Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
cmi-20200628_g1.jpg
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 29, 2019June 28, 2020
 
Commission File Number 1-4949
CUMMINS INC.
(Exact name of registrant as specified in its charter)
Indiana35-0257090
(State of Incorporation) (IRS Employer Identification No.)
500 Jackson Street
Box 3005
Columbus,, Indiana47202-3005
(Address of principal executive offices)
 
Telephone (812) (812) 377-5000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common stock, $2.50 par valueCMINew York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit such files).  Yes x  No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.  (Check one):
Large Accelerated FilerxAccelerated filer☐Non-accelerated filer☐
Smaller reporting company☐Emerging growth company☐
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐   No x
 
As of September 29, 2019,June 28, 2020, there were 153,203,601147,675,521 shares of common stock outstanding with a par value of $2.50 per share.



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Table of Contents
CUMMINS INC. AND SUBSIDIARIES
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
 
Page
PART I. FINANCIAL INFORMATION
3
Condensed Consolidated Statements of Net Income for the three and ninesix months ended September 29,June 28, 2020 and June 30, 2019 and September 30, 2018
3
Condensed Consolidated Statements of Comprehensive Income for the three and ninesix months ended September 29,June 28, 2020 and June 30, 2019 and September 30, 2018
4
Condensed Consolidated Balance Sheets at September 29, 2019June 28, 2020 and December 31, 20182019
5
Condensed Consolidated Statements of Cash Flows for the ninesix months ended September 29,June 28, 2020 and June 30, 2019 and September 30, 2018
6
Condensed Consolidated Statements of Changes in Equity for the three and ninesix months ended September 29,June 28, 2020 and June 30, 2019 and September 30, 2018
7
9
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PART II. OTHER INFORMATION
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Table of Contents
PART I.  FINANCIAL INFORMATION 
ITEM 1.  Condensed Consolidated Financial Statements 

CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF NET INCOME
(Unaudited)

 Three months endedSix months ended
In millions, except per share amounts June 28,
2020		June 30,
2019		June 28,
2020		June 30,
2019
NET SALES (a) (Note 3)
$3,852  $6,221  $8,863  $12,225  
Cost of sales2,962  4,580  6,679  9,052  
GROSS MARGIN890  1,641  2,184  3,173  
OPERATING EXPENSES AND INCOME    
Selling, general and administrative expenses470  629  1,016  1,222  
Research, development and engineering expenses189  251  427  488  
Equity, royalty and interest income from investees (Note 5)115  96  244  188  
Other operating expense, net(10) (9) (15) (4) 
OPERATING INCOME336  848  970  1,647  
Interest income4  12  11  24  
Interest expense23  29  46  61  
Other income, net45  40  82  106  
INCOME BEFORE INCOME TAXES362  871  1,017  1,716  
Income tax expense (Note 6)93  186  220  362  
CONSOLIDATED NET INCOME269  685  797  1,354  
Less: Net (loss) income attributable to noncontrolling interests(7) 10  10  16  
NET INCOME ATTRIBUTABLE TO CUMMINS INC.$276  $675  $787  $1,338  
 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.    
Basic$1.87  $4.29  $5.30  $8.51  
Diluted$1.86  $4.27  $5.29  $8.47  
 
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING    
Basic147.6  157.4  148.4  157.3  
Dilutive effect of stock compensation awards0.4  0.6  0.4  0.6  
Diluted148.0  158.0  148.8  157.9  
(a) Includes sales to nonconsolidated equity investees of $338 million and $595 million for the three and six months ended June 28, 2020, compared with $317 million and $602 million for the comparable periods in 2019.

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
3
  Three months ended Nine months ended
In millions, except per share amounts  September 29,
2019		 September 30,
2018		 September 29,
2019		 September 30,
2018
NET SALES (a) (Note 3)
 $5,768
 $5,943
 $17,993
 $17,645
Cost of sales 4,274
 4,392
 13,326
 13,454
GROSS MARGIN 1,494
 1,551
 4,667
 4,191
OPERATING EXPENSES AND INCOME  
  
  
  
Selling, general and administrative expenses 600
 604
 1,822
 1,794
Research, development and engineering expenses 242
 229
 730
 658
Equity, royalty and interest income from investees (Note 5) 68
 90
 256
 315
Other operating income (expense), net (21) (5) (25) 1
OPERATING INCOME 699
 803
 2,346
 2,055
Interest income 14
 9
 38
 26
Interest expense 26
 30
 87
 82
Other income, net 68
 23
 174
 44
INCOME BEFORE INCOME TAXES 755
 805
 2,471
 2,043
Income tax expense (Note 6) 139
 107
 501
 466
CONSOLIDATED NET INCOME 616
 698
 1,970
 1,577
Less: Net income (loss) attributable to noncontrolling interests (6) 6
 10
 15
NET INCOME ATTRIBUTABLE TO CUMMINS INC. $622
 $692
 $1,960
 $1,562
         
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.  
  
  
  
Basic $3.99
 $4.29
 $12.50
 $9.57
Diluted $3.97
 $4.28
 $12.45
 $9.53
         
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING  
  
  
  
Basic 155.9
 161.3
 156.8
 163.3
Dilutive effect of stock compensation awards 0.7
 0.5
 0.6
 0.6
Diluted 156.6
 161.8
 157.4
 163.9

(a) Includes sales to nonconsolidated equity investeesTable of $280 millionContents and $882 million for the three and nine months ended September 29, 2019, compared with $314 million and $951 million for the comparable periods in 2018.
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 Three months endedSix months ended
In millions June 28,
2020		June 30,
2019		June 28,
2020		June 30,
2019
CONSOLIDATED NET INCOME$269  $685  $797  $1,354  
Other comprehensive income (loss), net of tax (Note 13)    
Change in pension and other postretirement defined benefit plans16  7  18  (4) 
Foreign currency translation adjustments(11) (99) (173) (15) 
Unrealized gain on debt securities—  1  —  —  
Unrealized loss on derivatives(2) (10) (81) (11) 
Total other comprehensive income (loss), net of tax3  (101) (236) (30) 
COMPREHENSIVE INCOME272  584  561  1,324  
Less: Comprehensive (loss) income attributable to noncontrolling interests(12) 10  (12) 19  
COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC.$284  $574  $573  $1,305  
 
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

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Table of Contents
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEBALANCE SHEETS
(Unaudited)
In millions, except par valueJune 28,
2020		December 31,
2019
ASSETS  
Current assets  
Cash and cash equivalents$1,751  $1,129  
Marketable securities (Note 7)353  341  
Total cash, cash equivalents and marketable securities2,104  1,470  
Accounts and notes receivable, net
Trade and other3,069  3,387  
Nonconsolidated equity investees372  283  
Inventories (Note 8)3,655  3,486  
Prepaid expenses and other current assets634  761  
Total current assets9,834  9,387  
Long-term assets  
Property, plant and equipment8,620  8,699  
Accumulated depreciation(4,553) (4,454) 
Property, plant and equipment, net4,067  4,245  
Investments and advances related to equity method investees1,362  1,237  
Goodwill1,284  1,286  
Other intangible assets, net1,017  1,003  
Pension assets998  1,001  
Other assets1,752  1,578  
Total assets$20,314  $19,737  
LIABILITIES  
Current liabilities  
Accounts payable (principally trade)$2,281  $2,534  
Loans payable (Note 9)109  100  
Commercial paper (Note 9)2,027  660  
Accrued compensation, benefits and retirement costs309  560  
Current portion of accrued product warranty (Note 10)681  803  
Current portion of deferred revenue (Note 3)523  533  
Other accrued expenses (Note 11)920  1,039  
Current maturities of long-term debt (Note 9)66  31  
Total current liabilities6,916  6,260  
Long-term liabilities  
Long-term debt (Note 9)1,639  1,576  
Pensions and other postretirement benefits578  591  
Accrued product warranty (Note 10)636  645  
Deferred revenue (Note 3)829  821  
Other liabilities (Note 11)1,586  1,379  
Total liabilities$12,184  $11,272  
Commitments and contingencies (Note 12)
 
EQUITY
Cummins Inc. shareholders’ equity  
Common stock, $2.50 par value, 500 shares authorized, 222.4 and 222.4 shares issued$2,353  $2,346  
Retained earnings14,811  14,416  
Treasury stock, at cost, 74.8 and 71.7 shares(7,729) (7,225) 
Common stock held by employee benefits trust, at cost, 0.1 and 0.2 shares(1) (2) 
Accumulated other comprehensive loss (Note 13)(2,242) (2,028) 
Total Cummins Inc. shareholders’ equity7,192  7,507  
Noncontrolling interests938  958  
Total equity$8,130  $8,465  
Total liabilities and equity$20,314  $19,737  
  Three months ended Nine months ended
In millions  September 29,
2019		 September 30,
2018		 September 29,
2019		 September 30,
2018
CONSOLIDATED NET INCOME $616
 $698
 $1,970
 $1,577
Other comprehensive income (loss), net of tax (Note 14)  
  
  
  
Change in pension and other postretirement defined benefit plans 6
 13
 2
 34
Foreign currency translation adjustments (182) (159) (197) (374)
Unrealized gain (loss) on derivatives (29) (3) (40) 4
Total other comprehensive loss, net of tax (205) (149) (235) (336)
COMPREHENSIVE INCOME 411
 549
 1,735
 1,241
Less: Comprehensive income (loss) attributable to noncontrolling interests (11) (11) 8
 (25)
COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC. $422
 $560
 $1,727
 $1,266
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

5
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
In millions, except par value September 29,
2019		 December 31,
2018
ASSETS  
  
Current assets  
  
Cash and cash equivalents $1,560
 $1,303
Marketable securities (Note 7) 303
 222
Total cash, cash equivalents and marketable securities 1,863
 1,525
Accounts and notes receivable, net    
Trade and other 3,677
 3,635
Nonconsolidated equity investees 257
 231
Inventories (Note 8) 3,821
 3,759
Prepaid expenses and other current assets 610
 668
Total current assets 10,228
 9,818
Long-term assets  
  
Property, plant and equipment 8,452
 8,319
Accumulated depreciation (4,396) (4,223)
Property, plant and equipment, net 4,056
 4,096
Investments and advances related to equity method investees 1,250
 1,222
Goodwill 1,288
 1,126
Other intangible assets, net 1,022
 909
Pension assets 970
 929
Other assets 1,532
 962
Total assets $20,346
 $19,062
     
LIABILITIES  
  
Current liabilities  
  
Accounts payable (principally trade) $2,830
 $2,822
Loans payable (Note 10) 103
 54
Commercial paper (Note 10) 902
 780
Accrued compensation, benefits and retirement costs 494
 679
Current portion of accrued product warranty (Note 11) 817
 654
Current portion of deferred revenue (Note 3) 545
 498
Other accrued expenses (Note 12) 997
 852
Current maturities of long-term debt (Note 10) 37
 45
Total current liabilities 6,725
 6,384
Long-term liabilities  
  
Long-term debt (Note 10) 1,619
 1,597
Pensions and other postretirement benefits 521
 532
Accrued product warranty (Note 11) 645
 740
Deferred revenue (Note 3) 769
 658
Other liabilities (Note 12) 1,314
 892
Total liabilities $11,593
 $10,803
     
Commitments and contingencies (Note 13) 


 


   
  
EQUITY    
Cummins Inc. shareholders’ equity  
  
Common stock, $2.50 par value, 500 shares authorized, 222.4 and 222.4 shares issued $2,322
 $2,271
Retained earnings 14,315
 12,917
Treasury stock, at cost, 69.2 and 64.4 shares (6,784) (6,028)
Common stock held by employee benefits trust, at cost, 0.3 and 0.4 shares (3) (5)
Accumulated other comprehensive loss (Note 14) (2,040) (1,807)
Total Cummins Inc. shareholders’ equity 7,810
 7,348
Noncontrolling interests 943
 911
Total equity $8,753
 $8,259
Total liabilities and equity $20,346
 $19,062
Table of Contents


CUMMINS INC. AND SUBSIDIARIES
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
 Six months ended
In millionsJune 28,
2020		June 30,
2019
CASH FLOWS FROM OPERATING ACTIVITIES  
Consolidated net income$797  $1,354  
Adjustments to reconcile consolidated net income to net cash provided by operating activities  
Depreciation and amortization333  315  
Deferred income taxes(11) 17  
Equity in income of investees, net of dividends(124) (43) 
Pension and OPEB expense (Note 4)54  37  
Pension contributions and OPEB payments (Note 4)(82) (92) 
Stock-based compensation expense12  28  
Restructuring payments (Note 14)(81) —  
Gain on corporate owned life insurance(38) (55) 
Foreign currency remeasurement and transaction exposure(2) 46  
Changes in current assets and liabilities 
Accounts and notes receivable170  (312) 
Inventories(224) (125) 
Other current assets95  15  
Accounts payable(220) 148  
Accrued expenses(422) (194) 
Changes in other liabilities199  120  
Other, net(99) (39) 
Net cash provided by operating activities357  1,220  
CASH FLOWS FROM INVESTING ACTIVITIES  
Capital expenditures(152) (242) 
Investments in internal use software(21) (34) 
Investments in and advances to equity investees(17) (18) 
Investments in marketable securities—acquisitions(285) (259) 
Investments in marketable securities—liquidations (Note 7)254  153  
Cash flows from derivatives not designated as hedges(22) (26) 
Other, net9  15  
Net cash used in investing activities(234) (411) 
CASH FLOWS FROM FINANCING ACTIVITIES  
Net borrowings (payments) of commercial paper (Note 9)1,367  (346) 
Payments on borrowings and finance lease obligations(25) (17) 
Net borrowings under short-term credit agreements4  57  
Distributions to noncontrolling interests(13) (13) 
Dividend payments on common stock(388) (358) 
Repurchases of common stock(550) (100) 
Other, net65  66  
Net cash provided by (used in) financing activities460  (711) 
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS39  (4) 
Net increase in cash and cash equivalents622  94  
Cash and cash equivalents at beginning of year1,129  1,303  
CASH AND CASH EQUIVALENTS AT END OF PERIOD$1,751  $1,397  
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
  Nine months ended
In millions September 29,
2019		 September 30,
2018
CASH FLOWS FROM OPERATING ACTIVITIES  
  
