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

110K characters. Original on sec.gov · Markdown

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

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

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

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

GOVERNMENT REGULATION

any adverse consequences resulting from entering into the Settlement Agreements, including required additional mitigation projects, adverse reputational impacts and potential resulting legal actions;
increased scrutiny from regulatory agencies, as well as unpredictability in the adoption, implementation and enforcement of emission standards around the world;
evolving environmental and climate change legislation and regulatory initiatives;
changes in international, national and regional trade laws, regulations and policies;
changes in taxation;
global legal and ethical compliance costs and risks;
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.;
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, 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

climate change, global warming, more stringent climate change regulations, accords, mitigation efforts, greenhouse gas regulations or other legislation designed to address climate change;
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;
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 2023 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 2023 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 ISSUED ACCOUNTING PRONOUNCEMENTS

EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS

Overview

We are a global power solutions leader comprised of five business segments - Components, Engine, Distribution, Power Systems and Accelera - supported by our global manufacturing and extensive service and support network, skilled workforce and vast technical expertise. Our products range from advanced diesel, natural gas, electric and hybrid powertrains and powertrain-related components including aftertreatment, turbochargers, fuel systems, valvetrain technologies, controls systems, air handling systems, automated transmissions, axles, drivelines, brakes, suspension systems, electric power generation systems, batteries, electrified power systems, hydrogen production technologies 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 450 wholly-owned, joint venture and independent distributor locations and more than 19,000 Cummins certified dealer locations in approximately 190 countries and territories.

Our segment reporting structure is organized according to the products and markets each segment serves. The Components segment sells axles, drivelines, brakes and suspension systems for commercial diesel and natural gas applications, aftertreatment systems, turbochargers, fuel systems, valvetrain technologies, automated transmissions and electronics. 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 technologies 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, off-highway, power generation 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, 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 other countries in Europe, 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.

Divestiture of Atmus

On March 18, 2024, we completed the divestiture of our remaining 80.5 percent ownership of Atmus Filtration Technologies Inc. (Atmus) common stock through a tax-free split-off. The exchange resulted in a reduction of shares of our common stock outstanding by 5.6 million shares. See NOTE 14, "ATMUS DIVESTITURE," to the Condensed Consolidated Financial Statements for additional information.

Settlement Agreements

In December 2023, we announced that we reached an agreement in principle with the U.S. Environmental Protection Agency (EPA), the California Air Resources Board (CARB), the Environmental and Natural Resources Division of the U.S. Department of Justice and the California Attorney General’s Office to resolve certain regulatory civil claims regarding our emissions certification and compliance process for certain engines primarily used in pick-up truck applications in the U.S., which became final and effective in April 2024 (collectively, the Settlement Agreements). See NOTE 11, “COMMITMENTS AND CONTINGENCIES,” to our Condensed Consolidated Financial Statements for additional information.

2024 First Quarter Results

A summary of our results is as follows:


	Three months ended
	March 31,
In millions, except per share amounts	2024		2023
Net sales	$	8,403	$	8,453
Net income attributable to Cummins Inc.	1,993		790
Earnings per common share attributable to Cummins Inc.
Basic	$	14.10	$	5.58
Diluted	14.03		5.55

Worldwide revenues decreased by 1 percent in the three months ended March 31, 2024, compared to the same period in 2023, due to lower demand in heavy-duty truck markets, which negatively impacted Components product demand, as well as weaker demand for construction engines and decreased sales due to the divestiture of Atmus, mostly offset by increased power generation demand. Net sales in the U.S. and Canada remained flat as lower demand in North American heavy-duty truck markets, which negatively impacted Components product demand, and lower demand in oil and gas markets in North America were offset by higher demand in power generation and medium-duty truck markets. International demand (excludes the U.S. and Canada) declined 1 percent, with lower sales in China, Europe, Africa and the Middle East, partially offset by higher sales in Latin America and India. The decrease in international sales was primarily due to lower demand in construction markets (especially in China and Western Europe) and weaker demand for emission solutions products (primarily in China and India), partially offset by higher demand across most Distribution product lines.

