the three months ended March 31, 2023, compared to the same period in 2022, due to axles and brakes sales in the Components segment of $1.3 billion from the Meritor acquisition and higher demand in all operating segments and most geographic regions, partially offset by decreases in Russia due to the indefinite suspension of our Russian operations. Net sales in the U.S. and Canada improved 39 percent, primarily due to incremental sales of axles and brakes in North America, increased demand in all Distribution product lines and stronger demand in North American heavy-duty and medium-duty truck markets, which positively impacted most Components businesses. International demand (excludes the U.S. and Canada) improved 24 percent, with lower sales in Russia more than offset by higher sales in most other geographic regions. The increase in international sales was principally due to incremental sales of axles and brakes in Western Europe and Latin America. Unfavorable foreign currency fluctuations impacted international sales by 5 percent (primarily the Chinese renminbi, Indian rupee and Euro).

The following table contains sales and EBITDA (defined as earnings or losses before interest expense, income taxes, depreciation and amortization and noncontrolling interests) by operating segment, including adjusted prior year balances for the NPROXX changes noted above, for the three months ended March 31, 2023 and 2022. 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 March 31,
Operating Segments	2023							2022							Percent change
			Percent							Percent					2023 vs. 2022
In millions	Sales		of Total		EBITDA			Sales		of Total		EBITDA			Sales		EBITDA
Components	3,557		42	%	507			1,988		31	%	320			79	%	58	%
Engine	2,986		36	%	457			2,753		43	%	390			8	%	17	%
Distribution	2,406		28	%	335			2,117		33	%	110			14	%	NM
Power Systems	1,343		16	%	219			1,160		18	%	90			16	%	NM
Accelera	85		1	%	(94)			31		1	%	(65)			NM		(45)	%
Intersegment eliminations	(1,924)		(23)	%	(63)			(1,664)		(26)	%	(90)			16	%	(30)	%

Total	$	8,453	100	%	$	1,361	(1)	$	6,385	100	%	$	755	(2)	32	%	80	%

"NM" - not meaningful information
(1) EBITDA includes $18 million of costs associated with the planned separation of our filtration business.
(2) EBITDA includes $158 million of costs associated with the suspension of our Russian operations and $17 million of costs associated with the planned separation of our filtration business. See NOTE 15, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information.

Net income attributable to Cummins Inc. was $790 million, or $5.55 per diluted share, on sales of $8.5 billion for the three months ended March 31, 2023, versus the comparable prior year period net income attributable to Cummins Inc. of $418 million, or $2.92 per diluted share, on sales of $6.4 billion. The increases in net income attributable to Cummins Inc. and earnings per diluted share were driven by higher net sales and the absence of costs associated with the suspension of our Russian operations, partially offset by increased compensation costs, higher interest expense related to increased floating interest rates and new borrowings and higher amortization of intangible assets resulting from our acquisitions. The increase in gross margin was primarily due to higher volumes (including sales of axles and brakes due to the Meritor acquisition) and favorable pricing, partially offset by higher compensation expenses.

We generated $495 million of cash from operations for the three months ended March 31, 2023, compared to $164 million for the comparable period in 2022. See the section titled "Cash Flows" in the "LIQUIDITY AND CAPITAL RESOURCES" section for a discussion of items impacting cash flows.

Our debt to capital ratio (total capital defined as debt plus equity) at March 31, 2023, was 42.2 percent, compared to 44.1 percent at December 31, 2022. The decrease was primarily due to the increased equity balance from strong first quarter earnings and lower debt balances since December 31, 2022. At March 31, 2023, we had $2.4 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 three months of 2023, the investment gain on our U.S. pension trusts was 1.49 percent while our U.K. pension trusts' gain was 0.41 percent. We anticipate making additional defined benefit pension contributions during the remainder of 2023 of $20 million for our U.S. and U.K. qualified and non-qualified pension plans. We expect our 2023 annual net periodic pension cost to be near zero.

On April 3, 2023, we purchased all of the equity ownership interest of Teksid Hierro de Mexico, S.A. de C.V. and Teksid, Inc. from Stellantis N.V. for approximately €138 million, subject to certain adjustments set forth in the agreement. See NOTE 19, "SUBSEQUENT EVENT," to the Condensed Consolidated Financial Statements for additional information.