Consolidated net income $1,970
 $1,577
Adjustments to reconcile consolidated net income to net cash provided by operating activities  
  
Depreciation and amortization 493
 456
Deferred income taxes (14) (167)
Equity in income of investees, net of dividends (44) (156)
Pension contributions (in excess of) under expense, net (Note 4) (62) 36
Other postretirement benefits payments in excess of expense, net (Note 4) (12) (8)
Stock-based compensation expense 37
 38
Gain on corporate owned life insurance (64) (8)
Foreign currency remeasurement and transaction exposure (54) (27)
Changes in current assets and liabilities, net of acquisitions    
Accounts and notes receivable (101) (429)
Inventories (62) (773)
Other current assets 48
 (100)
Accounts payable (3) 467
Accrued expenses (74) 276
Changes in other liabilities 168
 118
Other, net 117
 88
Net cash provided by operating activities 2,343
 1,388
     
CASH FLOWS FROM INVESTING ACTIVITIES  
  
Capital expenditures (395) (361)
Investments in internal use software (50) (55)
Investments in and advances to equity investees (16) (9)
Acquisitions of businesses, net of cash acquired (Note 15) (237) (70)
Investments in marketable securities—acquisitions (367) (316)
Investments in marketable securities—liquidations (Note 7) 296
 298
Cash flows from derivatives not designated as hedges (86) (56)
Other, net 26
 50
Net cash used in investing activities (829) (519)
     
CASH FLOWS FROM FINANCING ACTIVITIES  
  
Net borrowings of commercial paper (Note 10) 122
 502
Payments on borrowings and finance lease obligations (47) (54)
Net borrowings under short-term credit agreements 53
 9
Distributions to noncontrolling interests (33) (30)
Dividend payments on common stock (562) (537)
Repurchases of common stock (806) (879)
Other, net 75
 29
Net cash used in financing activities (1,198) (960)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (59) (56)
Net increase (decrease) in cash and cash equivalents 257
 (147)
Cash and cash equivalents at beginning of year 1,303
 1,369
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,560
 $1,222

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

6
Table of Contents
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
Three months ended
In millions, except per share amountsCommon StockAdditional Paid-in CapitalRetained EarningsTreasury StockCommon Stock Held in TrustAccumulated Other Comprehensive LossTotal Cummins Inc. Shareholders’ EquityNoncontrolling InterestsTotal Equity
BALANCE AT MARCH 29, 2020$556  $1,779  $14,728  $(7,744) $(1) $(2,250) $7,068  $950  $8,018  
Net income276  276  (7) 269  
Other comprehensive income (loss), net of tax (Note 13)8  8  (5) 3  
Issuance of common stock1  1  —  1  
Employee benefits trust activity5  5  —  5  
Cash dividends on common stock, $1.311 per share(193) (193) —  (193) 
Stock-based awards4  15  19  —  19  
Other shareholder transactions8  8  —  8  
BALANCE AT JUNE 28, 2020$556  $1,797  $14,811  $(7,729) $(1) $(2,242) $7,192  $938  $8,130  
BALANCE AT MARCH 31, 2019$556  $1,717  $13,401  $(6,111) $(4) $(1,739) $7,820  $907  $8,727  
Net income675  675  10  685  
Other comprehensive loss, net of tax (Note 13)(101) (101) —  (101) 
Issuance of common stock1  1  —  1  
Employee benefits trust activity7  7  —  7  
Cash dividends on common stock, $1.14 per share(179) (179) —  (179) 
Stock-based awards8  29  37  —  37  
Other shareholder transactions18  18  1  19  
BALANCE AT JUNE 30, 2019$556  $1,751  $13,897  $(6,082) $(4) $(1,840) $8,278  $918  $9,196  
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.










7
Table of Contents
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)

  Three months ended
In millions, except per share amounts Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Common Stock Held in Trust Accumulated Other Comprehensive Loss Total Cummins Inc. Shareholders’ Equity Noncontrolling Interests Total Equity
BALANCE AT JUNE 30, 2019 $556
 $1,751
 $13,897
 $(6,082) $(4) $(1,840) $8,278
 $918
 $9,196
Net income 

 

 622
 

 

 

 622
 (6) 616
Other comprehensive income, net of tax (Note 14) 

 

 
 

 


 (200) (200) (5) (205)
Employee benefits trust activity 

 6
 

 


 1
 

 7
 —
 7
Repurchases of common stock 

 


 

 (706) 

 


 (706) —
 (706)
Cash dividends on common stock, $1.311 per share 

 

 (204) 

 

 

 (204) —
 (204)
Distributions to noncontrolling interests 

 

 

 

 

 

 —
 (20) (20)
Stock-based awards 

 1
 

 4
 

 


 5
 —
 5
Other shareholder transactions 

 8
 

 

 

 

 8
 56
 64
BALANCE AT SEPTEMBER 29, 2019 $556
 $1,766
 $14,315
 $(6,784) $(3) $(2,040) $7,810
 $943
 $8,753
                   
BALANCE AT JULY 1, 2018 $556
 $1,683
 $12,009
 $(5,276) $(6) $(1,667) $7,299
 $895
 $8,194
Net income 

 

 692
 

 

 

 692
 6
 698
Other comprehensive income, net of tax (Note 14) 

 

 

 

 


 (132) (132) (17) (149)
Issuance of common stock 

 2
 

 

 

 

 2
 —
 2
Employee benefits trust activity 

 2
 

 


 


 

 2
 —
 2
Repurchases of common stock 

 (100) 

 (400) 

 


 (500) —
 (500)
Cash dividends on common stock, $1.14 per share 

 

 (182) 

 

 

 (182) —
 (182)
Distributions to noncontrolling interests 

 

 

 

 

 

 —
 (19) (19)
Stock-based awards 

 1
 

 2
 

 


 3
 —
 3
Other shareholder transactions 

 7
 

 

 

 

 7
 4
 11
BALANCE AT SEPTEMBER 30, 2018 $556
 $1,595
 $12,519
 $(5,674) $(6) $(1,799) $7,191
 $869
 $8,060
Six months ended
In millions, except per share amountsCommon
Stock		Additional
Paid-in
Capital		Retained
Earnings		Treasury
Stock		Common
Stock
Held in
Trust		Accumulated
Other
Comprehensive
Loss		Total
Cummins Inc.
Shareholders’
Equity		Noncontrolling
Interests		Total
Equity
BALANCE AT DECEMBER 31, 2019$556  $1,790  $14,416  $(7,225) $(2) $(2,028) $7,507  $958  $8,465  
Adoption of new accounting standards (Note 16)(4) (4) —  (4) 
Net income787  787  10  797  
Other comprehensive loss, net of tax (Note 13)(214) (214) (22) (236) 
Issuance of common stock10  10  —  10  
Employee benefits trust activity22  1  23  —  23  
Repurchases of common stock(550) (550) —  (550) 
Cash dividends on common stock, $2.622 per share(388) (388) —  (388) 
Distributions to noncontrolling interests—  (13) (13) 
Stock-based awards(14) 46  32  —  32  
Other shareholder transactions(11) (11) 5  (6) 
BALANCE AT JUNE 28, 2020$556  $1,797  $14,811  $(7,729) $(1) $(2,242) $7,192  $938  $8,130  
BALANCE AT DECEMBER 31, 2018$556  $1,715  $12,917  $(6,028) $(5) $(1,807) $7,348  $911  $8,259  
Net income1,338  1,338  16  1,354  
Other comprehensive (loss) income, net of tax (Note 13)(33) (33) 3  (30) 
Issuance of common stock2  2  —  2  
Employee benefits trust activity20  1  21  —  21  
Repurchases of common stock(100) (100) —  (100) 
Cash dividends on common stock, $2.28 per share(358) (358) —  (358) 
Distributions to noncontrolling interests—  (13) (13) 
Stock-based awards(3) 46  43  —  43  
Other shareholder transactions17  17  1  18  
BALANCE AT JUNE 30, 2019$556  $1,751  $13,897  $(6,082) $(4) $(1,840) $8,278  $918  $9,196  

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





CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
8
  Nine months ended
In millions, except per share amounts Common
Stock		 Additional
Paid-in
Capital		 Retained
Earnings		 Treasury
Stock		 Common
Stock
Held in
Trust		 Accumulated
Other
Comprehensive
Loss		 Total
Cummins Inc.
Shareholders’
Equity		 Noncontrolling
Interests		 Total
Equity
BALANCE AT DECEMBER 31, 2018 $556
 $1,715
 $12,917
 $(6,028) $(5) $(1,807) $7,348
 $911
 $8,259
Net income 

 

 1,960
 

 

 

 1,960
 10
 1,970
Other comprehensive income, net of tax (Note 14) 

 

   

 

 (233) (233) (2) (235)
Issuance of common stock 

 2
 

 

 

 

 2
 —
 2
Employee benefits trust activity 

 26
 

 

 2
 

 28
 —
 28
Repurchases of common stock 

 


 

 (806) 

 

 (806) —
 (806)
Cash dividends on common stock, $3.591 per share 

 

 (562) 

 

 

 (562) —
 (562)
Distributions to noncontrolling interests 

 

 

 

 

 

 —
 (33) (33)
Stock-based awards 

 (2) 

 50
 

 

 48
 —
 48
Other shareholder transactions 

 25
 

 

 

 

 25
 57
 82
BALANCE AT SEPTEMBER 29, 2019 $556
 $1,766
 $14,315
 $(6,784) $(3) $(2,040) $7,810
 $943
 $8,753
                   
BALANCE AT DECEMBER 31, 2017 $556
 $1,654
 $11,464
 $(4,905) $(7) $(1,503) $7,259
 $905
 $8,164
Adoption of new accounting standards (1)
     30
       30
 —
 30
Net income 

 

 1,562
 

 

 

 1,562
 15
 1,577
Other comprehensive income, net of tax (Note 14) 

 

 

 

 

 (296) (296) (40) (336)
Issuance of common stock 

 10
 

 

 

 

 10
 —
 10
Employee benefits trust activity 

 10
 

 

 1
 

 11
 —
 11
Repurchases of common stock 

 (100) 

 (779) 

 

 (879) —
 (879)
Cash dividends on common stock, $3.30 per share 

 

 (537) 

 

 

 (537) —
 (537)
Distributions to noncontrolling interests 

 

 

 

 

 

 —
 (30) (30)
Stock-based awards 

 (3) 

 10
 

 

 7
 —
 7
Other shareholder transactions 

 24
 

 

 

 

 24
 19
 43
BALANCE AT SEPTEMBER 30, 2018 $556
 $1,595
 $12,519
 $(5,674) $(6) $(1,799) $7,191
 $869
 $8,060

(1)Includes $28 million related to adoptionTable of the revenue recognition standard and $2 million related to adoption of the accounting for certain financial instruments standard. See Note 1, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Recently Adopted and Recently Issued Accounting Pronouncements” of the Notes to the Consolidated Financial Statements of our 2018 Form 10-KContents for additional information.
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. NATURE OF OPERATIONS
Cummins Inc. (“Cummins,” “we,” “our” or “us”) was founded in 1919 as Cummins Engine Company, a corporation in Columbus, Indiana, and one of the first diesel engine manufacturers. In 2001, we changed our name to Cummins Inc. We are a global power leader that designs, manufactures, distributes and services diesel, and natural gas, engineselectric and hybrid powertrains and powertrain-related component products (includingcomponents including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems, and automated transmissions),transmissions, electric power generation systems, batteries, electrified power systems, hydrogen generation and fuel cell products. We sell our products to original equipment manufacturers (OEMs), distributors, dealers and other customers worldwide. We serve our customers through a network of approximately 600 wholly-owned, joint venture and independent distributor locations and over 7,600 Cummins certified dealer locations in more than 190 countries and territories.
NOTE 2. BASIS OF PRESENTATION
Interim Condensed Financial Statements
The unaudited Condensed Consolidated Financial Statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of operations, financial position and cash flows. All such adjustments are of a normal recurring nature. The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles in the United States of America (GAAP) pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial information. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted as permitted by such rules and regulations.
These interim condensed financial statements should be read in conjunction with the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 20182019. Our interim period financial results for the three and ninesix month periods presented are not necessarily indicative of results to be expected for any other interim period or for the entire year. The year-end Condensed Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.
Reclassifications
Certain amounts for prior year periods have been reclassified to conform to the presentation of the current year.
COVID-19
The outbreak of the coronavirus disease of 2019 (COVID-19) spread throughout the world and became a global pandemic with the resultant economic impacts evolving into a worldwide recession. The pandemic triggered a significant downturn in our markets globally and these challenging market conditions could continue for an extended period of time. In an effort to contain the spread of COVID-19, maintain the well-being of our employees and stakeholders, match the reduced demand from our customers and in accordance with governmental requirements, we closed or partially shut down certain office, manufacturing and distribution facilities around the world in March 2020. These closures expanded and continued into the second quarter of 2020. Most of our manufacturing and distribution facilities were open early in the second quarter of 2020, although operating at reduced capacities, while many of our global office buildings remained closed throughout the second quarter.
Use of Estimates in Preparation of Financial Statements
Preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts presented and disclosed in our Condensed Consolidated Financial Statements. Significant estimates and assumptions in these Condensed Consolidated Financial Statementsrequire the exercise of judgment. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be different from these estimates.
The global market downturn, closures and limitations on movement related to COVID-19 are expected to be temporary, however, the duration of the production and supply chain disruptions, and related financial impacts, cannot be estimated at this time. This uncertainty could have an impact on certain estimates used in the preparation of our second quarter financial results.