The following table contains sales and EBITDA (defined as earnings or losses before interest expense, income taxes, depreciation and amortization and noncontrolling interests) by operating segment for the three months ended March 31, 2024 and 2023. See NOTE 15, "OPERATING SEGMENTS," to the Condensed Consolidated Financial Statements for additional information and a reconciliation of our segment information to the corresponding amounts in our Condensed Consolidated Statements of Net Income.


	Three months ended March 31,
Operating Segments	2024							2023							Percent change
			Percent							Percent					2024 vs. 2023
In millions	Sales		of Total		EBITDA			Sales		of Total		EBITDA			Sales		EBITDA
Components	$	3,332	40	%	$	473		$	3,557	42	%	$	507		(6)	%	(7)	%
Engine	2,928		35	%	414			2,986		36	%	457			(2)	%	(9)	%
Distribution	2,535		30	%	294			2,406		28	%	335			5	%	(12)	%
Power Systems	1,389		16	%	237			1,343		16	%	219			3	%	8	%
Accelera	93		1	%	(101)			85		1	%	(94)			9	%	(7)	%
Intersegment eliminations	(1,874)		(22)	%	1,255			(1,924)		(23)	%	(63)			(3)	%	NM

Total	$	8,403	100	%	$	2,572	(1)	$	8,453	100	%	$	1,361	(2)	(1)	%	89	%

"NM" - not meaningful information
(1) EBITDA included $1.3 billion of gain recognized on the divestiture of Atmus and $35 million of costs associated with the divestiture of Atmus for the three months ended March 31, 2024. See NOTE 14, "ATMUS DIVESTITURE," to the Condensed Consolidated Financial Statements for additional information.
(2) EBITDA included $18 million of costs associated with the divestiture of Atmus for the three months ended March 31, 2023.

Net income attributable to Cummins Inc. was $2.0 billion, or $14.03 per diluted share, on sales of $8.4 billion for the three months ended March 31, 2024, versus the comparable prior year period net income attributable to Cummins Inc. of $790 million, or $5.55 per diluted share, on sales of $8.5 billion. The increases in net income attributable to Cummins Inc. and earnings per diluted share were driven by the gain recognized on the divestiture of Atmus, partially offset by higher compensation and consulting expenses. The increase in gross margin was primarily due to favorable pricing, partially offset by higher compensation expenses and lower volumes. Diluted earnings per common share for the three months ended March 31, 2024, benefited $0.09 from fewer weighted-average shares outstanding due to treasury shares reacquired in the Atmus divestiture. See NOTE 14, "ATMUS DIVESTITURE," to the Condensed Consolidated Financial Statements for additional information.

We generated $276 million of cash from operations for the three months ended March 31, 2024, compared to $495 million for the comparable period in 2023. 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, 2024, was 40.4 percent, compared to 40.3 percent at December 31, 2023. The increase was primarily due to higher debt balances at March 31, 2024. At March 31, 2024, we had $3.1 billion in cash and marketable securities on hand and access to our $4.0 billion credit facilities (net of commercial paper outstanding), if necessary, to meet acquisition, working capital, investment and funding needs.

On February 20, 2024, we issued $2.25 billion aggregate principal amount of senior unsecured notes consisting of $500 million aggregate principal amount of 4.90 percent senior unsecured notes due in 2029, $750 million aggregate principal amount of 5.15 percent senior unsecured notes due in 2034 and $1.0 billion aggregate principal amount of 5.45 percent senior unsecured notes due in 2054. We received net proceeds of $2.2 billion. See NOTE 9, "DEBT," to the Condensed Consolidated Financial Statements for additional information.

In the first three months of 2024, the investment gain on our U.S. pension trusts was 1.2 percent, while our U.K. pension trusts' loss was 2.3 percent. We anticipate making additional defined benefit pension contributions during the remainder of 2024 of $29 million for our U.S. and U.K. qualified and non-qualified pension plans. We expect our 2024 annual net periodic pension cost to approximate $34 million.