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

RESULTS OF OPERATIONS



	Three months ended				Favorable/
	March 31,				(Unfavorable)
In millions, except per share amounts	2023		2022		Amount		Percent
NET SALES	$	8,453	$	6,385	$	2,068	32	%
Cost of sales	6,424		4,853		(1,571)		(32)	%
GROSS MARGIN	2,029		1,532		497		32	%
OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses	753		615		(138)		(22)	%
Research, development and engineering expenses	350		298		(52)		(17)	%
Equity, royalty and interest income from investees	119		96		23		24	%

Other operating expense, net	19		111		92		83	%
OPERATING INCOME	1,026		604		422		70	%

Interest expense	87		17		(70)		NM
Other income (expense), net	90		(9)		99		NM
INCOME BEFORE INCOME TAXES	1,029		578		451		78	%
Income tax expense	223		155		(68)		(44)	%
CONSOLIDATED NET INCOME	806		423		383		91	%
Less: Net income attributable to noncontrolling interests	16		5		(11)		NM
NET INCOME ATTRIBUTABLE TO CUMMINS INC.	$	790	$	418	$	372	89	%
Diluted Earnings Per Common Share Attributable to Cummins Inc.	$	5.55	$	2.92	$	2.63	90	%

"NM" - not meaningful information


	Three months ended				Favorable/ (Unfavorable)
	March 31,
Percent of sales	2023		2022		Percentage Points
Gross margin	24.0	%	24.0	%	—
Selling, general and administrative expenses	8.9	%	9.6	%	0.7
Research, development and engineering expenses	4.1	%	4.7	%	0.6

Net Sales

Net sales for the three months ended March 31, 2023, increased by $2.1 billion versus the comparable period in 2022. The primary drivers were as follows:

Components segment sales increased 79 percent largely due to axles and brakes sales from the Meritor acquisition.
Distribution segment sales increased 14 percent due to higher demand across all product lines in North America.
Engine segment sales increased 8 percent principally due to strong heavy-duty truck demand (including higher aftermarket sales) in North America.
Power Systems segment sales increased 16 percent primarily due to higher demand in power generation markets and industrial oil and gas markets in North America.

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

Sales to international markets (excluding the U.S. and Canada), based on location of customers, for the three months ended March 31, 2023, were 39 percent of total net sales compared with 42 percent of total net sales for the comparable period in 2022. 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 $497 million for the three months ended March 31, 2023 and remained flat as a percentage of net sales versus the comparable period in 2022. The increase in gross margin was primarily due to higher volumes (including sales of axles and brakes due to the Meritor acquisition) and favorable pricing, partially offset by higher compensation expenses.

The provision for base warranties issued as a percent of sales for the three months ended March 31, 2023, was 1.7 percent compared to 1.9 percent for the comparable period in 2022.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $138 million for the three months ended March 31, 2023, versus the comparable period in 2022, primarily due to higher compensation expenses and higher consulting expenses. Compensation and related expenses include variable compensation, salaries and fringe benefits. Overall, selling, general and administrative expenses as a percentage of net sales decreased to 8.9 percent in the three months ended March 31, 2023, from 9.6 percent in the comparable period in 2022. The decrease in selling, general and administrative expenses as a percentage of net sales was due to net sales increasing at a faster rate than selling, general and administrative expenses.

Research, Development and Engineering Expenses

Research, development and engineering expenses increased $52 million for the three months ended March 31, 2023, versus the comparable period in 2022, primarily due to higher compensation expenses and lower expense recovery. Compensation and related expenses include variable compensation, salaries and fringe benefits. Overall, research, development and engineering expenses as a percentage of net sales decreased to 4.1 percent in the three months ended March 31, 2023, from 4.7 percent in the comparable period in 2022. The decrease in research, development and engineering expenses as a percentage of net sales was due to net sales increasing at a faster rate than research, development and engineering expenses.

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 increased $23 million for the three months ended March 31, 2023, versus the comparable period in 2022, primarily due to the absence of the $28 million impairment of our Russian joint venture with KAMAZ in the first quarter of 2022 and higher earnings at Komatsu Cummins Chile, Ltda., partially offset by lower royalty and interest income from investees. See NOTE 15, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information.