9
Table of Contents
Reporting Period
Our reporting period usually ends on the Sunday closest to the last day of the quarterly calendar period. The thirdsecond quarters of 20192020 and 20182019 ended on September 29June 28 and SeptemberJune 30, respectively. Our fiscal year ends on December 31, regardless of the day of the week on which December 31 falls.
Weighted-Average Diluted Shares Outstanding
The weighted-average diluted common shares outstanding excludesexclude the anti-dilutive effect of certain stock options since such options had an exercise price in excess of the monthly average market value of our common stock.options. The options excluded from diluted earnings per share were as follows:
 Three months endedSix months ended
 June 28,
2020		June 30,
2019		June 28,
2020		June 30,
2019
Options excluded1,339,359  234,947  1,286,774  509,261  
 Three months ended Nine months ended
 September 29,
2019		 September 30,
2018		 September 29,
2019		 September 30,
2018
Options excluded874,604
 1,481,750
 631,042
 799,337


NOTE 3. REVENUE RECOGNITION
Long-term Contracts

Most of our contracts are for a period of less than one year. We have certain long-term maintenance agreements, construction contracts and extended warranty coverage arrangements that span a period in excess of one year. The aggregate amount of the transaction price for long-term maintenance agreements and construction contracts allocated to performance obligations that havehad not been satisfied as of September 29, 2019,June 28, 2020, was $809$939 million. We expect to recognize the related revenue of $180$231 million over the next 12 months and $629$708 million over periods up to 10 years. See NOTE 11,Note 10, "PRODUCT WARRANTY LIABILITY," for additional disclosures on extended warranty coverage arrangements. Our other contracts generally are for a duration of less than one year, include payment terms that correspond to the timing of costcosts incurred when providing goods and services to our customers or represent sale-basedsales-based royalties.

Deferred and Unbilled Revenue
The following is a summary of our unbilled and deferred revenue and related activity:
In millions September 29,
2019		 December 31,
2018
Unbilled revenue $75
 $64
Deferred revenue, primarily extended warranty 1,314
 1,156
In millionsJune 28,
2020		December 31,
2019
Unbilled revenue$76  $68  
Deferred revenue, primarily extended warranty1,352  1,354  
We recognized revenue of $79$94 million and $282$206 million for the three and ninesix months ended September 29, 2019,June 28, 2020, compared with $71$94 million and $277$203 million for the comparable periods in 2018,2019, that was included in the deferred revenue balance at the beginning of each year. We did not record any impairment losses on our unbilled revenues during the three and ninesix months ended September 29,June 28, 2020 or June 30, 2019.
Disaggregation of Revenue
Consolidated Revenue
The table below presents our consolidated sales by geographic area. Net sales attributed to geographic areas were based on the location of the customer.
 Three months endedSix months ended
In millionsJune 28,
2020		June 30,
2019		June 28,
2020		June 30,
2019
United States$1,865  $3,611  $4,717  $7,047  
China810  644  1,332  1,217  
India70  234  240  458  
Other international1,107  1,732  2,574  3,503  
Total net sales$3,852  $6,221  $8,863  $12,225  
  Three months ended Nine months ended
In millions September 29,
2019		 September 30,
2018		 September 29,
2019		 September 30,
2018
United States $3,414
 $3,407
 $10,461
 $9,829
China 481
 559
 1,698
 1,753
India 185
 240
 643
 722
Other international 1,688
 1,737
 5,191
 5,341
Total net sales $5,768
 $5,943
 $17,993
 $17,645
10

Table of Contents
Segment Revenue
Engine segment external sales by market were as follows:
  Three months ended Nine months ended
In millions September 29,
2019		 September 30,
2018		 September 29,
2019		 September 30,
2018
Heavy-duty truck $635
 $769
 $2,112
 $2,113
Medium-duty truck and bus 525
 613
 1,765
 1,954
Light-duty automotive 451
 446
 1,216
 1,099
Total on-highway 1,611
 1,828
 5,093
 5,166
Off-highway 211
 254
 786
 779
Total sales $1,822
 $2,082
 $5,879
 $5,945


Three months endedSix months ended
In millionsJune 28,
2020		June 30,
2019		June 28,
2020		June 30,
2019
Heavy-duty truck$221  $754  $740  $1,477  
Medium-duty truck and bus298  630  788  1,240  
Light-duty automotive146  435  473  765  
Total on-highway665  1,819  2,001  3,482  
Off-highway272  254  515  575  
Total sales$937  $2,073  $2,516  $4,057  
Distribution segment external sales by region were as follows:
  Three months ended Nine months ended
In millions September 29,
2019		 September 30,
2018		 September 29,
2019		 September 30,
2018
North America $1,373
 $1,331
 $4,139
 $3,954
Asia Pacific 224
 223
 667
 621
Europe 135
 113
 380
 387
China 82
 77
 264
 238
Africa and Middle East 60
 55
 170
 178
Latin America 48
 42
 134
 125
India 46
 49
 142
 142
Russia 33
 37
 113
 117
Total sales $2,001
 $1,927
 $6,009
 $5,762

Three months endedSix months ended
In millionsJune 28,
2020		June 30,
2019		June 28,
2020		June 30,
2019
North America$1,038  $1,374  $2,283  $2,766  
Asia Pacific190  223  382  443  
Europe136  122  271  245  
China100  101  168  182  
Russia44  45  85  80  
Africa and Middle East38  55  89  110  
Latin America32  46  71  86  
India23  49  59  96  
Total sales$1,601  $2,015  $3,408  $4,008  
Distribution segment external sales by product line were as follows:
  Three months ended Nine months ended
In millions September 29,
2019		 September 30,
2018		 September 29,
2019		 September 30,
2018
Parts $796
 $797
 $2,464
 $2,415
Power generation 466
 359
 1,292
 1,029
Service 376
 372
 1,109
 1,091
Engines 363
 399
 1,144
 1,227
Total sales $2,001
 $1,927
 $6,009
 $5,762

Three months endedSix months ended
In millionsJune 28,
2020		June 30,
2019		June 28,
2020		June 30,
2019
Parts$653  $827  $1,436  $1,668  
Power generation376  425  751  826  
Service296  371  623  733  
Engines276  392  598  781  
Total sales$1,601  $2,015  $3,408  $4,008  
Components segment external sales by business were as follows:
Three months endedSix months ended
In millionsJune 28,
2020		June 30,
2019		June 28,
2020		June 30,
2019
Emission solutions$394  $735  $964  $1,484  
Filtration206  263  455  522  
Turbo technologies142  181  300  371  
Electronics and fuel systems91  66  147  120  
Automated transmissions43  156  125  305  
Total sales$876  $1,401  $1,991  $2,802  
  Three months ended Nine months ended
In millions September 29,
2019		 September 30,
2018		 September 29,
2019		 September 30,
2018
Emission solutions $660
 $677
 $2,144
 $2,096
Filtration 249
 242
 771
 756
Turbo technologies 151
 173
 522
 571
Automated transmissions 146
 150
 451
 408
Electronics and fuel systems 47
 55
 167
 181
Total sales $1,253
 $1,297
 $4,055
 $4,012
11

Table of Contents
Power Systems segment external sales by product line were as follows:
Three months endedSix months ended
In millionsJune 28,
2020		June 30,
2019		June 28,
2020		June 30,
2019
Power generation$224  $380  $493  $688  
Industrial145  246  310  477  
Generator technologies59  98  125  182  
Total sales$428  $724  $928  $1,347  
  Three months ended Nine months ended
In millions September 29,
2019		 September 30,
2018		 September 29,
2019		 September 30,
2018
Power generation $372
 $366
 $1,060
 $1,066
Industrial 227
 184
 704
 593
Generator technologies 84
 86
 266
 263
Total sales $683
 $636
 $2,030
 $1,922



NOTE 4. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
We sponsor funded and unfunded domestic and foreign defined benefit pension and other postretirement benefit (OPEB) plans. Contributions to these plans were as follows:
  Three months ended Nine months ended
In millions September 29,
2019		 September 30,
2018		 September 29,
2019		 September 30,
2018
Defined benefit pension plans  
  
  
  
Voluntary contribution $26
 $4
 $88
 $11
Mandatory contribution 7
 6
 22
 17
Defined benefit pension contributions $33
 $10
 $110
 $28
         
Other postretirement benefit plans        
Benefit payments, net $5
 $11
 $20
 $16
         
Defined contribution pension plans $23
 $21
 $80
 $82

 Three months endedSix months ended
In millionsJune 28,
2020		June 30,
2019		June 28,
2020		June 30,
2019
Defined benefit pension contributions$10  $44  $66  $77  
OPEB payments, net12  1  16  15  
Defined contribution pension plans18  18  52  57  
During the remainder of 2019,2020, we anticipate making $13 million in additional defined benefit pension contributions of $13in the U.K. and $12 million forin contributions to our U.S. and U.K. pensionnon-qualified benefit plans. Approximately $91 million of the estimated $123 million of pension contributions for the full year are voluntary. 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 20192020 annual net periodic pension cost to approximate $64$102 million.
The components of net periodic pension and other postretirement benefitOPEB costs under our plans were as follows:
 Pension     Pension  
 U.S. Plans U.K. Plans Other Postretirement Benefits U.S. PlansU.K. PlansOPEB
 Three months ended Three months ended
In millions September 29,
2019		 September 30,
2018		 September 29,
2019		 September 30,
2018		 September 29,
2019		 September 30,
2018		In millionsJune 28,
2020		June 30,
2019		June 28,
2020		June 30,
2019		June 28,
2020		June 30,
2019
Service cost $29
 $30
 $6
 $7
 $—
 $—
Service cost$33  $29  $7  $6  $—  $—  
Interest cost 27
 25
 10
 10
 3
 3
Interest cost23  27  9  11  1  3  
Expected return on plan assets (47) (49) (16) (17) —
 —
Expected return on plan assets(48) (48) (18) (18) —  —  
Amortization of prior service costAmortization of prior service cost1  1  —  1  —  —  
Recognized net actuarial loss 4
 8
 3
 7
 —
 —
Recognized net actuarial loss10  4  9  3  —  —  
Net periodic benefit cost $13
 $14
 $3
 $7
 $3
 $3
Net periodic benefit cost$19  $13  $7  $3  $1  $3  
  Pension    
  U.S. Plans U.K. Plans Other Postretirement Benefits
  Nine months ended
In millions September 29,
2019		 September 30,
2018		 September 29,
2019		 September 30,
2018		 September 29,
2019		 September 30,
2018
Service cost $87
 $90
 $19
 $22
 $—
 $—
Interest cost 81
 74
 32
 31
 8
 8
Expected return on plan assets (142) (147) (52) (53) —
 —
Amortization of prior service cost 1
 —
 1
 —
 —
 —
Recognized net actuarial loss 12
 25
 9
 22
 —
 —
Net periodic benefit cost $39
 $42
 $9
 $22
 $8
 $8


 Pension  
 U.S. PlansU.K. PlansOPEB
 Six months ended
In millionsJune 28,
2020		June 30,
2019		June 28,
2020		June 30,
2019		June 28,
2020		June 30,
2019
Service cost$67  $58  $14  $13  $—  $—  
Interest cost47  54  18  22  3  5  
Expected return on plan assets(97) (95) (37) (36) —  —  
Amortization of prior service cost1  1  1  1  —  —  
Recognized net actuarial loss20  8  17  6  —  —  
Net periodic benefit cost$38  $26  $13  $6  $3  $5  

12
Table of Contents
NOTE 5. EQUITY, ROYALTY AND INTEREST INCOME FROM INVESTEES
Equity, royalty and interest income from investees included in our Condensed Consolidated Statements of Net Income for the reporting periods was as follows:
 Three months endedSix months ended
In millionsJune 28,
2020		June 30,
2019		June 28,
2020		June 30,
2019
Manufacturing entities
Beijing Foton Cummins Engine Co., Ltd.$34  $20  $51  $41  
Dongfeng Cummins Engine Company, Ltd.26  16  34  30  
Chongqing Cummins Engine Company, Ltd.11  10  20  22  
All other manufacturers23  28  78  
(1)
55  
Distribution entities
Komatsu Cummins Chile, Ltda.7  7  17  13  
All other distributors—  —  —  (1) 
Cummins share of net income101  81  200  160  
Royalty and interest income14  15  44  28  
Equity, royalty and interest income from investees$115  $96  $244  $188  
(1) Includes $37 million in adjustments related to tax changes within India's 2020-2021 Union Budget of India (India Tax Law Changes) passed in March 2020. See NOTE 6, "INCOME TAXES" for additional information on India Tax Law Changes.
  Three months ended Nine months ended
In millions September 29,
2019		 September 30,
2018		 September 29,
2019		 September 30,
2018
Manufacturing entities 
 
