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 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 INITIAL PUBLIC OFFERING (IPO) AND 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). In the second quarter of 2024, we made $1.9 billion of payments required by the Settlement Agreements. See NOTE 11, “COMMITMENTS AND CONTINGENCIES,” to our Condensed Consolidated Financial Statements for additional information.

2024 Second Quarter and Year-to-Date Results

A summary of our results is as follows:

Three months endedSix months ended
June 30,June 30,
In millions, except per share amounts2024202320242023
Net sales$8,796$8,638$17,199$17,091
Net income attributable to Cummins Inc.7267202,7191,510
Earnings per common share attributable to Cummins Inc.
Basic$5.30$5.08$19.53$10.66
Diluted5.265.0519.4210.60

The table below presents our consolidated net sales by geographic area based on the location of the customer:

Three months endedFavorable/Six months endedFavorable/
June 30,(Unfavorable)June 30,(Unfavorable)
In millions20242023AmountPercent20242023AmountPercent
United States and Canada$5,501$5,274$2274%$10,612$10,402$2102%
International3,2953,364(69)(2)%6,5876,689(102)(2)%
Total net sales$8,796$8,638$1582%$17,199$17,091$1081%

Worldwide revenues increased by 2 percent in the three months ended June 30, 2024, compared to the same period in 2023, due to increased power generation demand and higher demand in North American on-highway truck markets, partially offset by decreased sales due to the divestiture of Atmus. Net sales in the U.S. and Canada improved 4 percent primarily due to higher demand in on-highway truck markets and power generation markets, partially offset by lower sales due to the divestiture of Atmus. International demand (excludes the U.S. and Canada) declined 2 percent primarily due to lower sales in Europe and China, partially offset with higher sales in Asia Pacific and Latin America. The slight decrease in international sales was primarily due to decreased sales resulting from the divestiture of Atmus, mostly offset with higher demand across most Distribution product lines and increased demand for power generation products (especially in China). Unfavorable foreign currency fluctuations impacted international sales by 2 percent (primarily the Chinese renminbi and South African rand).

Worldwide revenues increased by 1 percent in the six months ended June 30, 2024, compared to the same period in 2023, due to increased power generation demand and higher demand in North American on-highway truck markets, partially offset by decreased sales due to the divestiture of Atmus as well as weaker demand in global construction markets. Net sales in the U.S. and Canada improved 2 percent primarily due to higher demand in on-highway truck markets and power generation markets, partially offset by lower sales due to the divestiture of Atmus. International demand (excludes the U.S. and Canada) declined 2 percent primarily due to lower sales in Europe and China, partially offset with higher sales Latin America. The decrease in international sales was primarily due to decreased sales due to the divestiture of Atmus and lower demand in construction markets (especially in China and Western

Europe), largely offset by higher demand across most Distribution product lines and increased demand in power generation markets (mainly China and Asia Pacific). Unfavorable foreign currency fluctuations impacted international sales by 1 percent (primarily the Chinese renminbi).

The following tables contain sales and EBITDA (defined as earnings or losses before interest expense, income taxes, depreciation and amortization and noncontrolling interests) by operating segment for the three and six months ended June 30, 2024 and 2023. See NOTE 16, "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 June 30,
Operating Segments20242023Percent change
PercentPercent2024 vs. 2023
In millionsSalesof TotalEBITDASalesof TotalEBITDASalesEBITDA
Components$2,98234%$406$3,42540%$486(13)%(16)%
Engine3,15136%4452,98834%4255%5%
Distribution2,82932%3142,59530%2999%5%
Power Systems1,58918%3011,45717%2019%50%
Accelera1111%(117)851%(114)31%(3)%
Intersegment eliminations(1,866)(21)%(4)(1,912)(22)%7(2)%NM
Total$8,796100%$1,345$8,638100%$1,304(1)2%3%
"NM" - not meaningful information
(1) EBITDA included $23 million of costs associated with the IPO and divestiture of Atmus for the three months ended June 30, 2023.

Net income attributable to Cummins Inc. was $726 million, or $5.26 per diluted share, on sales of $8.8 billion for the three months ended June 30, 2024, versus the comparable prior year period net income attributable to Cummins Inc. of $720 million, or $5.05 per diluted share, on sales of $8.6 billion. The increases in net income attributable to Cummins Inc. and earnings per diluted share were driven by lower expenses resulting from the divestiture of Atmus and improved gross margin, partially offset by lower equity, royalty and interest income from investees and unfavorable foreign currency fluctuations (primarily in the Chinese renminbi and Mexican peso). The increase in gross margin was primarily due to favorable pricing and higher volumes, partially offset by the divestiture of Atmus, higher compensation expenses and increased product coverage.