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

RESULTS OF OPERATIONS



	Three months ended				Favorable/
	March 31,				(Unfavorable)
In millions, except per share amounts	2024		2023		Amount		Percent
NET SALES	$	8,403	$	8,453	$	(50)	(1)	%
Cost of sales	6,362		6,424		62		1	%
GROSS MARGIN	2,041		2,029		12		1	%
OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses	839		753		(86)		(11)	%
Research, development and engineering expenses	369		350		(19)		(5)	%
Equity, royalty and interest income from investees	123		119		4		3	%

Other operating expense, net	33		19		(14)		(74)	%
OPERATING INCOME	923		1,026		(103)		(10)	%

Interest expense	89		87		(2)		(2)	%
Other income, net	1,387		90		1,297		NM
INCOME BEFORE INCOME TAXES	2,221		1,029		1,192		NM
Income tax expense	193		223		30		13	%
CONSOLIDATED NET INCOME	2,028		806		1,222		NM
Less: Net income attributable to noncontrolling interests	35		16		(19)		NM
NET INCOME ATTRIBUTABLE TO CUMMINS INC.	$	1,993	$	790	$	1,203	NM
Diluted Earnings Per Common Share Attributable to Cummins Inc.	$	14.03	$	5.55	$	8.48	NM

"NM" - not meaningful information


	Three months ended				Favorable/ (Unfavorable)
	March 31,
Percent of sales	2024		2023		Percentage Points
Gross margin	24.3	%	24.0	%	0.3
Selling, general and administrative expenses	10.0	%	8.9	%	(1.1)
Research, development and engineering expenses	4.4	%	4.1	%	(0.3)

Net Sales

Net sales for the three months ended March 31, 2024, decreased by $50 million versus the comparable period in 2023. The primary drivers were as follows:

Components segment sales decreased 6 percent largely due to lower demand in our emission solutions and axles and brakes businesses and the divestiture of Atmus on March 18, 2024.
Engine segment sales decreased 2 percent primarily due to lower demand in global construction markets and North American heavy-duty truck markets, partially offset by higher demand in North American medium-duty truck markets.

These decreases were partially offset by the following:

Distribution segment sales increased 5 percent principally due to higher demand in power generation markets.
Power Systems segment sales increased 3 percent primarily due to higher demand in power generation markets.

Sales to international markets (excluding the U.S. and Canada), based on location of customers, for the three months ended March 31, 2024, were 39 percent of total net sales compared with 39 percent of total net sales for the comparable period in 2023. 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; compensation and related expenses, including variable compensation, salaries and fringe 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 and rent for production facilities and other production overhead.

Gross Margin

Gross margin increased $12 million for the three months ended March 31, 2024, and increased 0.3 points as a percentage of net sales versus the comparable period in 2023. The increase in gross margin and gross margin as a percentage of sales was primarily due to favorable pricing, partially offset by higher compensation expenses and lower volumes. Compensation and related expenses included salaries, fringe benefits and variable compensation.

The provision for base warranties issued as a percent of sales for the three months ended March 31, 2024, was 1.9 percent compared to 1.7 percent for the comparable period in 2023.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $86 million for the three months ended March 31, 2024, versus the comparable period in 2023, primarily due to higher compensation and consulting expenses. Compensation and related expenses included salaries, fringe benefits and variable compensation. Overall, selling, general and administrative expenses as a percentage of net sales increased to 10.0 percent in the three months ended March 31, 2024, from 8.9 percent in the comparable period in 2023.

Research, Development and Engineering Expenses

Research, development and engineering expenses increased $19 million for the three months ended March 31, 2024, versus the comparable period in 2023, primarily due to higher compensation expenses. Compensation and related expenses included salaries, fringe benefits and variable compensation. Overall, research, development and engineering expenses as a percentage of net sales increased to 4.4 percent in the three months ended March 31, 2024, from 4.1 percent in the comparable period in 2023.

Research activities continue to focus on development of new products and improvements of current technologies 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 hydrogen engine solutions, battery electric, fuel cell electric and hydrogen production technologies.

Equity, Royalty and Interest Income from Investees

Equity, royalty and interest income from investees increased $4 million for the three months ended March 31, 2024, versus the comparable period in 2023, primarily due to higher earnings at Chongqing Cummins Engine Co., Ltd., Dongfeng Cummins Engine Co., Ltd. and Sisamex, partially offset by lower royalty and interest income from investees.