 
 
Beijing Foton Cummins Engine Co., Ltd. $15
 $18
 $56
 $63
Dongfeng Cummins Engine Company, Ltd. 10
 13
 40
 47
Chongqing Cummins Engine Company, Ltd. 10
 11
 32
 43
All other manufacturers 21
 30
 76
 100
Distribution entities        
Komatsu Cummins Chile, Ltda. 6
 5
 19
 18
All other distributors 1
 —
 —
 —
Cummins share of net income 63
 77
 223
 271
Royalty and interest income 5
 13
 33
 44
Equity, royalty and interest income from investees $68
 $90
 $256
 $315

NOTE 6. INCOME TAXES
Our effective tax rate for the year is expected to approximate 21.5 percent, excluding any discrete tax items that may arise.
Our effective tax rates for the three and ninesix months ended September 29,June 28, 2020, were 25.7 percent and 21.6 percent, respectively. Our effective tax rates for the three and six months ended June 30, 2019, were 18.421.4 percent and 20.321.1 percent, respectively.respectively, and contained immaterial discrete items.
The three months ended September 29, 2019,June 28, 2020, contained $23unfavorable discrete items of $14 million, or $0.14 per share,primarily due to changes in tax reserves on certain U.S. tax matters.
The six months ended June 28, 2020, contained $4 million of favorable net discrete tax items, primarily due to withholding taxes and provision to return adjustments. The nine months ended September 29, 2019, contained $30 million, or $0.19 per share,favorable tax changes within India's 2020-2021 Union Budget of favorable net discrete tax items, primarily due to withholding taxes and provision to return adjustments.
Our effective tax rates for the three and nine months ended September 30, 2018, were 13.3 percent and 22.8 percent, respectively.
The three months ended September 30, 2018, contained $37 million, or $0.23 per share,India (India Tax Law Change) passed in March of favorable net discrete tax items, primarily due to $34 million of favorable discrete items related to the 2017 Tax Cuts and Jobs Act (Tax Legislation) and $3 million of other favorable discrete items.
The nine months ended September 30, 2018, contained $37 million, or $0.23 per share, of unfavorable net discrete tax items, primarily due to $48 million of unfavorable discrete items related to the Tax Legislation,2020, partially offset by $11 millionunfavorable changes in tax reserves in the second quarter of other favorable discrete items. See Note 4. "INCOME TAXES" of2020. The India Tax Law Change eliminated the Notesdividend distribution tax and replaced it with a lower rate withholding tax as the burden shifted from the dividend payor to the Consolidated Financial Statementsdividend recipient for a net favorable income statement impact of our 2018 Form 10-K$35 million.
The India Tax Law Change resulted in the following adjustments to the Income Statement in the first half of 2020:
In millionsFavorable (Unfavorable)
Equity, royalty and interest income from investees$37 
Income tax expense (1)
17 
Less: Net income attributable to noncontrolling interests(19)
Net income statement impact$35 
(1) The adjustment to "Income tax expense"includes $15 million of discrete items.
for additional information.
13

NOTE 7. MARKETABLE SECURITIES
A summary of marketable securities, all of which were classified as current, was as follows:
  September 29,
2019		 December 31,
2018
In millions Cost 
Gross unrealized gains/(losses)(1)
 Estimated
fair value		 Cost 
Gross unrealized gains/(losses)(1)
 Estimated
fair value
Equity securities  
  
  
  
  
  
Certificates of deposit $147
 $—
 $147
 $101
 $—
 $101
Debt mutual funds 132
 3
 135
 103
 1
 104
Equity mutual funds 16
 3
 19
 16
 —
 16
Bank debentures 1
 —
 1
 —
 —
 —
Debt securities 1
 —
 1
 1
 —
 1
Total marketable securities $297
 $6
 $303
 $221
 $1
 $222

(1)Unrealized gains and losses for debt securities are recorded in other comprehensive income while unrealized gains and losses for equity securities are recorded in "Other income, net" in our Condensed Consolidated Statements of Net Income.

 June 28,
2020		December 31,
2019
In millionsCost
Gross unrealized gains/(losses)(1)
Estimated
fair value		Cost
Gross unrealized gains/(losses)(1)
Estimated
fair value
Equity securities      
Debt mutual funds$221  $5  $226  $180  $3  $183  
Certificates of deposit104  —  104  133  —  133  
Equity mutual funds18  3  21  19  4  23  
Bank debentures1  —  1  1  —  1  
Debt securities1  —  1  1  —  1  
Total marketable securities$345  $8  $353  $334  $7  $341  
(1) Unrealized gains and losses for debt securities are recorded in other comprehensive income while unrealized gains and losses for equity securities are recorded in "Other income, net" in our Condensed Consolidated Statements of Net Income.
All debt securities are classified as available-for-sale. All marketable securities presented use a Level 2 fair value measure. The fair value of Level 2 securities is estimated using actively quoted prices for similar instruments from brokers and observable inputs where available, including market transactions and third-party pricing services, or net asset values provided to investors. We do not currently have any Level 3 securities, and there were no transfers between Level 2 or 3 during the first nine monthshalf of 20192020 or for the year ended December 31, 2018.

2019.

A description of the valuation techniques and inputs used for our Level 2 fair value measures is as follows:
•Debt mutual funds — The fair value measures for the vast majority of these investments are the daily net asset values published on a regulated governmental website. Daily quoted prices are available from the issuing brokerage and are used on a test basis to corroborate this Level 2 input.
•Certificates of deposit and bank debentures — These investments provide us with a contractual rate of return and generally range in maturity from three months to five years. The counterparties to these investments are reputable financial institutions with investment grade credit ratings. Since these instruments are not tradable and must be settled directly by us with the respective financial institution, our fair value measure is the financial institution's month-end statement.
•Equity mutual funds — The fair value measures for these investments are the net asset values published by the issuing brokerage. Daily quoted prices are available from reputable third-party pricing services and are used on a test basis to corroborate this Level 2 input measure.
•
Certificates of deposit and bank debentures — These investments provide us with a contractual rate of return and generally range in maturity from three months to five years. The counterparties to these investments are reputable financial institutions with investment grade credit ratings. Since these instruments are not tradable and must be settled directly by us with the respective financial institution, our fair value measure is the financial institution's month-end statement.
•Debt securities — The fair value measures for these securities are broker quotes received from reputable firms. These securities are infrequently traded on a national exchange and these values are used on a test basis to corroborate our Level 2 input measure.
•
Debt mutual funds — The fair value measure for the vast majority of these investments is the daily net asset value published on a regulated governmental website. Daily quoted prices are available from the issuing brokerage and are used on a test basis to corroborate this Level 2 input.
•
Equity mutual funds — The fair value measure for these investments is the net asset value published by the issuing brokerage. Daily quoted prices are available from reputable third party pricing services and are used on a test basis to corroborate this Level 2 input measure.
•
Debt securities — The fair value measure for these securities is broker quotes received from reputable firms. These securities are infrequently traded on a national stock exchange and these values are used on a test basis to corroborate our Level 2 input measure.
The proceeds from sales and maturities of marketable securities were as follows:
Six months ended
In millionsJune 28,
2020		June 30,
2019
Proceeds from sales of marketable securities$164  $97  
Proceeds from maturities of marketable securities90  56  
Investments in marketable securities - liquidations$254  $153  
  Nine months ended
In millions September 29,
2019		 September 30,
2018
Proceeds from sales of marketable securities $179
 $234
Proceeds from maturities of marketable securities 117
 64
Investments in marketable securities - liquidations $296
 $298


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NOTE 8. INVENTORIES
Inventories are stated at the lower of cost or market. Inventories included the following:
In millionsJune 28,
2020		December 31,
2019
Finished products$2,268  $2,214  
Work-in-process and raw materials1,519  1,395  
Inventories at FIFO cost3,787  3,609  
Excess of FIFO over LIFO(132) (123) 
Total inventories$3,655  $3,486  
In millions September 29,
2019		 December 31,
2018
Finished products $2,421
 $2,405
Work-in-process and raw materials 1,526
 1,487
Inventories at FIFO cost 3,947
 3,892
Excess of FIFO over LIFO (126) (133)
Total inventories $3,821
 $3,759


NOTE 9. LEASES

Lease Accounting Pronouncement Adoption

In February 2016, the Financial Accounting Standards Board (FASB) amended its standards related to the accounting for leases. Under the new standard, lessees are now required to recognize substantially all leases on the balance sheet as both a right-of-use (ROU) asset and a liability. The standard continues to have two types of leases for income statement recognition purposes: operating leases and finance leases. Operating leases result in the recognition of a single lease expense on a straight-line basis over the lease term, similar to the treatment for operating leases under the old standard. Finance leases result in an accelerated expense similar to the accounting for capital leases under the old standard. The determination of a lease classification as operating or finance will occur in a manner similar to the old standard. The new standard also contains amended guidance regarding the identification of embedded leases in service contracts and the identification of lease and non-lease components of an arrangement.

We adopted the new standard on January 1, 2019, using a modified retrospective approach and as a result did not adjust prior periods. Adoption of the standard resulted in the recording of $450 million of operating lease ROU assets and operating lease liabilities, but did not have a material impact on our net income or cash flows. The cumulative effect adjustment of adopting the new standard was not material. We elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification and to not re-evaluate existing contracts as to whether or not they contained a lease.
Lease Policies
We determine if an arrangement contains a lease in whole or in part at the inception of the contract. ROU assets represent our right to use an underlying asset for the lease term while lease liabilities represent our obligation to make lease payments arising from the lease. All leases greater than 12 months result in the recognition of a ROU asset and a liability at the lease commencement date based on the present value of the lease payments over the lease term. As most of our leases do not provide the information required to determine the implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. This rate is determined considering factors such as the lease term, our credit standing and the economic environment of the location of the lease. We use the implicit rate when readily determinable.
Our lease terms include all non-cancelable periods and may include options to extend (or to not terminate) the lease when it is reasonably certain that we will exercise that option. Leases that have a term of 12 months or less at the commencement date are expensed on a straight-line basis over the lease term and do not result in the recognition of an asset or a liability.
Lease expense for operating leases is recognized on a straight-line basis over the lease term. Lease expense for finance leases are generally front-loaded as the finance lease ROU asset is depreciated on a straight-line basis, but interest expense on the liability is recognized utilizing the interest method that results in more expense during the early years of the lease. We have lease agreements with lease and non-lease components, primarily related to real estate, vehicle and information technology (IT) assets. For vehicle and real estate leases, we account for the lease and non-lease components as a single lease component. For IT leases, we allocate the payment between the lease and non-lease components based on the relative value of each component.

Leases

Our lease portfolio consists primarily of real estate and equipment leases. Our real estate leases primarily consist of office, distribution, warehousing and manufacturing facilities. These leases typically range in term from 2 to 30 years and may contain renewal options for periods up to 2 years at our discretion. Our equipment lease portfolio consists primarily of vehicles (including service vehicles), forktrucks and IT equipment. These leases typically range in term from two years to three years and may contain renewal options. Our leases generally do not contain variable lease payments other than (1) certain foreign real estate leases which have payments indexed to inflation and (2) certain real estate executory costs (such as taxes, insurance and maintenance), which are paid based on actual expenses incurred by the lessor during the year. Our leases generally do not include residual value guarantees other than our service vehicle fleet, which has a residual guarantee based on a percentage of the original cost declining over the lease term.

The components of our lease expense were as follows:
  Three months ended Nine months ended
In millions September 29,
2019		 September 29,
2019
Operating lease cost $51
 $155
Finance lease cost    
Amortization of right-of-use asset 3
 12
Interest expense 1
 7
Short-term lease cost 2
 4
Variable lease cost 2
 4
Total lease cost $59
 $182

Supplemental balance sheet information related to leases:
In millions September 29, 2019 Balance Sheet Location
Assets    
Operating lease assets $446
 Other assets
Finance lease assets(1)
 124
 Property, plant and equipment, net
Total lease assets $570
  
     
Liabilities    
Current    
Operating $124
 Other accrued expenses
Finance 12
 Current maturities of long-term debt
Long-term    
Operating 333
 Other liabilities
Finance 110
 Long-term debt
Total lease liabilities $579
  

(1)Finance lease assets are recorded net of accumulated amortization of $62 million at September 29, 2019.