Six months ended June 30,
Operating Segments20242023Percent change
PercentPercent2024 vs. 2023
In millionsSalesof TotalEBITDASalesof TotalEBITDASalesEBITDA
Components$6,31437%$879$6,98241%$993(10)%(11)%
Engine6,07936%8595,97435%8822%(3)%
Distribution5,36431%6085,00129%6347%(4)%
Power Systems2,97817%5382,80016%4206%28%
Accelera2041%(218)1701%(208)20%(5)%
Intersegment eliminations(3,740)(22)%1,251(3,836)(22)%(56)(3)%NM
Total$17,199100%$3,917(1)$17,091100%$2,665(2)1%47%
"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 six months ended June 30, 2024.
(2) EBITDA included $41 million of costs associated with the IPO and divestiture of Atmus for the six months ended June 30, 2023.

Net income attributable to Cummins Inc. was $2.7 billion, or $19.42 per diluted share, on sales of $17.2 billion for the six months ended June 30, 2024, versus the comparable prior year period net income attributable to Cummins Inc. of $1.5 billion, or $10.60 per diluted share, on sales of $17.1 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 and lower material costs, partially offset by higher compensation expenses, the divestiture of Atmus and increased product coverage. Diluted earnings per common share for the six months ended June 30, 2024, benefited $0.45 from fewer weighted-average shares outstanding due to treasury shares reacquired in the Atmus divestiture.

2024 Highlights

We used $575 million in cash from operations for the six months ended June 30, 2024, compared to generating $978 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 June 30, 2024, was 41.5 percent, compared to 40.3 percent at December 31, 2023. The increase was primarily due to higher debt balances at June 30, 2024. At June 30, 2024, we had $2.2 billion in cash and marketable securities on hand and access to our $4.0 billion credit facilities (net of $1.6 billion of commercial paper outstanding), if necessary, to meet working capital, investment, acquisition and funding needs.

In July 2024, we settled the remaining $100 million of interest rate swaps and repaid the outstanding $100 million of our related term loan due in 2025.

In July 2024, the Board authorized an increase to our quarterly dividend of approximately 8 percent from $1.68 per share to $1.82 per share.

On June 3, 2024, we entered into an amended and restated five-year credit agreement that allows us to borrow up to $2.0 billion of unsecured funds at any time prior to June 3, 2029. The credit agreement amended and restated the prior $2.0 billion five-year credit agreement that would have matured on August 18, 2026.

On June 3, 2024, we entered into an amended and restated 364-day credit agreement that allows us to borrow up to $2.0 billion of unsecured funds at any time prior to June 2, 2025. This credit agreement amended and restated the prior $2.0 billion 364-day credit facility that matured on June 3, 2024.

In May 2024, we entered into an accounts receivable factoring agreement with Wells Fargo Bank, N.A., to sell certain accounts receivable up to $500 million. See NOTE 1, "NATURE OF OPERATIONS AND BASIS OF PRESENTATION," to our Condensed Consolidated Financial Statements for additional information.

In the second quarter of 2024, we made $1.9 billion of required payments towards the Settlement Agreements. See NOTE 11, “COMMITMENTS AND CONTINGENCIES,” to our Condensed Consolidated Financial Statements for additional information.

In the second quarter of 2024, we settled $400 million of interest rate swaps and paid $400 million of our related term loan due in 2025. See NOTE 9, “DEBT,” and NOTE 13, "DERIVATIVES," to our Condensed Consolidated Financial Statements for additional information.

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 six months of 2024, the investment gain on our U.S. pension trusts was 2.0 percent, while our U.K. pension trusts' loss was 4.3 percent. We anticipate making additional defined benefit pension contributions during the remainder of 2024 of $22 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 endedFavorable/Six months endedFavorable/
June 30,(Unfavorable)June 30,(Unfavorable)
In millions, except per share amounts20242023AmountPercent20242023AmountPercent
NET SALES$8,796$8,638$1582%$17,199$17,091$1081%
Cost of sales6,6036,490(113)(2)%12,96512,914(51)—%
GROSS MARGIN2,1932,148452%4,2344,177571%
OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses828873455%1,6671,626(41)(3)%
Research, development and engineering expenses37938451%748734(14)(2)%
Equity, royalty and interest income from investees103133(30)(23)%226252(26)(10)%
Other operating expense, net4427(17)(63)%7746(31)(67)%
OPERATING INCOME1,045997485%1,9682,023(55)(3)%
Interest expense10999(10)(10)%198186(12)(6)%
Other income, net4151(10)(20)%1,4281411,287NM
INCOME BEFORE INCOME TAXES977949283%3,1981,9781,22062%
Income tax expense225212(13)(6)%418435174%
CONSOLIDATED NET INCOME752737152%2,7801,5431,23780%
Less: Net income attributable to noncontrolling interests2617(9)(53)%6133(28)(85)%
NET INCOME ATTRIBUTABLE TO CUMMINS INC.$726$720$61%$2,719$1,510$1,20980%
Diluted Earnings Per Common Share Attributable to Cummins Inc.$5.26$5.05$0.214%$19.42$10.60$8.8283%
"NM" - not meaningful information
Three months endedFavorable/ (Unfavorable)Six months endedFavorable/ (Unfavorable)
June 30,June 30,
Percent of sales20242023Percentage Points20242023Percentage Points
Gross margin24.9%24.9%—24.6%24.4%0.2
Selling, general and administrative expenses9.4%10.1%0.79.7%9.5%(0.2)
Research, development and engineering expenses4.3%4.4%0.14.3%4.3%—