Other Operating Expense, Net

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


	Three months ended
	March 31,
In millions	2023		2022
Amortization of intangible assets	$	(32)	$	(5)
Loss on write-off of assets	(1)		(5)
Russian suspension costs	—		(68)		(1)
Asset impairments and other charges	—		(36)


Other, net	14		3
Total other operating expense, net	$	(19)	$	(111)



(1) See NOTE 15, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information.

Interest Expense

Interest expense increased $70 million for the three months ended March 31, 2023, versus the comparable periods in 2022. The increase was primarily due to the overall increase in floating interest rates, higher short-term borrowings (including commercial paper) and new term loan borrowings.

Other Income (Expense), Net

Other income (expense), net was as follows:


	Three months ended
	March 31,
In millions	2023		2022
Non-service pension and OPEB income	$	31	$	33
Gain (loss) on corporate owned life insurance	19		(37)
Interest income	18		8
Foreign currency gain (loss), net	12		(12)
Gain (loss) on marketable securities, net	5		(4)




Other, net	5		3
Total other income (expense), net	$	90	$	(9)

Income Tax Expense

Our effective tax rate for 2023 is expected to approximate 22.0 percent, excluding any discrete items that may arise.

Our effective tax rates for the three months ended March 31, 2023 and 2022, were 21.7 percent and 26.8 percent, respectively.

The three months ended March 31, 2023, contained favorable discrete tax items of $3 million, primarily due to share-based compensation tax benefits.

The three months ended March 31, 2022, contained unfavorable discrete items of $31 million, primarily due to $18 million of unfavorable changes associated with the indefinite suspension of Russian operations, $9 million of net unfavorable changes in tax reserves and $4 million of net unfavorable other discrete tax items.

Noncontrolling Interests

Noncontrolling interests eliminate the income or loss attributable to non-Cummins ownership interests in our consolidated entities. Noncontrolling interests in income of consolidated subsidiaries for the three months ended March 31, 2023, increased $11 million versus the comparable period in 2022 primarily due to higher earnings at Eaton Cummins Joint Venture and Cummins India Limited.

Comprehensive Income - Foreign Currency Translation Adjustment

The foreign currency translation adjustment was a net gain of $82 million for the three months ended March 31, 2023, compared to a net gain of $4 million for the three months ended March 31, 2022, driven by the following:


	Three months ended
	March 31,
	2023			2022
In millions	Translation adjustment		Primary currency driver vs. U.S. dollar	Translation adjustment		Primary currency driver vs. U.S. dollar
Wholly-owned subsidiaries	$	73	British pound, Brazilian real, Euro	$	16	Brazilian real, partially offset by Indian rupee, British pound, Euro
Equity method investments	6		Brazilian real, Chinese renminbi	(4)		Indian rupee
Consolidated subsidiaries with a noncontrolling interest	3		Indian rupee	(8)		Indian rupee
Total	$	82		$	4

OPERATING SEGMENT RESULTS

Our reportable operating segments consist of the Components, Engine, Distribution, Power Systems and Accelera 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 CODM to evaluate the performance of each of our reportable operating segments. We believe EBITDA is a useful measure of our operating performance as it assists investors and debt holders in comparing our performance on a consistent basis without regard to financing methods, capital structure, income taxes or depreciation and amortization methods, which can vary significantly depending upon many factors. Segment amounts exclude certain expenses not specifically identifiable to segments. 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.

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

Components Segment Results

Financial data for the Components segment was as follows:


	Three months ended								Favorable/
	March 31,								(Unfavorable)
In millions	2023				2022				Amount		Percent
External sales	$	3,043			$	1,517			$	1,526	NM
Intersegment sales	514				471				43		9	%
Total sales	3,557				1,988				1,569		79	%

Research, development and engineering expenses	91				76				(15)		(20)	%
Equity, royalty and interest income from investees	21				28				(7)		(25)	%
Interest income	6				1				5		NM

Russian suspension costs	—				6			(1)	6		100	%
Segment EBITDA	507			(2)	320				187		58	%

									Percentage Points
Segment EBITDA as a percentage of total sales	14.3		%		16.1		%				(1.8)

"NM" - not meaningful information

(1) See NOTE 15, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information.
(2) Includes $12 million of costs associated with the planned separation of our filtration business.