Supplemental cash flow and other information related to leases:
  Three months ended Nine months ended
In millions September 29,
2019		 September 29,
2019
Cash paid for amounts included in the measurement of lease liabilities    
Operating cash flows from operating leases $38
 $115
Operating cash flows from finance leases 2
 7
Financing cash flows from finance leases 3
 10
     
Right-of-use assets obtained in exchange for lease obligations    
Operating leases 51
 129
Finance leases 1
 7

Additional information related to leases:
September 29,
2019
Weighted-average remaining lease term (in years)
Operating leases5.3
Finance leases13.9
Weighted-average discount rate
Operating leases3.3%
Finance leases7.2%

Following is a summary of the future minimum lease payments due to finance and operating leases with terms of more than one year at September 29, 2019, together with the net present value of the minimum payments due to finance leases:
In millions Finance Leases Operating Leases
2019 $5
 $38
2020 19
 129
2021 16
 102
2022 15
 77
2023 14
 51
After 2023 146
 110
Total minimum lease payments 215
 507
Interest (93) (50)
Present value of net minimum lease payments $122
 $457


Following is a summary of the future minimum lease payments due to capital and operating leases with terms of more than one year at December 31, 2018, together with the net present value of the minimum payments due to capital leases under the previous lease standard:
In millions Capital Leases Operating Leases
2019 $30
 $138
2020 21
 109
2021 16
 81
2022 14
 60
2023 13
 39
After 2023 144
 81
Total minimum lease payments $238
 $508
Interest (106)  
Present value of net minimum lease payments $132
  

NOTE 10. DEBT
Loans Payable and Commercial Paper
Loans payable, commercial paper and the related weighted-average interest rates were as follows:
In millions September 29,
2019		 December 31,
2018
Loans payable (1)
 $103
 $54
Commercial paper (2)
 902
 780

(1) Loans payable consist primarily of notes payable to various domestic and international financial institutions and it is not practicable to aggregate these notes and calculate a quarterly weighted-average interest rate.
(2) The weighted-average interest rate, inclusive of all brokerage fees, was 2.18 percent and 2.59 percent at September 29, 2019 and December 31, 2018, respectively.
In millionsJune 28,
2020		December 31,
2019
Loans payable (1)
$109  $100  
Commercial paper (2)
2,027  660  
(1) Loans payable consist primarily of notes payable to various domestic and international financial institutions. It is not practicable to aggregate these notes and calculate a quarterly weighted-average interest rate.
(2) The weighted-average interest rate, inclusive of all brokerage fees, was 0.55 percent and 1.82 percent at June 28, 2020 and December 31, 2019, respectively.
We can issue up to $3.5 billion of unsecured, short-term promissory notes ("commercial paper")(commercial paper) pursuant to our boardthe Board of Directors (the Board) authorized commercial paper programs. The programs facilitate the private placement of unsecured short-term debt through third partythird-party brokers. We intend to use the net proceeds from the commercial paper borrowings for general corporate purposes.
On April 14, 2020, we were approved for the Federal Reserve Bank of New York’s Commercial Paper Funding Facility (CPFF) program to assure access to the commercial paper funding markets during volatile credit market conditions. The CPFF was intended to provide a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle (SPV). The facility allows us, based on our current short-term credit rating, to issue three-month unsecured commercial paper at a rate equal to a +110 basis point spread over the three-month overnight index swap rate on the date of issuance. The maximum amount of commercial paper that we may issue at any time through this program is $1.5 billion less the total principal amount of all other outstanding commercial paper that we have issued. We retain full access to our Board authorized $3.5 billion commercial paper program, as reduced by any amounts issued under this facility. The SPV is currently scheduled to cease purchasing commercial paper on March 17, 2021. As of June 28, 2020, we issued $230 million of commercial paper under the CPFF program.
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Revolving Credit Facilities
On August 21, 2019,May 1, 2020, we entered into an amended and restatedadditional 364-day credit facility agreement that allows us to borrow up to $1.5$2.0 billion of senior unsecured funds at any time through August 18, 2020.April 30, 2021. This credit agreement amends and restates the prior $1.5 billion 364-dayprogram does not backstop or increase our borrowing capacity for our commercial paper programs. Amounts payable under this revolving credit facility that maturedwill rank pro rata with all of our unsecured, unsubordinated indebtedness. Advances under the facility bear interest at (i) an alternate base rate or (ii) a rate equal to the adjusted LIBOR plus an applicable margin based on August 21, 2019.the credit ratings of our outstanding senior unsecured long-term debt. Based on our current long-term debt ratings, the applicable margin on adjusted LIBOR rate loans was 1.25 percent per annum as of June 28, 2020. Advances under the facility may be prepaid without premium or penalty, subject to customary breakage costs. This agreement includes various covenants, including, among others, maintaining a net debt to total capital leverage ratio of no more than 0.65 to 1.0.
We have access to committed credit facilities that total $3.5$5.5 billion, including the newa $1.5 billion 364-day facility that expires August 19, 2020, and a $2.0 billion five-year facility that expires on August 22, 2023.2023 and our new $2.0 billion 364-day facility that expires on April 30, 2021. We intend togenerally maintain credit facilities of a similarat the current or higher aggregate amountamounts by renewing or replacing these facilities at or before expiration. These revolving credit facilities are maintained primarily to provide backup liquidity for our commercial paper borrowings and for general corporate purposes.

At September 29, 2019,June 28, 2020, the $902$2,027 million of outstanding commercial paper effectively reduced the $3.5$5.5 billion of revolving credit capacity to $2.6 billion and$3.5 billion.
At June 28, 2020, we also had an additional $200$189 million available for borrowings under our international and other domestic credit facilities.

Long-term Debt
A summary of long-term debt was as follows:
In millions Interest Rate September 29,
2019		 December 31,
2018
Long-term debt    
  
Senior notes, due 2023 3.65% $500
 $500
Debentures, due 2027 6.75% 58
 58
Debentures, due 2028 7.125% 250
 250
Senior notes, due 2043 4.875% 500
 500
Debentures, due 2098(1)
 5.65% 165
 165
Other debt   70
 64
Unamortized discount   (50) (52)
Fair value adjustments due to hedge on indebtedness   41
 25
Finance leases   122
 132
Total long-term debt   1,656
 1,642
Less: Current maturities of long-term debt   37
 45
Long-term debt   $1,619
 $1,597

(1) The effective interest rate on this debt is 7.48%.
In millionsInterest RateJune 28,
2020		December 31,
2019
Long-term debt  
Senior notes, due 2023(1)
3.65%$500  $500  
Debentures, due 20276.75%58  58  
Debentures, due 20287.125%250  250  
Senior notes, due 20434.875%500  500  
Debentures, due 2098(2)
5.65%165  165  
Other debt140  59  
Unamortized discount(49) (50) 
Fair value adjustments due to hedge on indebtedness53  35  
Finance leases88  90  
Total long-term debt1,705  1,607  
Less: Current maturities of long-term debt66  31  
Long-term debt$1,639  $1,576  
(1) In June 2020, we settled a portion of our February 2014 interest rate swap. See "Interest Rate Risk" below for additional information.
(2) The effective interest rate on this debt is 7.48%.
Principal payments required on long-term debt during the next five years are as follows:
In millions 2019 2020 2021 2022 2023
Principal payments $16
 $30
 $45
 $9
 $507

In millions20202021202220232024
Principal payments$44  $59  $29  $524  $22  

Interest Rate Risk
In the third quarter,first half of 2020, we entered into a series ofadditional interest rate lock agreements to reduce the variability of the cash flows of the interest payments on $250a total of $500 million of fixed rate debt forecast to be issued in 2023 to replace our Seniorsenior notes at maturity. The termsWe recorded a net gain of the rate locks mirror those$10 million and net loss of the debt, matching the time period of the expected fixed rate debt issuance and the expected timing of interest payments on that debt. The gains and losses on these derivative instruments will be initially recorded in "Other comprehensive income" and will be released to earnings in "Interest expense" in future periods to reflect the difference in (1) the fixed rates economically locked in at the inception of the hedge and (2) the actual fixed rates established in the debt instrument at issuance. The loss included$69 million in "Other comprehensive income" for the three and six months ended September 29, 2019 was $28 million.June 28, 2020, respectively.
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In June 2020, we settled a portion of our February 2014 interest rate swap, which previously converted our $500 million debt issue, due in 2023, from fixed rate to floating rate based on a LIBOR spread. We will amortize the $30 million gain realized upon settlement over the remaining three year term of related debt.
Fair Value of Debt
Based on borrowing rates currently available to us for bank loans with similar terms and average maturities, considering our risk premium, the fair values and carrying values of total debt, including current maturities, were as follows:
In millionsJune 28,
2020		December 31,
2019
Fair value of total debt (1)
$4,241  $2,706  
Carrying values of total debt3,841  2,367  
(1) The fair value of debt is derived from Level 2 inputs.
In millions September 29,
2019		 December 31,
2018
Fair value of total debt (1)
 $3,031
 $2,679
Carrying values of total debt 2,661
 2,476

(1) The fair value of debt is derived from Level 2 inputs.
Shelf Registration
As a well-known seasoned issuer, we filed an automatic shelf registration for an undetermined amount of debt and equity securities with the SEC on February 13, 2019. 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.

NOTE 11.10. PRODUCT WARRANTY LIABILITY
A tabular reconciliation of the product warranty liability, including the deferred revenue related to our extended warranty coverage and accrued product campaigns was as follows:
  Nine months ended
In millions September 29,
2019		 September 30,
2018
Balance, beginning of year $2,208
 $1,687
Provision for base warranties issued 360
 337
Deferred revenue on extended warranty contracts sold 254
 211
Provision for product campaigns issued 163
 456
Payments made during period (431) (313)
Amortization of deferred revenue on extended warranty contracts (174) (179)
Changes in estimates for pre-existing product warranties (16) 18
Foreign currency translation and other (9) (6)
Balance, end of period $2,355
 $2,211


Six months ended
In millionsJune 28,
2020		June 30,
2019
Balance, beginning of year$2,389  $2,208  
Provision for base warranties issued161  259  
Deferred revenue on extended warranty contracts sold121  171  
Provision for product campaigns issued18  134  
Payments made during period(280) (308) 
Amortization of deferred revenue on extended warranty contracts(115) (117) 
Changes in estimates for pre-existing product warranties(20) (8) 
Foreign currency translation and other(11) (1) 
Balance, end of period$2,263  $2,338  
We recognized supplier recoveries of $3$2 million and $64$11 million for the three and ninesix months ended September 29, 2019,June 28, 2020, compared with $3 million and $16$61 million for the comparable periods in 2018.2019.
Warranty related deferred revenues and the long-term portion of the warranty liabilities on our Condensed Consolidated Balance Sheets were as follows:
In millionsJune 28,
2020		December 31,
2019		Balance Sheet Location
Deferred revenue related to extended coverage programs  
Current portion$244  $227  Current portion of deferred revenue
Long-term portion702  714  Deferred revenue
Total$946  $941   
Product warranty  
Current portion$681  $803  Current portion of accrued product warranty
Long-term portion636  645  Accrued product warranty
Total$1,317  $1,448   
Total warranty accrual$2,263  $2,389  
In millions September 29,
2019		 December 31,
2018		 Balance Sheet Location
Deferred revenue related to extended coverage programs  
    
Current portion $225
 $227
 Current portion of deferred revenue
Long-term portion 668
 587
 Deferred revenue
Total $893
 $814
  
       
Product warranty  
    
Current portion $817
 $654
 Current portion of accrued product warranty
Long-term portion 645
 740
 Accrued product warranty
Total $1,462
 $1,394
  
       
Total warranty accrual $2,355
 $2,208
  
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Engine System Campaign Accrual
During 2017, the California Air Resources Board (CARB) and the U.S. Environmental Protection Agency (EPA) selected certain of our pre-2013 model year engine systems for additional emissions testing. Some of these engine systems failed CARB and EPA tests as a result of degradation of an aftertreatment component.
In the first quarter of 2018, we concluded based upon additional emission testing performed, and further discussions with the EPA and CARB that the field campaigns should be expanded to include a larger population of our engine systems that are subject to the aftertreatment component degradation, including our model years 2010 through 2015. As a result, we recorded an additional charge of $187 million or $0.87 per share, to cost of sales in our Condensed Consolidated Statements of Net Income ($94 million recorded in the Components segment and $93 million in the Engine segment).
In the second quarter of 2018, we reached agreement with the CARB and EPA regarding our plans to address the affected populations. In finalizing our plans,From the fourth quarter of 2017 through the second quarter of 2018, we increasedrecorded charges for the numberexpected costs of systemsfield campaigns to be addressed through hardware replacement compared to our assumptions resulting in an additional charge of $181 million, or $0.85 per share, to cost of sales in our Condensed Consolidated Statements of Net Income ($91 million recorded in the Engine segment and $90 million in the Components segment).repair these engine systems.