Other Operating Expense, Net

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


	Three months ended
	March 31,
In millions	2024		2023
Amortization of intangible assets	$	(32)	$	(32)



Other, net	(1)		13
Total other operating expense, net	$	(33)	$	(19)

Interest Expense

Interest expense was $89 million for the three months ended March 31, 2024, versus $87 million for the comparable period in 2023. Interest expense increased $2 million primarily due to the higher outstanding long-term borrowings related to the 2024 note issuance and higher weighted-average interest rates, partially offset by lower commercial paper and decreased average term loan borrowings outstanding.

Other Income, Net

Other income (expense), net was as follows:


	Three months ended
	March 31,
In millions	2024		2023

Gain related to divestiture of Atmus (1)	$	1,333	$	—
Non-service pension and OPEB income	30		31
Interest income	29		18
Gain on marketable securities, net	4		5
Gain on corporate owned life insurance	2		19
Foreign currency (loss) gain, net	(11)		12



Other, net	—		5
Total other income, net	$	1,387	$	90





(1) See NOTE 14, "ATMUS DIVESTITURE," to our Condensed Consolidated Financial Statements for additional information.

Income Tax Expense

Our effective tax rate for 2024 is expected to approximate 24.0 percent, excluding any discrete items that may arise.

Our effective tax rates for the three months ended March 31, 2024 and 2023, were 8.7 percent and 21.7 percent, respectively.

The three months ended March 31, 2024, contained favorable discrete tax items primarily due to the $1.3 billion non-taxable gain on the Atmus split-off. Other discrete tax items were $21 million favorable primarily due to adjustments related to audit settlements.

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

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, 2024, increased $19 million versus the comparable period in 2023 primarily due to higher earnings at Cummins India Limited and the absence of losses at Hydrogenics Corporation resulting from the June 2023 acquisition, partially offset by lower earnings at Eaton Cummins Joint Venture. The three months ended March 31, 2024, included the noncontrolling interest associated with Atmus through March 18, 2024, the date of divestiture.

Comprehensive Income - Foreign Currency Translation Adjustment

The foreign currency translation adjustment was a net loss of $60 million for the three months ended March 31, 2024, compared to a net gain of $82 million for the three months ended March 31, 2023, driven by the following:


	Three months ended
	March 31,
	2024			2023
In millions	Translation adjustment		Primary currency driver vs. U.S. dollar	Translation adjustment		Primary currency driver vs. U.S. dollar
Wholly-owned subsidiaries	$	(54)	Chinese renminbi, Euro	$	73	British pound, Brazilian real, Euro
Equity method investments	(3)		Chinese renminbi, partially offset by Indian rupee	6		Brazilian real, Chinese renminbi
Consolidated subsidiaries with a noncontrolling interest	(3)		Indian rupee, Chinese renminbi, Euro	3		Indian rupee
Total	$	(60)		$	82

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

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

Components Segment Results

Financial data for the Components segment was as follows:


	Three months ended								Favorable/
	March 31,								(Unfavorable)
In millions	2024				2023				Amount		Percent
External sales	$	2,842			$	3,043			$	(201)	(7)	%
Intersegment sales	490				514				(24)		(5)	%
Total sales	3,332				3,557				(225)		(6)	%

Research, development and engineering expenses	84				91				7		8	%
Equity, royalty and interest income from investees	26				21				5		24	%
Interest income	8				6				2		33	%

Segment EBITDA	473			(1)	507			(2)	(34)		(7)	%

									Percentage Points
Segment EBITDA as a percentage of total sales	14.2		%		14.3		%				(0.1)



(1) Included $21 million of costs associated with the divestiture of Atmus for the three months ended March 31, 2024.
(2) Included $12 million of costs associated with the divestiture of Atmus for the three months ended March 31, 2023.

On March 18, 2024, we completed the divestiture of our remaining 80.5 percent ownership of Atmus common stock through a tax-free split-off. See NOTE 14, "ATMUS DIVESTITURE," to the Condensed Consolidated Financial Statements for additional information.