As noted above, the descriptions of the two new businesses are as follows:

Engine components - We design, manufacture and market turbocharger, valvetrain and fuel system technologies for light-duty, mid-range, heavy-duty and high-horsepower markets across North America, Europe, China and India.
Software and electronics - We develop, supply and remanufacture control units, specialty sensors, power electronics, actuators and software for on-highway, off-highway and power generation applications. We primarily serve markets in the Americas, China, India and Europe.

Sales for our Components segment by business, including adjusted prior year balances for the changes noted above, were as follows:


	Three months ended				Favorable/
	March 31,				(Unfavorable)
In millions	2023		2022		Amount		Percent
Axles and brakes	$	1,272	$	—	$	1,272	NM
Emission solutions	1,056		910		146		16	%
Engine components	581		502		79		16	%
Filtration	417		382		35		9	%
Automated transmissions	179		134		45		34	%
Software and electronics	52		60		(8)		(13)	%
Total sales	$	3,557	$	1,988	$	1,569	79	%

"NM" - not meaningful information

Sales

Components segment sales for the three months ended March 31, 2023, increased $1.6 billion versus the comparable period in 2022. The following were the primary drivers by business:

Axles and brakes sales added $1.3 billion in sales due to the Meritor acquisition.
Emission solutions sales increased $146 million primarily due to stronger demand in North America and China.
Engine components sales increased $79 million largely due to higher demand in North America and China.

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

Segment EBITDA

Components segment EBITDA for the three months ended March 31, 2023, increased $187 million versus the comparable period in 2022, mainly due to higher volumes (including sales of axles and brakes due to the Meritor acquisition) and favorable pricing, partially offset by higher compensation expenses.

Engine Segment Results

Financial data for the Engine segment was as follows:


	Three months ended							Favorable/
	March 31,							(Unfavorable)
In millions	2023			2022				Amount		Percent
External sales	$	2,252		$	2,049			$	203	10	%
Intersegment sales	734			704				30		4	%
Total sales	2,986			2,753				233		8	%

Research, development and engineering expenses	134			109				(25)		(23)	%
Equity, royalty and interest income from investees	65			42			(1)	23		55	%

Interest income	3			4				(1)		(25)	%

Russian suspension costs	—			32			(2)	32		100	%

Segment EBITDA	457			390				67		17	%

								Percentage Points
Segment EBITDA as a percentage of total sales	15.3		%	14.2		%				1.1




(1) Includes a $28 million impairment of our joint venture with KAMAZ and $3 million of royalty charges as part of our costs associated with the suspension of our Russian operations. See NOTE 15, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information.
(2) Includes $31 million of Russian suspension costs reflected in the equity, royalty and interest income from investees line above. See NOTE 15, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information.

Sales for our Engine segment by market were as follows:


	Three months ended						Favorable/
	March 31,						(Unfavorable)
In millions	2023			2022			Amount		Percent
Heavy-duty truck	$	1,114		$	908		$	206	23	%
Medium-duty truck and bus	903			848			55		6	%
Light-duty automotive	439			498			(59)		(12)	%
Total on-highway	2,456			2,254			202		9	%
Off-highway	530			499			31		6	%
Total sales	$	2,986		$	2,753		$	233	8	%

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

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


	Three months ended		Favorable/
	March 31,		(Unfavorable)
	2023	2022	Amount	Percent
Heavy-duty	34,700	28,600	6,100	21	%
Medium-duty	78,900	72,600	6,300	9	%
Light-duty	55,000	66,500	(11,500)	(17)	%
Total unit shipments	168,600	167,700	900	1	%

Sales

Engine segment sales for the three months ended March 31, 2023, increased $233 million versus the comparable period in 2022. The following were the primary drivers by market:

Heavy-duty truck sales increased $206 million principally due to stronger demand (including higher aftermarket sales) in North America with higher shipments of 26 percent.
Medium-duty truck and bus sales increased $55 million mainly due to higher demand (including higher aftermarket sales) especially in North America.

These increases were partially offset by decreased light-duty automotive sales of $59 million primarily due to lower sales to Stellantis and our indefinite suspension of operations in Russia.