Net Sales

Net sales for the three months ended June 30, 2024, increased by $158 million versus the comparable period in 2023. The primary drivers were as follows:

  • Distribution segment sales increased 9 percent principally due to higher demand in power generation markets, especially in North America and Europe.

  • Engine segment sales increased 5 percent largely due to stronger demand in North American on-highway truck markets.

  • Power Systems segment sales increased 9 percent primarily due to higher demand in power generation markets, especially in North America and China.

These increases were partially offset by a Components segment sales decrease of 13 percent mainly due to the divestiture of Atmus on March 18, 2024.

Net sales for the six months ended June 30, 2024, increased $108 million versus the comparable period in 2023. The primary drivers were as follows:

  • Distribution segment sales increased 7 percent principally due to higher demand in power generation markets, especially in North America, Europe and Asia.

  • Power Systems segment sales increased 6 percent primarily due to higher demand in power generation markets, especially in North America.

  • Engine segment sales increased 2 percent largely due to stronger demand in North American medium-duty truck markets, partially offset by lower demand in global construction markets.

These increases were partially offset by a Components segment sales decrease of 10 percent mainly due to the divestiture of Atmus on March 18, 2024.

Sales to international markets (excluding the U.S. and Canada), based on location of customers, for the three and six months ended June 30, 2024, were 37 percent and 38 percent of total net sales compared with 39 percent and 39 percent of total net sales for the comparable periods 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 $45 million for the three months ended June 30, 2024, and remained flat as a percentage of net sales versus the comparable period in 2023. The increase in gross margin was primarily due to favorable pricing and higher volumes, partially offset by the divestiture of Atmus, higher compensation expenses and increased product coverage. Compensation and related expenses included salaries, fringe benefits and variable compensation.

Gross margin increased $57 million for the six months ended June 30, 2024, and increased 0.2 points as a percentage of 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 and lower material costs, partially offset by higher compensation expenses, the divestiture of Atmus and increased product coverage.

The provision for base warranties issued as a percent of sales for the three and six months ended June 30, 2024, was 1.9 percent and 1.9 percent, respectively, compared to 1.8 percent and 1.8 percent for the comparable periods in 2023.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $45 million for the three months ended June 30, 2024, versus the comparable period in 2023, primarily due to lower expenses resulting from the divestiture of Atmus. Overall, selling, general and administrative expenses as a percentage of net sales decreased to 9.4 percent in the three months ended June 30, 2024, from 10.1 percent in the comparable period in 2023.

Selling, general and administrative expenses increased $41 million for the six months ended June 30, 2024, versus the comparable period in 2023, primarily due to higher consulting and compensation expenses. Compensation and related expenses included salaries, fringe benefits and variable compensation. Overall, selling, general and administrative expenses as a percentage of sales increased to 9.7 percent in the six months ended June 30, 2024, from 9.5 percent in the comparable period in 2023.

Research, Development and Engineering Expenses

Research, development and engineering expenses decreased $5 million for the three months ended June 30, 2024, versus the comparable period in 2023, primarily due to lower consulting expenses. Overall, research, development and engineering expenses as a percentage of net sales decreased to 4.3 percent in the three months ended June 30, 2024, from 4.4 percent in the comparable period in 2023.

Research, development and engineering expenses increased $14 million for the six months ended June 30, 2024, versus the comparable period in 2023, primarily due to lower expense recoveries, partially offset by lower consulting expenses. Overall, research, development and engineering expenses as a percentage of net sales remained flat at 4.3 percent for both the six months ended June 30, 2024 and 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 decreased $30 million and $26 million for the three and six months ended June 30, 2024, versus the comparable periods in 2023, primarily due to lower royalty and interest income from investees, losses at NPROXX and lower earnings from Komatsu Cummins Chile, Ltda., partially offset by higher earnings at Chongqing Cummins Engine Co., Ltd.