Sales for our Components segment by business were as follows:


	Three months ended					Favorable/
	March 31,					(Unfavorable)
In millions	2024			2023		Amount		Percent
Axles and brakes	$	1,232		$	1,272	$	(40)	(3)	%
Emission solutions	971			1,056		(85)		(8)	%
Engine components	544			581		(37)		(6)	%
Atmus	353		(1)	417		(64)		(15)	%
Automated transmissions	165			179		(14)		(8)	%
Software and electronics	67			52		15		29	%
Total sales	$	3,332		$	3,557	$	(225)	(6)	%


(1) Included sales through the March 18, 2024, divestiture. See NOTE 14, "ATMUS DIVESTITURE," to the Condensed Consolidated Financial Statements for additional information.

Sales

Components segment sales for the three months ended March 31, 2024, decreased $225 million versus the comparable period in 2023. The following were the primary drivers by business:

Emission solutions sales decreased $85 million primarily due to weaker demand in China and India.
Atmus sales decreased $64 million due to the divestiture on March 18, 2024.
Axles and brakes sales decreased $40 million mainly due to weaker demand in North America and Western Europe, partially offset by stronger demand in Brazil.

Segment EBITDA

Components segment EBITDA for the three months ended March 31, 2024, decreased $34 million versus the comparable period in 2023, mainly due to lower volumes (including the divestiture of Atmus) and higher compensation expenses, partially offset by lower material costs and favorable mix.

Engine Segment Results

Financial data for the Engine segment was as follows:


	Three months ended						Favorable/
	March 31,						(Unfavorable)
In millions	2024			2023			Amount		Percent
External sales	$	2,240		$	2,252		$	(12)	(1)	%
Intersegment sales	688			734			(46)		(6)	%
Total sales	2,928			2,986			(58)		(2)	%

Research, development and engineering expenses	154			134			(20)		(15)	%
Equity, royalty and interest income from investees	57			65			(8)		(12)	%

Interest income	7			3			4		NM


Segment EBITDA	414			457			(43)		(9)	%

							Percentage Points
Segment EBITDA as a percentage of total sales	14.1		%	15.3		%			(1.2)


"NM" - not meaningful information

Sales for our Engine segment by market were as follows:


	Three months ended						Favorable/
	March 31,						(Unfavorable)
In millions	2024			2023			Amount		Percent
Heavy-duty truck	$	1,059		$	1,114		$	(55)	(5)	%
Medium-duty truck and bus	995			903			92		10	%
Light-duty automotive	438			439			(1)		—	%
Total on-highway	2,492			2,456			36		1	%
Off-highway	436			530			(94)		(18)	%
Total sales	$	2,928		$	2,986		$	(58)	(2)	%

							Percentage Points
On-highway sales as percentage of total sales	85		%	82		%			3

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)
	2024	2023	Amount	Percent
Heavy-duty	33,600	34,700	(1,100)	(3)	%
Medium-duty	75,800	78,900	(3,100)	(4)	%
Light-duty	54,800	55,000	(200)	—	%
Total unit shipments	164,200	168,600	(4,400)	(3)	%

Sales

Engine segment sales for the three months ended March 31, 2024, decreased $58 million versus the comparable period in 2023. The following were the primary drivers by market:

Off-highway sales decreased $94 million mainly due to lower demand in global construction markets, especially in China and Western Europe.
Heavy-duty truck sales decreased $55 million principally due to weaker demand in North America.

These decreases were partially offset by increased medium-duty truck and bus sales of $92 million mainly due to higher demand in North America with higher medium-duty truck shipments of 20 percent.

Segment EBITDA

Engine segment EBITDA for the three months ended March 31, 2024, decreased $43 million versus the comparable period in 2023, primarily due to lower volumes, higher compensation expenses and unfavorable product coverage costs, partially offset by favorable pricing.

Distribution Segment Results

Financial data for the Distribution segment was as follows:


	Three months ended						Favorable/
	March 31,						(Unfavorable)
In millions	2024			2023			Amount		Percent
External sales	$	2,529		$	2,399		$	130	5	%
Intersegment sales	6			7			(1)		(14)	%
Total sales	2,535			2,406			129		5	%

Research, development and engineering expenses	14			14			—		—	%
Equity, royalty and interest income from investees	24			24			—		—	%
Interest income	11			7			4		57	%

Segment EBITDA	294			335			(41)		(12)	%

							Percentage Points
Segment EBITDA as a percentage of total sales	11.6		%	13.9		%			(2.3)