Segment EBITDA

Engine segment EBITDA for the three months ended March 31, 2023, increased $67 million versus the comparable period in 2022, primarily due to favorable pricing, the absence of costs related to asset impairments and other charges recorded in the first quarter of 2022 and the absence of costs associated with the suspension of our Russian operations (including impairment of our joint venture with KAMAZ), partially offset by higher compensation expenses, increased materials costs and unfavorable mix. See NOTE 15, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information.

Distribution Segment Results

Financial data for the Distribution segment was as follows:


	Three months ended							Favorable/
	March 31,							(Unfavorable)
In millions	2023			2022				Amount		Percent
External sales	$	2,399		$	2,111			$	288	14	%
Intersegment sales	7			6				1		17	%
Total sales	2,406			2,117				289		14	%

Research, development and engineering expenses	14			13				(1)		(8)	%
Equity, royalty and interest income from investees	24			16				8		50	%
Interest income	7			2				5		NM

Russian suspension costs	—			100			(1)	100		100	%
Segment EBITDA	335			110				225		NM

								Percentage Points
Segment EBITDA as a percentage of total sales	13.9		%	5.2		%				8.7

"NM" - not meaningful information

(1) See NOTE 15, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information.

Sales for our Distribution segment by region, including adjusted prior year balances for the changes noted above, were as follows:


	Three months ended				Favorable/
	March 31,				(Unfavorable)
In millions	2023		2022		Amount		Percent
North America	$	1,695	$	1,367	$	328	24	%
Asia Pacific	240		246		(6)		(2)	%
Europe	195		281		(86)		(31)	%
China	102		83		19		23	%
Africa and Middle East	62		50		12		24	%
India	59		49		10		20	%
Latin America	53		41		12		29	%

Total sales	$	2,406	$	2,117	$	289	14	%

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


	Three months ended				Favorable/
	March 31,				(Unfavorable)
In millions	2023		2022		Amount		Percent
Parts	$	1,057	$	924	$	133	14	%
Power generation	492		401		91		23	%
Engines	456		441		15		3	%
Service	401		351		50		14	%
Total sales	$	2,406	$	2,117	$	289	14	%

Sales

Distribution segment sales for the three months ended March 31, 2023, increased $289 million versus the comparable period in 2022. The following were the primary drivers by region:

North American sales increased $328 million due to higher demand across all product lines.

The increase was partially offset by the following:

Europe sales decreased $86 million as a result of our indefinite suspension of operations in Russia.
Unfavorable foreign currency fluctuations, primarily in the Chinese renminbi, Canadian dollar, Indian rupee, Australian dollar and Euro.

Segment EBITDA

Distribution segment EBITDA for the three months ended March 31, 2023, increased $225 million versus the comparable period in 2022, primarily due to the absence of costs associated with the suspension of our Russian operations, favorable mix and increased volumes. See NOTE 15, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information.

Power Systems Segment Results

Financial data for the Power Systems segment was as follows:


	Three months ended							Favorable/
	March 31,							(Unfavorable)
In millions	2023			2022				Amount		Percent
External sales	$	679		$	683			$	(4)	(1)	%
Intersegment sales	664			477				187		39	%
Total sales	1,343			1,160				183		16	%

Research, development and engineering expenses	63			64				1		2	%
Equity, royalty and interest income from investees	13			11				2		18	%
Interest income	2			1				1		100	%

Russian suspension costs	—			20			(1)	20		100	%
Segment EBITDA	219			90				129		NM

								Percentage Points
Segment EBITDA as a percentage of total sales	16.3		%	7.8		%				8.5

"NM" - not meaningful information



(1) See NOTE 15, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information.

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


	Three months ended				Favorable/
	March 31,				(Unfavorable)
In millions	2023		2022		Amount		Percent
Power generation	$	770	$	664	$	106	16	%
Industrial	455		393		62		16	%
Generator technologies	118		103		15		15	%
Total sales	$	1,343	$	1,160	$	183	16	%

Sales

Power Systems segment sales for the three months ended March 31, 2023, increased $183 million versus the comparable period in 2022. The following were the primary drivers by product line:

Power generation sales increased $106 million primarily due to higher demand in North America, Asia Pacific, Western Europe, Latin America and India, partially offset by weaker demand in China.
Industrial sales increased $62 million principally due to improved oil and gas market demand in North America.