Other Operating Expense, Net

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

Three months endedSix months ended
June 30,June 30,
In millions2024202320242023
Amortization of intangible assets$(33)$(34)$(65)$(66)
Other, net(11)7(12)20
Total other operating expense, net$(44)$(27)$(77)$(46)

Interest Expense

Interest expense was $109 million and $198 million for the three and six months ended June 30, 2024, versus $99 million and $186 million for the comparable periods in 2023. Interest expense increased $10 million and $12 million, respectively, primarily due to higher weighted-average interest rates, partially offset by lower weighted-average debt balances.

Other Income, Net

Other income (expense), net was as follows:

Three months endedSix months ended
June 30,June 30,
In millions2024202320242023
Interest income$30$25$59$43
Non-service pension and OPEB income22315262
Gain related to divestiture of Atmus (1)——1,333—
Gain on marketable securities, net—348
(Loss) gain on corporate owned life insurance(2)1—20
Foreign currency (loss) gain, net(12)(11)(23)1
Other, net3237
Total other income, net$41$51$1,428$141
(1) See NOTE 14, "ATMUS IPO AND 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 and six months ended June 30, 2024, were 23.0 percent and 13.1 percent, respectively. Our effective tax rates for the three and six months ended June 30, 2023, were 22.3 percent and 22.0 percent, respectively.

The three months ended June 30, 2024, contained favorable discrete tax items of $9 million primarily due to share-based compensation tax benefits.

The six months ended June 30, 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 $30 million favorable primarily due to adjustments related to audit settlements and share-based compensation benefits.

The three months ended June 30, 2023, contained net unfavorable discrete tax items of $3 million.

The six months ended June 30, 2023, contained net discrete tax items of zero, as the result of offsetting amounts for the first two quarters, primarily due to share-based compensation tax benefits and other discrete 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 and six months ended June 30, 2024, increased $9 million and $28 million versus the comparable periods in 2023. The increase for the three months ended June 30, 2024, was primarily due to the absence of losses at Hydrogenics Corporation resulting from the June 2023 acquisition, partially offset by lower earnings at Eaton Cummins Joint Venture. The increase for the six months ended June 30, 2024, was primarily due to the absence of losses at Hydrogenics Corporation and higher earnings at Cummins India Limited, partially offset by lower earnings at Eaton Cummins Joint Venture.

Comprehensive Income - Foreign Currency Translation Adjustment

The foreign currency translation adjustment was a net loss of $83 million and $143 million, for the three and six months ended June 30, 2024, respectively, compared to a net loss of $110 million and $28 million, for the three and six months ended June 30, 2023, respectively, driven by the following:

Three months ended
June 30,
20242023
In millionsTranslation adjustmentPrimary currency driver vs. U.S. dollarTranslation adjustmentPrimary currency driver vs. U.S. dollar
Wholly-owned subsidiaries$(69)Brazilian real, Chinese renminbi$(72)Chinese renminbi, partially offset by Brazilian real and British pound
Equity method investments(12)Chinese renminbi, Brazilian real(36)Chinese renminbi
Consolidated subsidiaries with a noncontrolling interest(2)Indian rupee(2)Chinese renminbi
Total$(83)$(110)
Six months ended
June 30,
20242023
In millionsTranslation adjustmentPrimary currency driver vs. U.S. dollarTranslation adjustmentPrimary currency driver vs. U.S. dollar
Wholly-owned subsidiaries$(123)Brazilian real, Chinese renminbi$1Chinese renminbi, partially offset by Brazilian real, British pound and Euro
Equity method investments(15)Chinese renminbi, partially offset by Indian rupee(30)Chinese renminbi, partially offset by Brazilian real
Consolidated subsidiaries with a noncontrolling interest(5)Indian rupee, Chinese renminbi1Indian rupee, partially offset by Chinese renminbi
Total$(143)$(28)

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 16, "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 endedFavorable/Six months endedFavorable/
June 30,(Unfavorable)June 30,(Unfavorable)
In millions20242023AmountPercent20242023AmountPercent
External sales$2,518$2,924$(406)(14)%$5,360$5,967$(607)(10)%
Intersegment sales464501(37)(7)%9541,015(61)(6)%
Total sales2,9823,425(443)(13)%6,3146,982(668)(10)%
Research, development and engineering expenses811032221%1651942915%
Equity, royalty and interest income from investees1324(11)(46)%3945(6)(13)%
Interest income97229%1713431%
Segment EBITDA(1)406486(80)(16)%879993(114)(11)%
Percentage PointsPercentage Points
Segment EBITDA as a percentage of total sales13.6%14.2%(0.6)13.9%14.2%(0.3)
(1) Included $21 million of costs associated with the divestiture of Atmus for the six months ended June 30, 2024. Included $18 million and $30 million of costs associated with the divestiture of Atmus for the three and six months ended June 30, 2023, respectively. See NOTE 14, "ATMUS IPO AND DIVESTITURE," to the Condensed Consolidated Financial Statements for additional information.