Sales for our Distribution segment by region were as follows:


	Three months ended				Favorable/
	March 31,				(Unfavorable)
In millions	2024		2023		Amount		Percent
North America	$	1,723	$	1,695	$	28	2	%
Asia Pacific	285		240		45		19	%
Europe	240		195		45		23	%
China	102		102		—		—	%
India	71		59		12		20	%
Latin America	60		53		7		13	%
Africa and Middle East	54		62		(8)		(13)	%

Total sales	$	2,535	$	2,406	$	129	5	%

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


	Three months ended				Favorable/
	March 31,				(Unfavorable)
In millions	2024		2023		Amount		Percent
Parts	$	1,001	$	1,057	$	(56)	(5)	%
Power generation	707		492		215		44	%
Engines	421		456		(35)		(8)	%
Service	406		401		5		1	%
Total sales	$	2,535	$	2,406	$	129	5	%

Sales

Distribution segment sales for the three months ended March 31, 2024, increased $129 million versus the comparable period in 2023. The following were the primary drivers by region:

Asia Pacific sales increased $45 million primarily due to higher demand in power generation, especially data center markets, and service.
European sales increased $45 million mainly due to favorable demand in power generation and parts.
North American sales increased $28 million principally due to higher demand in power generation, especially commercial and data center markets, partially offset by lower demand for engines and aftermarket products.

Segment EBITDA

Distribution segment EBITDA for the three months ended March 31, 2024, decreased $41 million versus the comparable period in 2023, primarily due to higher compensation expenses, unfavorable inventory adjustments and unfavorable mix, partially offset by favorable pricing.

Power Systems Segment Results

Financial data for the Power Systems segment was as follows:


	Three months ended						Favorable/
	March 31,						(Unfavorable)
In millions	2024			2023			Amount		Percent
External sales	$	708		$	679		$	29	4	%
Intersegment sales	681			664			17		3	%
Total sales	1,389			1,343			46		3	%

Research, development and engineering expenses	60			63			3		5	%
Equity, royalty and interest income from investees	19			13			6		46	%
Interest income	3			2			1		50	%

Segment EBITDA	237			219			18		8	%

							Percentage Points
Segment EBITDA as a percentage of total sales	17.1		%	16.3		%			0.8

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


	Three months ended				Favorable/
	March 31,				(Unfavorable)
In millions	2024		2023		Amount		Percent
Power generation	$	853	$	770	$	83	11	%
Industrial	420		455		(35)		(8)	%
Generator technologies	116		118		(2)		(2)	%
Total sales	$	1,389	$	1,343	$	46	3	%

Sales

Power Systems segment sales for the three months ended March 31, 2024, increased $46 million versus the comparable period in 2023. The primary driver was an increase in power generation sales of $83 million mainly due to higher demand in North America and India, partially offset by weaker demand in Western Europe and Latin America. The increase was partially offset by a decrease in industrial sales of $35 million mainly due to weaker demand in the oil and gas market in North America, partially offset by stronger demand in global mining markets.

Segment EBITDA

Power Systems segment EBITDA for the three months ended March 31, 2024, increased $18 million versus the comparable period in 2023, mainly due to favorable pricing, partially offset by unfavorable mix and higher compensation expenses.

Accelera Segment Results

Financial data for the Accelera segment was as follows:



	Three months ended				Favorable/
	March 31,				(Unfavorable)
In millions	2024		2023		Amount		Percent
External sales	$	84	$	80	$	4	5	%
Intersegment sales	9		5		4		80	%
Total sales	93		85		8		9	%

Research, development and engineering expenses	55		48		(7)		(15)	%
Equity, royalty and interest loss from investees	(3)		(4)		1		25	%

Segment EBITDA	(101)		(94)		(7)		(7)	%

Accelera segment sales for the three months ended March 31, 2024, increased $8 million versus the comparable period in 2023 principally due to improved sales of electrolyzers.

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 2024.

Positive Trends

We expect demand for medium-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 and mining markets.
We anticipate demand in our aftermarket business will continue to be robust, driven primarily by strong demand in our Engine and Power Systems businesses.
We expect demand for trucks in China to remain stable or improve in 2024.