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

Segment EBITDA

Power Systems segment EBITDA for the three months ended March 31, 2023, increased $129 million versus the comparable period in 2022, mainly due to favorable pricing, increased volumes, favorable foreign currency fluctuations (principally in the British pound and Indian rupee) and the absence of costs associated with the suspension of our Russian operations, partially offset by higher compensation expenses. See NOTE 15, "RUSSIAN OPERATIONS," to our Condensed Consolidated Financial Statements for additional information.

Accelera Segment Results

Financial data for the Accelera segment was as follows:



	Three months ended				Favorable/
	March 31,				(Unfavorable)
In millions	2023		2022		Amount		Percent
External sales	$	80	$	25	$	55	NM
Intersegment sales	5		6		(1)		(17)	%
Total sales	85		31		54		NM

Research, development and engineering expenses	48		36		(12)		(33)	%
Equity, royalty and interest loss from investees	(4)		(1)		(3)		NM

Segment EBITDA	(94)		(65)		(29)		(45)	%




"NM" - not meaningful information

Accelera segment sales for the three months ended March 31, 2023, increased $54 million versus the comparable period in 2022 principally due to incremental sales of central drive systems, e-axles and accessory systems since the acquisitions of Siemens' Commercial Vehicles Propulsion business and Meritor as well as improved electrified components and fuel cell sales.

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 2023.

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 expect demand within our Power Systems business to remain strong, including the power generation, mining, oil and gas and marine markets.
We anticipate demand in our aftermarket business will continue to be robust, driven primarily by truck utilization in North America and continued strong demand in our Power Systems business.
We expect demand for trucks in China to improve from the low demand levels in 2022.

Challenges

Continued increases in material and labor 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.
The completion of the Meritor, Inc. acquisition in 2022 impacted our liquidity and resulted in incremental interest expense for debt utilized in funding the transaction and increased amortization of intangible assets, which will negatively impact net income.
Increasing interest rates could increase borrowing costs and negatively impact net income.
We expect the planned separation of our filtration business, into a stand-alone company, will continue to result in incremental expenses.

LIQUIDITY AND CAPITAL RESOURCES

Key Working Capital and Balance Sheet Data

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


Dollars in millions	March 31, 2023			December 31, 2022
Working capital (1)	$	3,445		$	3,030
Current ratio	1.29			1.27
Accounts and notes receivable, net	$	5,834		$	5,202
Days' sales in receivables	60			60
Inventories	$	5,878		$	5,603
Inventory turnover	4.4			4.2
Accounts payable (principally trade)	$	4,636		$	4,252
Days' payable outstanding	62			60
Total debt	$	7,752		$	7,855
Total debt as a percent of total capital	42.2		%	44.1		%

(1) Working capital includes cash and cash equivalents.

Cash Flows

Cash and cash equivalents were impacted as follows:


	Three months ended
	March 31,
In millions	2023		2022		Change
Net cash provided by operating activities	$	495	$	164	$	331
Net cash used in investing activities	(228)		(10)		(218)
Net cash used in financing activities	(363)		(497)		134
Effect of exchange rate changes on cash and cash equivalents	(25)		27		(52)
Net decrease in cash and cash equivalents	$	(121)	$	(316)	$	195

Net cash provided by operating activities increased $331 million for the three months ended March 31, 2023, versus the comparable period in 2022, primarily due to higher net income of $383 million and lower working capital requirement of $36 million, partially offset by the absence of Russian suspension costs in 2023. The lower working capital requirements resulted in a cash outflow of $494 million compared to a cash outflow of $530 million in the comparable period of 2022, mainly due to increased accrued expenses (from higher variable compensation accruals in 2023 and higher variable compensation payments in the first quarter of 2022 for the previous year), partially offset by increased accounts and notes receivable balances and lower accounts payable balances.

Net cash used in investing activities increased $218 million for the three months ended March 31, 2023, versus the comparable period in 2022, primarily due to higher capital expenditures of $89 million and the absence of $83 million of cash acquired from the acquisition of Cummins Westport Inc., net of purchase price, in the first quarter of 2022.

Net cash used in financing activities decreased $134 million for the three months ended March 31, 2023, versus the comparable period in 2022, primarily due to the absence of repurchases of common stock of $311 million, partially offset by higher payments on borrowings and finance lease obligations of $118 million and higher net payments of commercial paper of $27 million.