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

Beginning in the second quarter of 2024, we realigned certain businesses within our Components segment to be consistent with how our segment manager now monitors performance. We reorganized the businesses to combine the engine components and software and electronics businesses into the newly formed components and software business. In addition, we rebranded our axles and brakes business as drivetrain and braking systems. We began reporting results for these changes within our Components segment effective April 1, 2024, and reflected these changes in the historical periods presented. The change had no impact on our consolidated results.

Sales for our Components segment by business were as follows:

Three months endedFavorable/Six months endedFavorable/
June 30,(Unfavorable)June 30,(Unfavorable)
In millions20242023AmountPercent20242023AmountPercent
Drivetrain and braking systems$1,256$1,249$71%$2,488$2,521$(33)(1)%
Emission solutions941964(23)(2)%1,9122,020(108)(5)%
Components and software62361671%1,2341,249(15)(1)%
Automated transmissions162179(17)(9)%327358(31)(9)%
Atmus—417(417)(100)%353(1)834(481)(58)%
Total sales$2,982$3,425$(443)(13)%$6,314$6,982$(668)(10)%
(1) Included sales through the March 18, 2024, divestiture. See NOTE 14, "ATMUS IPO AND DIVESTITURE," to the Condensed Consolidated Financial Statements for additional information.

Sales

Components segment sales for the three months ended June 30, 2024, decreased $443 million versus the comparable period in 2023. The following were the primary drivers by business:

  • Sales decreased $417 million due to the Atmus divestiture on March 18, 2024.

  • Emission solutions sales decreased $23 million primarily due to weaker demand in China and North America, partially offset by higher demand in Mexico.

Components segment sales for the six months ended June 30, 2024, decreased $668 million versus the comparable period in 2023. The following were the primary drivers by business:

  • Sales decreased $481 million due to the Atmus divestiture on March 18, 2024.

  • Emission solutions sales decreased $108 million principally due to lower demand in China and North America, partially offset by higher demand in Mexico.

Segment EBITDA

Components segment EBITDA for the three and six months ended June 30, 2024, decreased $80 million and $114 million, respectively, versus the comparable periods in 2023, mainly due to the divestiture of Atmus.

Engine Segment Results

Financial data for the Engine segment was as follows:

Three months endedFavorable/Six months endedFavorable/
June 30,(Unfavorable)June 30,(Unfavorable)
In millions20242023AmountPercent20242023AmountPercent
External sales$2,468$2,263$2059%$4,708$4,515$1934%
Intersegment sales683725(42)(6)%1,3711,459(88)(6)%
Total sales3,1512,9881635%6,0795,9741052%
Research, development and engineering expenses167148(19)(13)%321282(39)(14)%
Equity, royalty and interest income from investees4871(23)(32)%105136(31)(23)%
Interest income77——%1410440%
Segment EBITDA445425205%859882(23)(3)%
Percentage PointsPercentage Points
Segment EBITDA as a percentage of total sales14.1%14.2%(0.1)14.1%14.8%(0.7)

Sales for our Engine segment by market were as follows:

Three months endedFavorable/Six months endedFavorable/
June 30,(Unfavorable)June 30,(Unfavorable)
In millions20242023AmountPercent20242023AmountPercent
Heavy-duty truck$1,184$1,117$676%$2,243$2,231$121%
Medium-duty truck and bus1,07494213214%2,0691,84522412%
Light-duty automotive461445164%899884152%
Total on-highway2,7192,5042159%5,2114,9602515%
Off-highway432484(52)(11)%8681,014(146)(14)%
Total sales$3,151$2,988$1635%$6,079$5,974$1052%
Percentage PointsPercentage Points
On-highway sales as percentage of total sales86%84%286%83%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 endedFavorable/Six months endedFavorable/
June 30,(Unfavorable)June 30,(Unfavorable)
20242023AmountPercent20242023AmountPercent
Heavy-duty37,50036,4001,1003%71,10071,100——%
Medium-duty79,60076,0003,6005%155,400154,900500—%
Light-duty57,20053,6003,6007%112,000108,6003,4003%
Total unit shipments174,300166,0008,3005%338,500334,6003,9001%

Sales

Engine segment sales for the three months ended June 30, 2024, increased $163 million versus the comparable period in 2023. The following were the primary drivers by market:

  • Medium-duty truck and bus sales increased $132 million primarily due to higher truck demand, especially in North America with shipments up 12 percent, and increased pricing.

  • Heavy-duty truck sales increased $67 million mainly due to stronger demand in North America with shipments up 5 percent and favorable pricing.