Challenges

We expect demand for heavy-duty trucks in North America to weaken modestly, particularly in the second half of 2024.
Continued increases in material and labor costs, as well as other inflationary pressures, could negatively impact earnings.
The financial implications resulting from our Settlement Agreements will negatively impact our liquidity in 2024 and will result in incremental interest expense for debt utilized in funding the civil penalty.

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, 2024			December 31, 2023
Working capital (1)	$	3,934		$	2,295
Current ratio	1.34			1.18
Accounts and notes receivable, net	$	5,463		$	5,583
Days' sales in receivables	60			58
Inventories	$	5,758		$	5,677
Inventory turnover	4.3			4.5
Accounts payable (principally trade)	$	4,476		$	4,260
Days' payable outstanding	64			62
Total debt	$	6,835		$	6,696
Total debt as a percent of total capital	40.4		%	40.3		%

(1) Working capital included cash and cash equivalents

Cash Flows

Cash and cash equivalents were impacted as follows:


	Three months ended
	March 31,
In millions	2024		2023		Change
Net cash provided by operating activities	$	276	$	495	$	(219)
Net cash used in investing activities	(406)		(228)		(178)
Net cash provided by (used in) financing activities	499		(363)		862
Effect of exchange rate changes on cash and cash equivalents	(7)		(25)		18
Net increase (decrease) in cash and cash equivalents	$	362	$	(121)	$	483

Net cash provided by operating activities decreased $219 million for the three months ended March 31, 2024, versus the comparable period in 2023, primarily due to higher working capital requirements of $112 million and lower operating income of $103 million. The higher working capital requirements resulted in a cash outflow of $606 million compared to a cash outflow of $494 million in the comparable period of 2023, mainly due to higher variable compensation payouts in accrued expenses, increased inventories and unfavorable changes in accounts payable, partially offset by favorable changes in accounts and notes receivable.

Net cash used in investing activities increased $178 million for the three months ended March 31, 2024, versus the comparable period in 2023, primarily due to cash associated with the Atmus divestiture of $174 million and higher acquisition activity of $59 million, partially offset by higher net liquidations of marketable securities of $33 million and lower capital expenditures of $24 million.

Net cash provided by financing activities increased $862 million for the three months ended March 31, 2024, versus the comparable period in 2023, primarily due to proceeds from borrowings of $2.4 billion (principally related to our 2024 note issuance), partially offset by higher net payments of commercial paper of $858 million and payments on borrowings and finance lease obligations of $606 million.

The effect of exchange rate changes on cash and cash equivalents for the three months ended March 31, 2024, versus the comparable period in 2023, increased $18 million primarily due to unfavorable fluctuations in the British pound, partially offset by the Chinese renminbi.

Sources of Liquidity

We generate significant ongoing cash flow. Cash provided by operations is our principal source of liquidity with $276 million generated in the three months ended March 31, 2024. Our sources of liquidity include:


	March 31, 2024
In millions	Total		U.S.		International		Primary location of international balances
Cash and cash equivalents	$	2,541	$	1,617	$	924	Singapore, Australia, Belgium, Mexico, Canada, China

Marketable securities (1)	510		85		425		India
Total	$	3,051	$	1,702	$	1,349
Available credit capacity
Revolving credit facilities (2)	$	3,391

International and other uncommitted domestic credit facilities	$	396




(1) The majority of marketable securities could be liquidated into cash within a few days.
(2) The five-year credit facility for $2.0 billion and the 364-day credit facility for $2.0 billion, maturing August 2026 and June 2024, respectively, are maintained primarily to provide backup liquidity for our commercial paper borrowings and general corporate purposes. At March 31, 2024, we had $609 million of commercial paper outstanding, which effectively reduced our available capacity under our revolving credit facilities to $3.4 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

In April 2024, we issued approximately $1.0 billion of commercial paper in anticipation of paying the substantial majority of payments required by the Settlement Agreements in May 2024. See NOTE 11, “COMMITMENTS AND CONTINGENCIES,” to the Condensed Consolidated Financial Statements for additional information on the Settlement Agreements.

Our committed credit facilities provide access up to $4.0 billion, including our $2.0 billion 364-day facility that expires June 3, 2024, 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, 2024.