The effect of exchange rate changes on cash and cash equivalents for the three months ended March 31, 2023, versus the comparable period in 2022, changed $52 million primarily due to unfavorable fluctuations in the British pound.

Sources of Liquidity

We generate significant ongoing cash flow. Cash provided by operations is our principal source of liquidity with $495 million generated in the three months ended March 31, 2023. Our sources of liquidity include:


	March 31, 2023
In millions	Total		U.S.		International		Primary location of international balances
Cash and cash equivalents	$	1,980	$	658	$	1,322	Singapore, China, Belgium, Canada, Australia, Mexico, India

Marketable securities (1)	459		89		370		India
Total	$	2,439	$	747	$	1,692
Available credit capacity
Revolving credit facilities (2)	$	1,455
International and other uncommitted domestic credit facilities	$	215




(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 March 31, 2023, we had $2.5 billion of commercial paper outstanding, which effectively reduced our available capacity under our revolving credit facilities to $1.5 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, Canada (including underlying subsidiaries) and Netherlands domiciled subsidiaries. At present, we do not foresee a need to repatriate any earnings for which we assert permanent reinvestment. However, to help fund cash needs of the U.S. or other international subsidiaries as they arise, we repatriate available cash from certain foreign subsidiaries whose earnings are not permanently reinvested when it is cost effective to do so.

Debt Facilities and Other Sources of Liquidity

We have access to committed credit facilities totaling $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 March 31, 2023.

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 intend to use the net proceeds from the commercial paper borrowings for acquisitions and general corporate purposes. The total combined borrowing capacity under the revolving credit facilities and commercial programs should not exceed $4.0 billion. At March 31, 2023, we had $2.5 billion of commercial paper outstanding, which effectively reduced our available capacity under our revolving credit facilities to $1.5 billion.

In 2021, we entered into a series of interest rate swaps to effectively convert our $500 million senior notes, due in 2025, from a fixed rate of 0.75 percent to a floating rate equal to the three-month LIBOR plus a spread. We also entered into a series of interest rate swaps to effectively convert $765 million of our $850 million senior notes, due in 2030, from a fixed rate of 1.50 percent to a floating rate equal to the three-month LIBOR plus a spread. The swaps were designated and are accounted for as fair value hedges. In March

2023, we settled a portion of our 2021 interest rate swaps with a notional amount of $100 million. The $7 million loss on settlement will be amortized over the remaining term of the related debt.

In 2019 we entered into $350 million of interest rate lock agreements, and in 2020 we entered into an additional $150 million of lock agreements to reduce the variability of the cash flows of the interest payments on a total of $500 million of fixed rate debt forecast to be issued in 2023 to replace our senior notes at maturity. In December 2022, we settled certain rate lock agreements with notional amounts totaling $150 million for $49 million. In February 2023, we settled certain rate lock agreements with notional amounts totaling $100 million for $34 million. The $83 million of gains on settlements will remain in other comprehensive income and will be amortized over the term of the anticipated new debt.

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 LIBOR, announced it intends to phase out LIBOR by the end of 2021. The cessation date for submission and publication of rates for certain tenors of LIBOR has since been extended until mid-2023. Various central bank committees and working groups continue to discuss replacement of benchmark rates, the process for amending existing LIBOR-based contracts and the potential economic impacts of different alternatives. The Alternative Reference Rates Committee has identified the Secured Overnight Financing Rate (SOFR) as its preferred alternative rate for U.S. dollar LIBOR. SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions. We have evaluated the potential impact of the replacement of the LIBOR benchmark interest rate including risk management, internal operational readiness and monitoring the Financial Accounting Standards Board standard-setting process to address financial reporting issues that might arise in connection with transition from LIBOR to a new benchmark rate. While we do not believe the change will materially impact us due to our operational and system readiness coupled with relevant contractual fallback language, we continue to evaluate all eventual transition risks. In anticipation of LIBOR's phase out, our revolving credit and term loan agreements incorporate the use of SOFR as a replacement for LIBOR. Our 5-year credit facility maturing August 18, 2026, as amended to date, also incorporates SOFR. Additionally, with respect to our $1.2 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 February 15, 2023, certain of our subsidiaries entered into an amendment to the $1.0 billion credit agreement (Credit Agreement), consisting of a $400 million revolving credit facility and a $600 million term loan facility (Facilities), in anticipation of the separation of our filtration business, which extended the date on which the Credit Agreement terminates from March 30, 2023 to June 30, 2023. 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 June 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 original due date. The maximum amount that we may have outstanding under the program is $532 million. We do not reimburse vendors for any costs they incur for participation in the program, their participation is completely voluntary and there are no assets pledged as security or other forms of guarantees provided for the committed payment to the finance provider or intermediary. As a result, all amounts owed to the financial intermediaries are presented as accounts payable in our Condensed Consolidated Balance Sheets. Amounts due to the financial intermediaries reflected in accounts payable at March 31, 2023, were $253 million.