These increases were partially offset by decreased off-highway sales of $52 million mainly due to lower demand in global construction markets, especially in China, Western Europe and North America.

Engine segment sales for the six months ended June 30, 2024, increased $105 million versus the comparable period in 2023. The primary driver by market was an increase in medium-duty truck and bus sales of $224 million principally due to higher truck demand, especially in North America with shipments up 16 percent, and favorable pricing. The increase was partially offset by decreased off-highway sales of $146 million mainly due to lower demand in global construction markets, especially in China and Western Europe.

Segment EBITDA

Engine segment EBITDA for the three months ended June 30, 2024, increased $20 million versus the comparable period in 2023, primarily due to favorable pricing, partially offset by higher compensation expenses, lower equity, royalty and interest income from investees and unfavorable mix.

Engine segment EBITDA for the six months ended June 30, 2024, decreased $23 million versus the comparable period in 2023, primarily due to higher compensation expenses, increased product coverage, lower equity, royalty and interest income from investees, lower parts volumes and unfavorable mix, partially offset by favorable pricing.

Distribution Segment Results

Financial data for the Distribution segment was as follows:

Three months endedFavorable/Six months endedFavorable/
June 30,(Unfavorable)June 30,(Unfavorable)
In millions20242023AmountPercent20242023AmountPercent
External sales$2,821$2,576$24510%$5,350$4,975$3758%
Intersegment sales819(11)(58)%1426(12)(46)%
Total sales2,8292,5952349%5,3645,0013637%
Research, development and engineering expenses141517%282913%
Equity, royalty and interest income from investees2424——%4848——%
Interest income118338%2215747%
Segment EBITDA314299155%608634(26)(4)%
Percentage PointsPercentage Points
Segment EBITDA as a percentage of total sales11.1%11.5%(0.4)11.3%12.7%(1.4)

Sales for our Distribution segment by region were as follows:

Three months endedFavorable/Six months endedFavorable/
June 30,(Unfavorable)June 30,(Unfavorable)
In millions20242023AmountPercent20242023AmountPercent
North America$1,901$1,797$1046%$3,624$3,492$1324%
Asia Pacific3102664417%5955068918%
Europe2852137234%52540811729%
China1301131715%232215178%
India79651422%1501242621%
Latin America646135%124114109%
Africa and Middle East6080(20)(25)%114142(28)(20)%
Total sales$2,829$2,595$2349%$5,364$5,001$3637%

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

Three months endedFavorable/Six months endedFavorable/
June 30,(Unfavorable)June 30,(Unfavorable)
In millions20242023AmountPercent20242023AmountPercent
Parts$990$1,019$(29)(3)%$1,991$2,076$(85)(4)%
Power generation95461434055%1,6611,10655550%
Service448431174%854832223%
Engines437531(94)(18)%858987(129)(13)%
Total sales$2,829$2,595$2349%$5,364$5,001$3637%

Sales

Distribution segment sales for the three months ended June 30, 2024, increased $234 million versus the comparable period in 2023. The following were the primary drivers by region:

  • North American sales increased $104 million principally due to higher demand in power generation markets, especially data center and commercial markets, partially offset by lower demand for engines and aftermarket products.

  • European sales increased $72 million mainly due to favorable demand in power generation markets.

Distribution segment sales for the six months ended June 30, 2024, increased $363 million versus the comparable period in 2023. The following were the primary drivers by region:

  • North American sales increased $132 million principally due to higher demand in power generation markets, especially commercial and data center markets, partially offset by lower demand for engines and aftermarket products.

  • European sales increased $117 million mainly due to favorable demand in power generation markets.

  • Asia Pacific sales increased $89 million primarily due to higher demand in power generation markets, especially data center markets, and service.

Segment EBITDA

Distribution segment EBITDA for the three months ended June 30, 2024, increased $15 million versus the comparable period in 2023, primarily due to favorable pricing, partially offset by higher compensation expenses.

Distribution segment EBITDA for the six months ended June 30, 2024, decreased $26 million versus the comparable period in 2023, primarily due to higher compensation expenses, unfavorable mix and higher managed expenses, partially offset by favorable pricing.