The campaigns launched in the third quarter of 2018 and are being completed in phases across the affected population with a projection to be substantially complete by December 31, 2020.population. The total engine system campaign charge, excluding supplier recoveries, was $410 million. At September 29, 2019,June 28, 2020, the remaining accrual balance was $279$184 million.
NOTE 12.11. SUPPLEMENTAL BALANCE SHEET DATA

Other accrued expenses included the following:
In millions September 29,
2019		 December 31, 2018
Marketing accruals $208
 $199
Other taxes payable 185
 196
Income taxes payable 132
 97
Current portion of operating lease liabilities 124
 —
Other 348
 360
Other accrued expenses $997
 $852


In millionsJune 28, 2020December 31, 2019
Other taxes payable$199  $228  
Marketing accruals181  176  
Current portion of operating lease liabilities136  131  
Income taxes payable90  52  
Other314  452  
Other accrued expenses$920  $1,039  
Other liabilities included the following:
In millionsJune 28, 2020December 31, 2019
Operating lease liabilities$339  $370  
One-time transition tax293  293  
Deferred income taxes292  306  
Accrued compensation180  206  
Mark-to-market valuation on interest rate locks103  12  
Other long-term liabilities379  192  
Other liabilities$1,586  $1,379  
In millions September 29,
2019		 December 31,
2018
Operating lease liabilities $333
 $—
Deferred income taxes 301
 263
Income taxes payable 293
 293
Accrued compensation 161
 173
Other long-term liabilities 226
 163
Other liabilities $1,314
 $892

NOTE 13.12. COMMITMENTS AND CONTINGENCIES
We are subject to numerous lawsuits and claims arising out of the ordinary course of our business, including actions related to product liability; personal injury; the use and performance of our products; warranty matters; product recalls; patent, trademark or other intellectual property infringement; contractual liability; the conduct of our business; tax reporting in foreign jurisdictions; distributor termination; workplace safety; and environmental matters. We also have been identified as a potentially responsible party at multiple waste disposal sites under U.S. federal and related state environmental statutes and regulations and may have joint and several liability for any investigation and remediation costs incurred with respect to such sites. We have denied liability with respect to many of these lawsuits, claims and proceedings and are vigorously defending such lawsuits, claims and proceedings. We carry various forms of commercial, property and casualty, product liability and other forms of insurance; however, such insurance may not be applicable or adequate to cover the costs associated with a judgment against us with respect to these lawsuits, claims and proceedings. We do not believe that these lawsuits are material individually or in the aggregate. While we believe we have also established adequate accruals pursuant to GAAP for our expected future liability with respect to pending lawsuits, claims and proceedings, where the nature and extent of any such liability can be reasonably estimated based upon then presently available information, there can be no assurance that the final resolution of any existing or future lawsuits, claims or proceedings will not have a material adverse effect on our business, results of operations, financial condition or cash flows.
We conduct significant business operations in Brazil that are subject to the Brazilian federal, state and local labor, social security, tax and customs laws. While we believe we comply with such laws, they are complex, subject to varying interpretations and we are often engaged in litigation regarding the application of these laws to particular circumstances.
18
Table of Contents
On April 29, 2019, we announced that we were conducting a formal internal review of our emissions certification process and compliance with emissionsemission standards for our pick-up truck applications, following conversations with the EPA and CARB regarding certification of our engines in model year 2019 RAM 2500 and 3500 trucks. This review is being conducted with external advisors to ensure the certification and compliance processes for all of our pick-up truck applications are consistent with our internal policies, engineering standards and applicable laws. In addition, we voluntarily disclosed our formal internal review to ourthe regulators and to other government agencies, the Department of Justice (DOJ) and the SEC, and have been working cooperatively with them to ensure a complete and thorough review. During conversations with the EPA and CARB about the effectiveness of our pick-up truck applications, the regulators raised concerns that certain aspects of our emissions

systems may reduce the effectiveness of our emissions control systems and thereby act as defeat devices. As a result, our internal review focuses, in part, on the regulators’ concerns. We are working closely with the regulators to enhance our emissionemissions systems to improve the effectiveness of all of our pick-up truck applications and to fully address the regulators’ requirements. Based on discussions with the regulators, we have developed a new calibration for the engines in model year 2019 RAM 2500 and 3500 trucks that has been included in all engines shipped since September 2019. During our discussions, the regulators have asked us to look at other model years and other engines, though the primary focus of our review has been the model year 2019 RAM. We are also fully cooperating with the DOJ's and the SEC's information requests and inquiries. Due to the continuing nature of our formal review, our ongoing cooperation with our regulators and other government agencies, and the presence of many unknown facts and circumstances, we cannot predict the final outcome of this review and these regulatory and agency processes, and we cannot provide assurance that the matter will not have a materially adverse impact on our results of operations and cash flows.
Guarantees and Commitments
Periodically, we enter into guarantee arrangements, including guarantees of non-U.S. distributor financings, residual value guarantees on equipment under operating leases and other miscellaneous guarantees of joint ventures or third-party obligations. At September 29, 2019,June 28, 2020, the maximum potential loss related to these guarantees was $54$47 million.
We have arrangements with certain suppliers that require us to purchase minimum volumes or be subject to monetary penalties. At September 29, 2019,June 28, 2020, if we were to stop purchasing from each of these suppliers, the aggregate amount of the penalty would be approximately $54$42 million. Most of these arrangements enable us to secure supplies of critical components. We do not currently anticipate paying any penalties under these contracts.
We enter into physical forward contracts with suppliers of platinum and palladium to purchase certain volumes of the commodities at contractually stated prices for various periods, which generally fall within two years. At September 29, 2019,June 28, 2020, the total commitments under these contracts were $33$54 million. These arrangements enable us to fixguarantee the prices of these commodities, which otherwise are subject to market volatility.
We have guarantees with certain customers that require us to satisfactorily honor contractual or regulatory obligations, or compensate for monetary losses related to nonperformance. These performance bonds and other performance-related guarantees were $140$95 million at September 29, 2019.June 28, 2020.
Indemnifications
Periodically, we enter into various contractual arrangements where we agree to indemnify a third-party against certain types of losses. Common types of indemnities include:
•product liability and license, patent or trademark indemnifications;
•asset sale agreements where we agree to indemnify the purchaser against future environmental exposures related to the asset sold; and
•
product liability and license, patent or trademark indemnifications;
•
asset sale agreements where we agree to indemnify the purchaser against future environmental exposures related to the asset sold; and
any contractual agreement where we agree to indemnify the counterparty for losses suffered as a result of a misrepresentation in the contract.
We regularly evaluate the probability of having to incur costs associated with these indemnities and accrue for expected losses that are probable. Because the indemnifications are not related to specified known liabilities and due to their uncertain nature, we are unable to estimate the maximum amount of the potential loss associated with these indemnifications.

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Table of Contents
NOTE 14.13. ACCUMULATED OTHER COMPREHENSIVE LOSS
Following are the changes in accumulated other comprehensive income (loss) by component for the three months ended:
In millionsChange in
pensions and
other
postretirement
defined benefit
plans		Foreign
currency
translation
adjustment		Unrealized gain
(loss) on
debt
securities		Unrealized gain
(loss) on
derivatives		Total
attributable to
Cummins Inc.		Noncontrolling
interests		Total
Balance at March 29, 2020$(732) $(1,430) $—  $(88) $(2,250)   
Other comprehensive income before reclassifications       
Before-tax amount—  (7) —  (3) (10) $(5) $(15) 
Tax benefit (expense)—  1  —  3  4  —  4  
After-tax amount—  (6) —  —  (6) (5) (11) 
Amounts reclassified from accumulated other comprehensive income (loss)(1)
16  —  —  (2) 14  —  14  
Net current period other comprehensive income (loss)16  (6) —  (2) 8  $(5) $3  
Balance at June 28, 2020$(716) $(1,436) $—  $(90) $(2,242)   
Balance at March 31, 2019$(682) $(1,057) $(1) $1  $(1,739)   
Other comprehensive income before reclassifications       
Before-tax amount1  (97) 1  (11) (106) $—  $(106) 
Tax benefit (expense)—  (2) —  4  2  —  2  
After-tax amount1  (99) 1  (7) (104) —  (104) 
Amounts reclassified from accumulated other comprehensive income (loss)(1)
6  —  —  (3) 3  —  3  
Net current period other comprehensive income (loss)7  (99) 1  (10) (101) $—  $(101) 
Balance at June 30, 2019$(675) $(1,156) $—  $(9) $(1,840)   
(1) Amounts are net of tax. Reclassifications out of accumulated other comprehensive income (loss) and the related tax effects are immaterial for separate disclosure.
  Three months ended
In millions Change in
pensions and
other
postretirement
defined benefit
plans		 Foreign
currency
translation
adjustment		 Unrealized gain
(loss) on
debt
securities		 Unrealized gain
(loss) on
derivatives		 Total
attributable to
Cummins Inc.		 Noncontrolling
interests		 Total
Balance at June 30, 2019 $(675) $(1,156) $—
 $(9) $(1,840)  
  
Other comprehensive income before reclassifications  
  
  
  
  
  
  
Before tax amount —
 (177) —
 (39) (216) $(5) $(221)
Tax benefit (expense) —
 —
 —
 8
 8
 —
 8
After tax amount —
 (177) —
 (31) (208) (5) (213)
Amounts reclassified from accumulated other comprehensive loss(1)
 6
 —
 —
 2
 8
 —
 8
Net current period other comprehensive income (loss) 6
 (177) —
 (29) (200) $(5) $(205)
Balance at September 29, 2019 $(669) $(1,333) $—
 $(38) $(2,040)  
  
               
Balance at July 1, 2018 $(668) $(1,003) $—
 $4
 $(1,667)  
  
Other comprehensive income before reclassifications  
  
  
  
  
  
  
Before tax amount —
 (139) 2
 1
 (136) $(17) $(153)
Tax benefit (expense) —
 (3) —
 —
 (3) —
 (3)
After tax amount —
 (142) 2
 1
 (139) (17) (156)
Amounts reclassified from accumulated other comprehensive loss(1)
 13
 —
 (2) (4) 7
 —
 7
Net current period other comprehensive income (loss) 13
 (142) —
 (3) (132) $(17) $(149)
Balance at September 30, 2018 $(655) $(1,145) $—
 $1
 $(1,799)  
  

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





















20
Table of Contents
Following are the changes in accumulated other comprehensive income (loss) by component for the ninesix months ended:
In millionsChange in
pensions and
other
postretirement
defined benefit
plans		Foreign
currency
translation
adjustment		Unrealized gain (loss) on debt securitiesUnrealized gain
(loss) on
derivatives		Total
attributable to
Cummins Inc.		Noncontrolling
interests		Total
Balance at December 31, 2019$(734) $(1,285) $—  $(9) $(2,028)   
Other comprehensive income before reclassifications       
Before-tax amount(19) (155) —  (98) (272) $(22) $(294) 
Tax benefit (expense)5  4  —  21  30  —  30  
After-tax amount(14) (151) —  (77) (242) (22) (264) 
Amounts reclassified from accumulated other comprehensive loss(1)
32  —  —  (4) 28  —  28  
Net current period other comprehensive income (loss)18  (151) —  (81) 
(2)
(214) $(22) $(236) 
Balance at June 28, 2020$(716) $(1,436) $—  $(90) $(2,242)   
Balance at December 31, 2018$(671) $(1,138) $—  $2  $(1,807)   
Other comprehensive income before reclassifications       
Before-tax amount(22) (17) —  (8) (47) $3  $(44) 
Tax benefit (expense)5  (1) —  3  7  —  7  
After-tax amount(17) (18) —  (5) (40) 3  (37) 
Amounts reclassified from accumulated other comprehensive loss(1)
13  —  —  (6) 7  —  7  
Net current period other comprehensive income (loss)(4) (18) —  (11) (33) $3  $(30) 
Balance at June 30, 2019$(675) $(1,156) $—  $(9) $(1,840)   
(1) Amounts are net of tax. Reclassifications out of accumulated other comprehensive income (loss) and the related tax effects are immaterial for separate disclosure.
(2) Primarily related to interest rate lock activity. See the Interest Rate Risk section in NOTE 9 "DEBT" for additional information.
  Nine months ended
In millions Change in
pensions and
other
postretirement
defined benefit
plans		 Foreign
currency
translation
adjustment		 Unrealized gain (loss) on debt securities Unrealized gain
(loss) on
derivatives		 Total
attributable to
Cummins Inc.		 Noncontrolling
interests		 Total
Balance at December 31, 2018 $(671) $(1,138) $—
 $2
 $(1,807)  
  
Other comprehensive income before reclassifications  
  
  
  
  
  
  
Before tax amount (22) (194) —
 (47) (263) $(2) $(265)
Tax benefit (expense) 5
 (1) —
 11
 15
 —
 15
After tax amount (17) (195) —
 (36) (248) (2) (250)
Amounts reclassified from accumulated other comprehensive loss(1)
 19
 —
 —
 (4) 15
 —
 15
Net current period other comprehensive income (loss) 2
 (195) —
 (40) (233) $(2) $(235)
Balance at September 29, 2019 $(669) $(1,333) $—
 $(38) $(2,040)  
  
               
Balance at December 31, 2017 $(689) $(812) $1
 $(3) $(1,503)  
  
Other comprehensive income before reclassifications  
  
  
  
  
  
  
Before tax amount (8) (342) 2
 16
 (332) $(41) $(373)
Tax benefit (expense) 2
 9
 —
 (6) 5
 —
 5
After tax amount (6) (333) 2
 10
 (327) (41) (368)
Amounts reclassified from accumulated other comprehensive loss(1)
 40
 —
 (3) (6) 31
 1
 32
Net current period other comprehensive income (loss) 34
 (333) (1) 4
 (296) $(40) $(336)
Balance at September 30, 2018 $(655) $(1,145) $—
 $1
 $(1,799)  
  

21
(1) Amounts are netTable of tax. Reclassifications out of accumulated other comprehensive income (loss) andContents
NOTE 14. RESTRUCTURING ACTIONS
In November 2019, we announced our intentions to reduce our global workforce in response to the related tax effects are immaterial for separate disclosure.


NOTE 15. ACQUISITIONS
Acquisitions for the nine months ended September 29, 2019 and September 30, 2018 were as follows:
Entity Acquired (Dollars in millions) Date of Acquisition Additional Percent Interest Acquired Payments to Former Owners Acquisition Related Debt Retirements Total Purchase Consideration 
Type of Acquisition(1)
 Goodwill Acquired 
Intangibles Recognized(2)
 Net Sales Previous Fiscal Year Ended
2019                  
Hydrogenics Corporation 09/09/19 81% $235
 $—
 $235
 COMB $166
 $158
 $34
2018                  
Efficient Drivetrains, Inc. 08/15/18 100% $51
 $2
 $64
(3) 
COMB $49
 $15
 $3
Johnson Matthey Battery Systems, Ltd. 01/31/18 100% 9
 —
 9
 COMB —
 5
 3

(1) Newly consolidated entities were accounted for as business combinations (COMB) and were includedcontinued deterioration in our global markets in the Electrified Power Segment onsecond half of 2019, as well as expected reductions in orders in most U.S. and international markets in 2020. In the datefourth quarter of acquisition.
(2) Intangible assets acquired2019, we began executing restructuring actions, primarily in business combinations were mostly technologythe form of voluntary and customer related,involuntary employee separation programs. To the majority of which will be amortized overextent these programs involve voluntary separations, a period of upliability is generally recorded at the time offers to 20 years fromemployees are accepted. To the date of the acquisition.
(3) The "Total Purchase Consideration" represents the total amount that will or is estimated to be paid to complete the acquisition. A portion of the acquisition payment has not yet been made and will be paid in future periodsextent these programs provide separation benefits in accordance with pre-existing agreements or policies, a liability is recorded once the purchase contract.