Our committed credit facilities provide access up to $4.0 billion of unsecured, short-term promissory notes (commercial paper) pursuant to the Board of Directors (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 general corporate purposes. The total combined borrowing capacity under the revolving credit facilities and commercial paper programs should not exceed $4.0 billion. At March 31, 2024, we had $609 million of commercial paper outstanding, which effectively reduced our available capacity under our revolving credit facilities to $3.4 billion. See NOTE 9, "DEBT," to the Condensed Consolidated Financial Statements for additional information.

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.

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, which generally have 60 to 90 day payment terms. The maximum amount that we could have outstanding under the program was $512 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, 2024, were $193 million.

Uses of Cash

Settlement Agreements

In December 2023, we announced that we reached an agreement in principle with the EPA, CARB, the Environmental and Natural Resources Division of the U.S. Department of Justice and the California Attorney General’s Office to resolve certain regulatory civil claims regarding our emissions certification and compliance process for certain engines primarily used in pick-up truck applications in the U.S., which became final and effective in April 2024 (collectively, the Settlement Agreements). As part of the Settlement Agreements, among other things, we agreed to pay civil penalties, complete recall requirements, undertake mitigation projects, provide extended warranties, undertake certain testing, take certain corporate compliance measures and make certain payments. Failure to comply with the terms and conditions of the Settlement Agreements will subject us to stipulated penalties. We recorded a charge of $2.0 billion in the fourth quarter of 2023 to resolve the matters addressed by the Settlement Agreements involving approximately one million of our pick-up truck applications in the U.S. This charge was in addition to the previously announced charges of $59 million for the recalls of model years 2013 through 2018 RAM 2500 and 3500 trucks and model years 2016 through 2019 Titan trucks. Of this amount, $1.9 billion relates to payments that we began making in April 2024; however, the majority of these payments are expected to be made in May 2024. See NOTE 11, "COMMITMENTS AND CONTINGENCIES," to the Condensed Consolidated Financial Statements for additional information.

Repayment of Debt

We used a portion of the net proceeds of $2.2 billion from our February 2024 bond issuance to pay down $650 million of our term loan, due 2025, and commercial paper. We intend to use the remaining net proceeds for general corporate purposes.

In April 2024, we also repaid $100 million of our term loan, due 2025.

Dividends

We paid dividends of $239 million during the three months ended March 31, 2024.

Capital Expenditures

Capital expenditures for the three months ended March 31, 2024, were $169 million versus $193 million in the comparable period in 2023. 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 2024 on capital expenditures with over 65 percent of these expenditures expected to be invested in North America.

Current Maturities of Short and Long-Term Debt

We had $609 million of commercial paper outstanding at March 31, 2024, that matures in less than one year. The maturity schedule of our existing long-term debt requires significant cash outflows in 2025 when our term loan and 0.75 percent senior notes are due. Required annual long-term debt principal payments range from $41 million to $1.1 billion over the next five years (including the remainder of 2024). We intend to retain our strong investment 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 113 percent funded at December 31, 2023. Our U.S. defined benefit plans (qualified and non-qualified), which represented approximately 69 percent of the worldwide pension obligation, were 113 percent funded, and our U.K. defined benefit plans were 113 percent funded at December 31, 2023. 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 2024, the investment gain on our U.S. pension trusts was 1.2 percent, while our U.K. pension trusts' loss was 2.3 percent. We anticipate making additional defined benefit pension contributions during the remainder of 2024 of $29 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 2024 annual net periodic pension cost to approximate $34 million.

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 2024. The dollar value remaining available for future purchases under the 2019 program at March 31, 2024, was $218 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 make payments required by the Settlement Agreements, targeted capital expenditures, dividend payments, debt service obligations, projected pension obligations, common stock repurchases and fund acquisitions through 2024 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.

We anticipate making the substantial majority of payments required by the Settlement Agreements in May 2024 through the use of our existing liquidity and access to cash from commercial paper issued in April. See NOTE 17, "SUBSEQUENT EVENTS," to the Condensed Consolidated Financial Statements for additional information.

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 2023 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 2023 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 2024.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

See NOTE 16, "RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS," in the Notes to Condensed Consolidated Financial Statements for additional information.

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