Power Systems Segment Results

Financial data for the Power Systems segment was as follows:

Three months endedFavorable/Six months endedFavorable/
June 30,(Unfavorable)June 30,(Unfavorable)
In millions20242023AmountPercent20242023AmountPercent
External sales$888$794$9412%$1,596$1,473$1238%
Intersegment sales701663386%1,3821,327554%
Total sales1,5891,4571329%2,9782,8001786%
Research, development and engineering expenses636635%12312965%
Equity, royalty and interest income from investees2618844%45311445%
Interest income32150%64250%
Segment EBITDA30120110050%53842011828%
Percentage PointsPercentage Points
Segment EBITDA as a percentage of total sales18.9%13.8%5.118.1%15.0%3.1

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

Three months endedFavorable/Six months endedFavorable/
June 30,(Unfavorable)June 30,(Unfavorable)
In millions20242023AmountPercent20242023AmountPercent
Power generation$987$854$13316%$1,840$1,624$21613%
Industrial478468102%898923(25)(3)%
Generator technologies124135(11)(8)%240253(13)(5)%
Total sales$1,589$1,457$1329%$2,978$2,800$1786%

Sales

Power Systems segment sales for the three months ended June 30, 2024, increased $132 million versus the comparable period in 2023. The primary driver was an increase in power generation sales of $133 million principally due to higher demand in data center markets in North America and China, partially offset by weaker demand in India.

Power Systems segment sales for the six months ended June 30, 2024, increased $178 million versus the comparable period in 2023. The primary driver was an increase in power generation sales of $216 million principally due to higher demand in data center markets in North America, partially offset by weaker demand for industrial products in the North American oil and gas markets.

Segment EBITDA

Power Systems segment EBITDA for the three months ended June 30, 2024, increased $100 million versus the comparable period in 2023, mainly due to favorable pricing, improved mix and higher volumes, partially offset by increased product coverage costs.

Power Systems segment EBITDA for the six months ended June 30, 2024, increased $118 million versus the comparable period in 2023, primarily due to favorable pricing and higher volumes, partially offset by increased product coverage costs.

Accelera Segment Results

Financial data for the Accelera segment was as follows:

Three months endedFavorable/Six months endedFavorable/
June 30,(Unfavorable)June 30,(Unfavorable)
In millions20242023AmountPercent20242023AmountPercent
External sales$101$81$2025%$185$161$2415%
Intersegment sales1046NM19910NM
Total sales111852631%2041703420%
Research, development and engineering expenses5452(2)(4)%109100(9)(9)%
Equity, royalty and interest loss from investees(8)(4)(4)(100)%(11)(8)(3)(38)%
Interest income—1(1)(100)%—1(1)(100)%
Segment EBITDA(117)(114)(3)(3)%(218)(208)(10)(5)%
"NM" - not meaningful information

Accelera segment sales for the three and six months ended June 30, 2024, increased $26 million and $34 million versus the comparable periods in 2023 primarily 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 in the second half of 2024.

  • Continued increases in labor costs, as well as other inflationary pressures, could negatively impact earnings.

  • The financial implications resulting from our Settlement Agreements 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 millionsJune 30, 2024December 31, 2023
Working capital (1)$3,818$2,295
Current ratio1.341.18
Accounts and notes receivable, net$5,606$5,583
Days' sales in receivables5958
Inventories$5,857$5,677
Inventory turnover4.44.5
Accounts payable (principally trade)$4,405$4,260
Days' payable outstanding6262
Total debt$7,503$6,696
Total debt as a percent of total capital41.5%40.3%
(1) Working capital included cash and cash equivalents

Cash Flows

Cash and cash equivalents were impacted as follows:

Six months ended
June 30,
In millions20242023Change
Net cash (used in) provided by operating activities$(575)$978$(1,553)
Net cash used in investing activities(806)(606)(200)
Net cash provided by (used in) financing activities807(603)1,410
Effect of exchange rate changes on cash and cash equivalents(15)(68)53
Net decrease in cash and cash equivalents$(589)$(299)$(290)

Net cash used in operating activities increased $1.6 billion for the six months ended June 30, 2024, versus the comparable period in 2023, primarily due to higher working capital requirements of $1.6 billion. The higher working capital requirements resulted in a cash outflow of $2.5 billion compared to a cash outflow of $849 million in the comparable period of 2023, mainly due to $1.9 billion of payments required by the Settlement Agreements, partially offset by favorable changes in accounts and notes receivable.

Net cash used in investing activities increased $200 million for the six months ended June 30, 2024, versus the comparable period in 2023, primarily due to cash associated with the Atmus divestiture.

Net cash provided by financing activities increased $1.4 billion for the six months ended June 30, 2024, versus the comparable period in 2023, primarily due to higher proceeds from borrowings of $1.7 billion (principally related to our 2024 note issuance) and increased net borrowings of commercial paper of $743 million, partially offset by higher payments on borrowings and finance lease obligations of $995 million (largely related to increased early payments of $900 million on our term loan, due 2025).

The effect of exchange rate changes on cash and cash equivalents for the six months ended June 30, 2024, versus the comparable period in 2023, increased $53 million primarily due to favorable fluctuations in the British pound.