Hydrogenics Corporation
On September 9, 2019, we acquired an 81 percent interest in Hydrogenics Corporation for total considerationamount is probable and reasonably estimable. We incurred a charge of $235 million. The Hydrogen Company, a wholly-owned subsidiary of L’Air Liquide, S.A., will maintain a non-controlling interest in Hydrogenics. We accounted for the transaction as a business combination and included it$119 million ($90 million after-tax) in the Electrified Power segment in the thirdfourth quarter of 2019. We have not yet assigned this business to a reporting unit2019 for goodwill impairment purposes.these actions which impacted approximately 2,300 employees. The preliminary purchase price allocation was as follows:voluntary actions were completed by December 31, 2019 and the involuntary actions were completed by June 28, 2020.
The table below summarizes the activity and balance of accrued restructuring, which is included in "Other accrued expenses" in our Condensed Consolidated Balance Sheets:
In millionsRestructuring Accrual
Balance at December 31, 2019$116 
Cash payments(81)
Change in estimate(5)
Foreign currency translation(1)
Balance at June 28, 2020$29 
In millions  
Inventory $21
Other current assets 25
Intangible assets  
Technology assets 94
Customer relationships 28
In-process research and development 35
Other intangible assets 1
Goodwill 166
Other assets 18
Current liabilities (50)
Other liabilities (47)
Total business valuation 291
Less: Noncontrolling interest 56
Total purchase consideration $235

At September 29, 2019, our purchase accounting was not complete. The above table represents our current estimate of the allocation. We are reviewing and validating the significant assumptions used to value the intangible assets and expect that these amounts could change as we finalize our allocation by the end of 2019. We expect the "Intangible assets" to be amortized over periods ranging from 3 to 20 years. We are also validating our calculations related to deferred tax assets and liabilities.
"Goodwill" was determined based on the residual difference between the fair value of consideration transferred and the value assigned to tangible and intangible assets and liabilities. The goodwill amount is provisional and subject to changes, pending the completion of the valuation of acquired assets and liabilities. The goodwill amount will not be deductible for tax purposes. Among the factors contributing to a purchase price resulting in the recognition of goodwill are the acquisition of engineering talent in the fuel cell space, the ability to be one of the forerunners in the development of clean fuel cell energy and the continued opportunity to expand our position as a global power leader.
This business was included in our September results but the amounts were not significant. Pro forma financial information was not provided as the historical financial statement activity of Hydrogenics is not material to our consolidated results.
NOTE 16.15. OPERATING SEGMENTS
Operating segments under GAAP are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (CODM), or decision-making group, in deciding how to allocate resources and in assessing performance. Our CODM is the President and Chief Operating Officer.
Our reportable operating segments consist of Engine, Distribution, Components, Power Systems and ElectrifiedNew Power. This reporting structure is organized according to the products and markets each segment serves. The Engine segment produces engines (15 liters and smaller) and associated parts for sale to customers in on-highway and various off-highway markets. Our engines are used in trucks of all sizes, buses and recreational vehicles, as well as in various industrial applications, including construction, agriculture, power generation systems and other off-highway applications. The Distribution segment includes wholly-owned and partially-owned distributorships engaged in wholesaling engines, generator sets and service parts, as well as performing service and repair activities on our products and maintaining relationships with various OEMs throughout the world. The Components segment sells filtration products, aftertreatment systems, turbochargers, electronics, fuel systems and automated transmissions. 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 ElectrifiedNew Power segment designs, manufactures, sells and

supports electrified power systems ranging from fully electric to hybrid along with innovative components and with the acquisition of Hydrogenics Corporation in the third quarter of 2019, also offers hydrogen generation, andsubsystems, including battery, fuel cell products.and hydrogen production technologies. We continue to serve all our markets as they adopt electrification and alternative power technologies, meeting the needs of our OEM partners and end customers.
We use EBITDA (defined as earnings before interest expense, income taxes, noncontrolling interests, depreciation and amortization) as the primary basis for the CODM to evaluate the performance of each of our reportable operating segments. We believe EBITDA is a useful measure of our operating performance as it assists investors and debt holders in comparing our performance on a consistent basis without regard to financing methods, capital structure, income taxes or depreciation and amortization methods, which can vary significantly depending upon many factors. Segment amounts exclude certain expenses not specifically identifiable to segments.
The accounting policies of our operating segments are the same as those applied in our Condensed Consolidated Financial Statements. We prepared the financial results of our operating segments on a basis that is consistent with the manner in which we internally disaggregate financial information to assist in making internal operating decisions. We allocate certain common costs and expenses, primarily corporate functions, among segments differently than we would for stand-alone financial information prepared in accordance with GAAP. These include certain costs and expenses of shared services, such as information technology, human resources, legal, finance and supply chain management. We do not allocate gains (losses) of corporate owned life insurance or restructuring charges related to corporate functions to individual segments. EBITDA may not be consistent with measures used by other companies.

22
Table of Contents
Summarized financial information regarding our reportable operating segments for the three months ended is shown in the table below:
In millions Engine Distribution Components Power Systems Electrified Power Total Segments 
Intersegment Eliminations (1)
 TotalIn millionsEngineDistributionComponentsPower SystemsNew PowerTotal Segments
Intersegment Eliminations (1)
Total
Three months ended September 29, 2019  
    
  
      
  
Three months ended June 28, 2020Three months ended June 28, 2020    
External sales $1,822
 $2,001
 $1,253
 $683
 $9
 $5,768
 $—
 $5,768
External sales$937  $1,601  $876  $428  $10  $3,852  $—  $3,852  
Intersegment sales 594
 3
 397
 443
 —
 1,437
 (1,437) —
Intersegment sales486  4  274  349  —  1,113  (1,113) —  
Total sales 2,416
 2,004
 1,650
 1,126
 9
 7,205
 (1,437) 5,768
Total sales1,423  1,605  1,150  777  10  4,965  (1,113) 3,852  
Research, development and engineering expenses 79
 7
 73
 58
 25
 242
 —
 242
Research, development and engineering expenses65  4  55  41  24  189  —  189  
Equity, royalty and interest income from investees 34
 12
 9
 13
 —
 68
 —
 68
Equity, royalty and interest income from investees84  11  12  9  (1) 115  —  115  
Interest income 5
 4
 2
 3
 —
 14
 —
 14
Interest income1  1  1  1  —  4  —  4  
Segment EBITDA 341
 186
 286
 158
 (36) 935
 23
 958
Segment EBITDA150  160  141  91  (38) 504  45  549  
Depreciation and amortization (2)
 50
 29
 67
 29
 2
 177
 —
 177
Depreciation and amortization (2)
51  30  47  32  4  164  —  164  
                
Three months ended September 30, 2018  
  
  
  
      
  
Three months ended June 30, 2019Three months ended June 30, 2019      
External sales $2,082
 $1,927
 $1,297
 $636
 $1
 $5,943
 $—
 $5,943
External sales$2,073  $2,015  $1,401  $724  $8  $6,221  $—  $6,221  
Intersegment sales 644
 4
 457
 471
 1
 1,577
 (1,577) —
Intersegment sales630  13  445  479  —  1,567  (1,567) —  
Total sales 2,726
 1,931
 1,754
 1,107
 2
 7,520
 (1,577) 5,943
Total sales2,703  2,028  1,846  1,203  8  7,788  (1,567) 6,221  
Research, development and engineering expenses 74
 5
 71
 57
 22
 229
 —
 229
Research, development and engineering expenses88  7  75  57  24  251  —  251  
Equity, royalty and interest income from investees 55
 9
 12
 14
 —
 90
 —
 90
Equity, royalty and interest income from investees62  12  11  11  —  96  —  96  
Interest income 3
 4
 1
 1
 —
 9
 —
 9
Interest income4  4  2  2  —  12  —  12  
Segment EBITDA 405
 155
 288
 163
 (30) 981
 2
 983
Segment EBITDA416  172  297  173  (33) 1,025  33  1,058  
Depreciation and amortization (2)
 46
 27
 44
 29
 2
 148
 —
 148
Depreciation and amortization (2)
51  28  47  30  2  158  —  158  
(1) Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three months ended June 28, 2020 and June 30, 2019.
(1) Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three months ended June 28, 2020 and June 30, 2019.
(2) Depreciation and amortization, as shown on a segment basis, excludes the amortization of debt discount and deferred costs included in the Condensed Consolidated Statements of Net Income as "Interest expense." A portion of depreciation expense is included in "Research, development and engineering expenses."
(2) Depreciation and amortization, as shown on a segment basis, excludes the amortization of debt discount and deferred costs included in the Condensed Consolidated Statements of Net Income as "Interest expense." A portion of depreciation expense is included in "Research, development and engineering expenses."

(1) Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three months ended September 29, 2019 and September 30, 2018.
(2)
Depreciation and amortization, as shown on a segment basis, excludes the amortization



















23
Table of debt discount and deferred costs included in the Condensed Consolidated Statements of Net Income as "Interest expense." A portion of depreciation expense is included in "Research, development and engineering expenses."Contents


Summarized financial information regarding our reportable operating segments for the ninesix months ended is shown in the table below:
In millionsEngineDistributionComponentsPower SystemsNew PowerTotal Segments
Intersegment Eliminations (1)
Total
Six months ended June 28, 2020      
External sales$2,516  $3,408  $1,991  $928  $20  $8,863  $—  $8,863  
Intersegment sales1,065  11  661  733  —  2,470  (2,470) —  
Total sales3,581  3,419  2,652  1,661  20  11,333  (2,470) 8,863  
Research, development and engineering expenses145  11  123  95  53  427  —  427  
Equity, royalty and interest income from investees162  32  33  18  (1) 244  —  244  
Interest income5  2  2  2  —  11  —  11  
Segment EBITDA515  318  420  168  (81) 1,340  55  1,395  
Depreciation and amortization(2)
104  61  95  64  8  332  —  332  
Six months ended June 30, 2019      
External sales$4,057  $4,008  $2,802  $1,347  $11  $12,225  $—  $12,225  
Intersegment sales1,299  21  905  933  —  3,158  (3,158) —  
Total sales5,356  4,029  3,707  2,280  11  15,383  (3,158) 12,225  
Research, development and engineering expenses166  14  150  113  45  488  —  488  
Equity, royalty and interest income from investees118  23  21  26  —  188  —  188  
Interest income8  8  4  4  —  24  —  24  
Segment EBITDA854  343  622  311  (62) 2,068  23  2,091  
Depreciation and amortization(2)
101  57  93  59  4  314  —  314  
(1) Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the six months ended June 28, 2020 and June 30, 2019.
(2) Depreciation and amortization, as shown on a segment basis, excludes the amortization of debt discount and deferred costs included in the Condensed Consolidated Statements of Net Income as "Interest expense." The amortization of debt discount and deferred costs was $1 million and $1 million for the six months ended June 28, 2020 and June 30, 2019, respectively. A portion of depreciation expense is included in "Research, development and engineering expenses."
In millions Engine Distribution Components Power Systems Electrified Power Total Segments 
Intersegment Eliminations (1)
 Total
Nine months ended September 29, 2019  
  
  
  
      
  
External sales $5,879
 $6,009
 $4,055
 $2,030
 $20
 $17,993
 $—
 $17,993
Intersegment sales 1,893
 24
 1,302
 1,376
 —
 4,595
 (4,595) —
Total sales 7,772
 6,033
 5,357
 3,406
 20
 22,588
 (4,595) 17,993
Research, development and engineering expenses 245
 21
 223
 171
 70
 730
 —
 730
Equity, royalty and interest income from investees 152
 35
 30
 39
 —
 256
 —
 256
Interest income 13
 12
 6
 7
 —
 38
 —
 38
Segment EBITDA 1,195
 529
 908
 469
 (98) 3,003
 46
 3,049
Depreciation and amortization(2)
 151
 86
 160
 88
 6
 491
 —
 491
                 
Nine months ended September 30, 2018  
  
  
  
      
  
External sales $5,945
 $5,762
 $4,012
 $1,922
 $4
 $17,645
 $—
 $17,645
Intersegment sales 1,923
 16
 1,382
 1,505
 1
 4,827
 (4,827) —
Total sales 7,868
 5,778
 5,394
 3,427
 5
 22,472
 (4,827) 17,645
Research, development and engineering expenses 229
 15
 195
 174
 45
 658
 —
 658
Equity, royalty and interest income from investees 189
 33
 42
 51
 —
 315
 —
 315
Interest income 8
 9
 4
 5
 —
 26
 —
 26
Segment EBITDA 1,053
 423
 752
 491
 (61) 2,658
 (78) 2,580
Depreciation and amortization(2)
 142
 81
 137
 91
 4
 455
 —
 455
24

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(1) Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the nine months ended September 29, 2019 and September 30, 2018.
(2) Depreciation and amortization, as shown on a segment basis, excludes the amortization of debt discount and deferred costs included in the Condensed Consolidated Statements of Net Income as "Interest expense." The amortization of debt discount and deferred costs was $2 million and $1 million for the nine months ended September 29, 2019 and September 30, 2018, respectively. A portion of depreciation expense is included in "Research, development and engineering expenses."