Uses of Cash

Dividends

We paid dividends of $222 million during the three months ended March 31, 2023.

Capital Expenditures

Capital expenditures for the three months ended March 31, 2023, were $193 million versus $104 million in the comparable period in 2022. We continue to invest in new product lines and targeted capacity expansions. We plan to spend an estimated $1.2 billion to $1.3 billion in 2023 on capital expenditures with over 60 percent of these expenditures expected to be invested in North America.

Current Maturities of Short and Long-Term Debt

We had $2.5 billion of commercial paper outstanding at March 31, 2023, that matures in less than one year. The maturity schedule of our existing long-term debt requires significant cash outflows in 2023 when our 3.65 percent senior notes are due and in 2025 when our term loan and 0.75 percent senior notes are due. Required annual long-term debt principal payments range from $46 million to $2.0 billion over the next five years (including the remainder of 2023). In 2023, we intend to have a greater emphasis on the repayment of debt to maintain our strong credit ratings. See NOTE 9, "DEBT," to the Condensed Consolidated Financial Statements for additional information.

Pensions

Our global pension plans, including our unfunded and non-qualified plans, were 120 percent funded at December 31, 2022. Our U.S. defined benefit plans (qualified and non-qualified), which represented approximately 69 percent of the worldwide pension obligation, were 121 percent funded, and our U.K. defined benefit plans were 119 percent funded at December 31, 2022. The funded status of our pension plans is dependent upon a variety of variables and assumptions including return on invested assets, market interest rates and levels of voluntary contributions to the plans. In the first three months of 2023, the investment gain on our U.S. pension trusts was 1.49 percent while our U.K. pension trusts' gain was 0.41 percent. We anticipate making additional defined benefit pension contributions during the remainder of 2023 of $20 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 2023 annual net periodic pension cost to be near zero.

Stock Repurchases

In December 2021, the Board authorized the acquisition of up to $2.0 billion of additional common stock upon completion of the $2.0 billion repurchase plan authorized in 2019. We did not make any repurchases of common stock in the first three months of 2023.

Redeemable Noncontrolling Interests

A 19 percent minority shareholder in one of our businesses, Hydrogenics Corporation (Hydrogenics), has, among other rights and subject to related obligations and restrictive covenants, rights that are exercisable between September 2022 and September 2026 to require us to (1) purchase such shareholder's shares (put option) at an amount up to the fair market value (calculated pursuant to a process outlined in the shareholders' agreement) and (2) sell to such shareholder Hydrogenics' electrolyzer business at an amount up to the fair market value of the electrolyzer business (calculated pursuant to a process outlined in the shareholders’ agreement). We recorded the estimated fair value of the put option as redeemable noncontrolling interests in our Condensed Consolidated Financial Statements with an offset to additional paid-in capital. At March 31, 2023, the redeemable noncontrolling interest balance was $261 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 repayment of debt obligations, dividend payments, acquisitions, targeted capital expenditures, common stock repurchases, projected pension obligations and working capital through 2023 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 2022 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, fair value of intangible assets, 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 2022 Form 10-K under the caption “APPLICATION OF CRITICAL ACCOUNTING ESTIMATES.” Within the context of these critical accounting estimates, we are not currently aware of any reasonably likely events or circumstances that would result in different policies or estimates being reported in the first three months of 2023.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

See Note 18, "RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS," in the Notes to Condensed Consolidated Financial Statements for additional information.

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