Sources of Liquidity

We generate significant ongoing cash flow. Cash provided by operations is generally our principal source of liquidity. In February, we issued $2.25 billion in long-term debt to pay down higher cost debt, finance Settlement Agreement payments and improve our overall liquidity. Our sources of liquidity include the following:

June 30, 2024
In millionsTotalU.S.InternationalPrimary location of international balances
Cash and cash equivalents$1,590$716$874Singapore, Australia, China, Mexico, Belgium, Canada
Marketable securities (1)59385508India
Total$2,183$801$1,382
Available credit capacity
Revolving credit facilities (2)$2,419
International and other uncommitted domestic credit facilities$385
(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 June 2029 and June 2025, respectively, are maintained primarily to provide backup liquidity for our commercial paper borrowings and general corporate purposes. At June 30, 2024, we had $1.6 billion of commercial paper outstanding, which effectively reduced our available capacity under our revolving credit facilities to $2.4 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 completely permanently reinvested when cost effective to do so.

Debt Facilities and Other Sources of Liquidity

On June 3, 2024, we entered into an amended and restated five-year credit agreement that allows us to borrow up to $2.0 billion of unsecured funds at any time prior to June 3, 2029. The credit agreement amended and restated the prior $2.0 billion five-year credit agreement that would have matured on August 18, 2026.

On June 3, 2024, we entered into an amended and restated 364-day credit agreement that allows us to borrow up to $2.0 billion of unsecured funds at any time prior to June 2, 2025. This credit agreement amended and restated the prior $2.0 billion 364-day credit facility that matured on June 3, 2024.

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.

Our committed credit facilities provide access up to $4.0 billion, including our $2.0 billion 364-day facility that expires June 2, 2025, and our $2.0 billion five-year facility that expires on June 3, 2029. 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 June 30, 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 June 30, 2024, we had $1.6 billion of commercial paper outstanding, which effectively reduced our available capacity under our revolving credit facilities to $2.4 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 these programs was $538 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 June 30, 2024, were $212 million.

Accounts Receivable Sales Program

In May 2024, we entered into an accounts receivable sales agreement with Wells Fargo Bank, N.A., to sell certain accounts receivable up to a Board approved limit of $500 million. See NOTE 1, "NATURE OF OPERATIONS AND BASIS OF PRESENTATION," to the Condensed Consolidated Financial Statements for additional information.

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. We made $1.9 billion of payments required by the Settlement Agreements in the second quarter of 2024. See NOTE 11, "COMMITMENTS AND CONTINGENCIES," to the Condensed Consolidated Financial Statements for additional information.

Dividends

We paid dividends of $469 million during the six months ended June 30, 2024. In July 2024, the Board authorized an increase to our quarterly dividend of approximately 8 percent from $1.68 per share to $1.82 per share.

Capital Expenditures

Capital expenditures for the six months ended June 30, 2024, were $409 million versus $414 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 $1,581 million of commercial paper outstanding at June 30, 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 $61 million to $755 million 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. In July 2024, we settled the remaining $100 million of interest rate swaps and repaid the outstanding $100 million of our related term loan due in 2025.

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 six months of 2024, the investment gain on our U.S. pension trusts was 2.0 percent, while our U.K. pension trusts' loss was 4.3 percent. We anticipate making additional defined benefit pension contributions during the remainder of 2024 of $22 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 six months of 2024. The dollar value remaining available for future purchases under the 2019 program at June 30, 2024, was $218 million.

Amplify Cell Technologies LLC Joint Venture

In September 2023, our Accelera business signed an agreement to form a joint venture, Amplify Cell Technologies LLC, with Daimler Trucks and Buses US Holding LLC (Daimler Truck), PACCAR Inc. (PACCAR) and EVE Energy to accelerate and localize battery cell production and the battery supply chain in the U.S., including building a 21-gigawatt hour battery production facility in Marshall County, Mississippi. The joint venture will manufacture battery cells for electric commercial vehicles and industrial applications. At June 30, 2024, our maximum remaining required contribution to the joint venture was $780 million, which could be reduced by future government incentives received by the joint venture. The majority of the contribution is expected to be made by the end of 2028. See NOTE 4, "EQUITY, ROYALTY AND INTEREST INCOME FROM INVESTEES," to the Condensed Consolidated Financial Statements for additional information.

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-TermShort-Term
Credit Rating Agency (1)Senior Debt RatingDebt RatingOutlook
Standard and Poor’s Rating ServicesAA1Stable
Moody’s Investors Service, Inc.A2P1Stable
(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 targeted capital expenditures, dividend payments, debt service obligations, projected pension obligations, common stock repurchases and fund joint venture contributions and 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.

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 six months of 2024.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

See NOTE 17, "RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS," in the Notes to Condensed Consolidated Financial Statements for additional information.

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