A reconciliation of our segment information to the corresponding amounts in the Condensed Consolidated Statements of Net Income is shown in the table below:
 Three months endedSix months ended
In millionsJune 28,
2020		June 30,
2019		June 28,
2020		June 30,
2019
Total EBITDA$549  $1,058  $1,395  $2,091  
Less:
Depreciation and amortization164  158  332  314  
Interest expense23  29  46  61  
Income before income taxes$362  $871  $1,017  $1,716  
  Three months ended Nine months ended
In millions September 29,
2019		 September 30,
2018		 September 29,
2019		 September 30,
2018
Total EBITDA $958
 $983
 $3,049
 $2,580
Less:        
Depreciation and amortization 177
 148
 491
 455
Interest expense 26
 30
 87
 82
Income before income taxes $755
 $805
 $2,471
 $2,043


NOTE 17.16. RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Accounting Pronouncements Recently Adopted
On January 1, 2019, we adopted the new lease standard in accordance with GAAP.See NOTE 9, "LEASES," for detailed information about the adoption of this standard.
On January 1, 2019, we adopted the new FASB standard related to accounting for derivatives and hedging. The new standard allows the initial hedge effectiveness assessment to be performed by the end of the first quarter in which the hedge is designated rather than concurrently with entering into the hedge transaction. The changes also expand the use of a periodic qualitative hedge effectiveness assessment in lieu of an ongoing quantitative assessment performed throughout the life of the hedge. The revision removes the requirement to record ineffectiveness on cash flow hedges through the income statement when a hedge is considered highly effective, instead deferring all related hedge gains and losses in other comprehensive income until the hedged item impacts earnings. The modifications permit hedging the contractually-specified price of a component of a commodity purchase and revises certain disclosure requirements. We adopted the new standard on a modified retrospective basis for existing cash flow hedges and prospectively for disclosures. The amendments did not have a material effect on our Condensed Consolidated Financial Statements and no transition adjustment was required upon adoption. The adoption of this standard did not materially change our policies for existing hedges.
Accounting Pronouncements Issued But Not Yet Effective
In August 2018, the FASB issued a new standard that aligns the accounting for implementation costs incurred in a cloud computing arrangement accounted for as a service contract with the model currently used for internal use software costs. Under the new standard, costs that meet certain criteria will be required to be capitalized on the balance sheet and subsequently amortized over the term of the hosting arrangement. TheWe adopted the standard is effective for us beginning on January 1, 2020, with earlyon a prospective basis as allowed by the standard. The adoption permitted. The standard allows for either prospective or retrospective transition. We are still evaluating theis not expected to have a material impact of this standard on our financial statements.Condensed Consolidated Financial Statements.
In June 2016,On January 1, 2020, we adopted the new FASB amended its standardsstandard amendment related to accounting for credit losses on financial instruments. This amendment introduces new guidance for accounting for credit losses on instruments including trade receivables and held-to-maturity debt securities. The standard requires entities to record a cumulative effect adjustment to the statement of financial position. We recorded a net decrease to opening retained earnings of $4 million, net of tax, as of January 1, 2020, due to the cumulative impact of adopting the new rulesstandard. The impact to any individual financial statement line item as a result of applying the new standard, as compared to the old standard, was not material for the six months ended June 28, 2020.
In March 2020, the FASB amended its standard to provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendment allows entities to elect not to apply certain modification accounting requirements to contracts affected by reference rate reform if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met. These expedients would apply to our interest rate swaps and interest rate locks. The guidance was effective for annualupon issuance and interim periods beginningexpires after December 15, 2019. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We do31, 2022. The amendment did not expect adoption of this standard to have a material impactan effect on ourCondensed Consolidated Financial Statements.Statements at June 28, 2020. We are still evaluating which contracts will be impacted by reference rate reform, but the expedients will allow us to make permitted changes prior to the expiration of the amendments without resulting in an impact to our Consolidated Financial Statements.

25

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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" 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:
•market slowdown due to the impacts from COVID-19 pandemic, other public health crises, epidemics or pandemics;
•impacts to manufacturing and supply chain abilities from an extended shutdown or disruption of our operations due to the COVID-19 pandemic;
•supply shortages and supplier financial risk, particularly from any of our single-sourced suppliers, including suppliers that may be impacted by the COVID-19 pandemic;
•aligning our capacity and production with our demand, including impacts of COVID-19;
•a major customer experiencing financial distress, particularly related to the COVID-19 pandemic;
•any adverse results of our internal review into our emissions certification process and compliance with emission standards;
•
any adverse results of our internal review into our emissions certification process and compliance with emissions standards;
a sustained slowdown or significant downturn in our markets;
•
changes in the engine outsourcing practices of significant customers;
the development of new technologies that reduce demand for our current products and services;
increased scrutiny from regulatory agencies, as well as unpredictability in the adoption, implementation and enforcement of emissionsemission standards around the world;
•
•disruptions in global credit and financial markets as the result of the COVID-19 pandemic;
•adverse impacts from government actions to stabilize credit markets and financial institutions and other industries;
•product recalls;
•the development of new technologies that reduce demand for our current products and services;
•
policy changes in international trade;
•a slowdown in infrastructure development and/or depressed commodity prices;
•the U.K.'s exit from the European Union (EU);
•labor relations or work stoppages;
•reliance on our executive leadership team and other key personnel;
•
the U.K.'s decision to end its membership in the European Union;
lower than expected acceptance of new or existing products or services;
a slowdown•changes in infrastructure development and/or depressed commodity prices;the engine outsourcing practices of significant customers;
supply shortages and supplier financial risk, particularly from any of our single-sourced suppliers;
exposure to potential security breaches or other disruptions to our information technology systems and data security;
a major customer experiencing financial distress;
the actions of, and income from, joint ventures and other investees that we do not directly control;
•our plan to reposition our portfolio of product offerings through exploration of strategic acquisitions and divestitures and related uncertainties of entering such transactions;
•exposure to potential security breaches or other disruptions to our information technology systems and data security;
•challenges or unexpected costs in completing cost reduction actions and restructuring initiatives;
•failure to realize expected results from our investment in Eaton Cummins Automated Transmission Technologies joint venture;
•political, economic and other risks from operations in numerous countries;
26
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•competitor activity;
•increasing competition, including increased global competition among our customers in emerging markets;
•foreign currency exchange rate changes;
•
•variability in material and commodity costs;
•the actions of, and income from, joint ventures and other investees that we do not directly control;
•
•
political, economic and other risks from operations in numerous countries;
changes in taxation;
•
•global legal and ethical compliance costs and risks;
•product liability claims;
•
aligning our capacity and production with our demand;

•
product liability claims;
increasingly stringent environmental laws and regulations;
•the performance of our pension plan assets and volatility of discount rates, particularly those related to the sustained slowdown of the global economy due to the COVID-19 pandemic;
•future bans or limitations on the use of diesel-powered products;
•the price and availability of energy;
•our sales mix of products;
•protection and validity of our patent and other intellectual property rights;
•
the performance of our pension plan assets and volatility of discount rates;
•
labor relations;
•
changes in accounting standards;
•
our sales mix of products;
•
protection and validity of our patent and other intellectual property rights;
the outcome of pending and future litigation and governmental proceedings;
•
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 our 2018 Form 10-K, Part I, Item 1A. under the caption “Risk Factors.”
•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 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.
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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 20182019 Form 10-K. Our MD&A is presented in the following sections:
•EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS
•RESULTS OF OPERATIONS
•OPERATING SEGMENT RESULTS
•OUTLOOK
•LIQUIDITY AND CAPITAL RESOURCES
•APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
•RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS



EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS
Overview
We are a global power leader that designs, manufactures, distributes and services diesel, and natural gas, engineselectric and hybrid powertrains and powertrain-related component products (includingcomponents including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems, and automated transmissions),transmissions, electric power generation systems, batteries, electrified power systems, hydrogen generation 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, Navistar International Corporation, Daimler Trucks North America and Fiat Chrysler Automobiles (Chrysler). We serve our customers through a network of approximately 600 wholly-owned, joint venture and independent distributor locations and over 7,600 Cummins certified dealer locations in more than 190 countries and territories.
Our reportable operating segments consist of Engine, Distribution, Components, Power Systems and ElectrifiedNew Power. This reporting structure is organized according to the products and markets each segment serves. The Engine segment produces engines (15 liters and smaller) and associated parts for sale to customers in on-highway and various off-highway markets. Our engines are used in trucks of all sizes, buses and recreational vehicles, as well as in various industrial applications, including construction, agriculture, power generation systems and other off-highway applications. The Distribution segment includes wholly-owned and partially-owned distributorships engaged in wholesaling engines, generator sets and service parts, as well as performing service and repair activities on our products and maintaining relationships with various OEMs throughout the world. The Components segment sells filtration products, aftertreatment systems, turbochargers, electronics, fuel systems and automated transmissions. 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 ElectrifiedNew Power segment designs, manufactures, sells and supports electrified power systems ranging from fully electric to hybrid along with innovative components and with the acquisition of Hydrogenics Corporation in the third quarter of 2019, also offers hydrogen generation, andsubsystems, including battery, fuel cell products.and hydrogen production technologies. We continue to serve all our markets as they adopt electrification and alternative power technologies, meeting the needs of our OEM partners and end customers.
Our financial performance depends, in large part, on varying conditions in the markets we serve, particularly the on-highway, construction and general industrial markets. Demand in these markets tends to fluctuate in response to overall economic conditions. Our sales may also be impacted by OEM inventory levels, production schedules and stoppages. 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 currency, political, economic, public health crises, epidemics or pandemics and regulatory matters, including adoption and enforcement of environmental and emissionsemission standards, in the countries we serve. As part of our growth strategy, we invest in businesses in certain countries that carry high levels of these risks such as China, Brazil, India, Mexico, Russia and countries in the Middle East and Africa. At the same time, our geographic diversity and broad product and service offerings have helped limit the impact from a drop in demand in any one industry or customer or the economy of any single country on our consolidated results.
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COVID-19 Update
The outbreak of COVID-19 spread throughout the world and became a global pandemic with the resultant economic impacts evolving into a worldwide recession. The pandemic triggered a significant downturn in our markets globally and these challenging market conditions could continue for an extended period of time. In an effort to contain the spread of COVID-19, maintain the well-being of our employees and stakeholders, match the reduced demand from our customers and in accordance with governmental requirements, we closed or partially shut down certain office, manufacturing and distribution facilities around the world in March 2020. These closures expanded and continued into the second quarter of 2020. Most of our manufacturing and distribution facilities were open early in the second quarter of 2020, although operating at reduced capacities, while many of our global office buildings remained closed throughout the second quarter. While the impacts of the pandemic and the resulting global recession are expected to be temporary, the duration of the production and supply chain disruptions, and related financial impacts, cannot be estimated at this time. Should the reduced manufacturing and distribution capacities continue for an extended period of time or worsen, the impact on our production and supply chain could have a material adverse effect on our results of operations, financial condition and cash flows. Our Board of Directors continues to monitor and evaluate all of these factors along with the continuing impacts of the COVID-19 pandemic on our business and operations.
2020 Results
Our results for the first half of 2020 were significantly impacted by COVID-19, which caused manufacturing and supplier plant closures in China in early 2020 and other targeted shut-downs beginning in late March 2020 in response to both customer plant closures and government actions to slow the spread of the virus. Plants closed in China during the first quarter were reopened in late March 2020; however, additional plants and distribution locations around the world were shut down or working at reduced capacities early in the second quarter. Although these actions did not have a material effect on our results of operations in the first quarter, they materially impacted our second quarter results and we expect them to continue to have significant impacts on our results of operations, financial condition and cash flows throughout the remainder of 2020.
Worldwide revenues decreased 338 percent in the three months ended September 29, 2019,June 28, 2020, compared to the same period in 2018,2019, as we experienced lower salesdemand in Engineall major operating segments and Components segments were partially offset by higheralmost all geographic regions of the world due to the economic impacts of COVID-19 and the anticipated down cycle in most of our related markets. Net sales in the DistributionU.S. and Power Systems segments. Canada declined 48 percent, primarily due to COVID-19 impacts resulting in decreased demand in North American on-highway markets, which also negatively impacted our emission solutions, automated transmissions and turbo technologies businesses, reduced sales in our distribution product lines and decreased demand for power generation equipment. International demand (excludes the U.S. and Canada) declined by 822 percent, with lower sales in all geographic regions except for China's rebound from first quarter shutdowns. The decline in international sales was principally due to COVID-19 impacts resulting in decreased demand in on-highway markets (mainly medium-duty truck), which also negatively impacted our emission solutions and turbo technologies businesses, lower off-highway demand (mainly international mining markets and oil and gas markets in China, partially offset by higher construction markets in China), lower demand for power generation equipment, reduced demand in all distribution product lines and unfavorable foreign currency impacts of 5 percent of international sales (primarily the Chinese renminbi, Brazilian real, Australian dollar and British pound).
Worldwide revenues decreased 28 percent in the six months ended June 28, 2020, compared to the same period in 2019, as we experienced lower demand in all major operating segments and almost all geographic regions of the world due to the economic impacts of COVID-19 and the anticipated down cycle in most regions.of our related markets. Net sales in the U.S. and Canada declined 32 percent, primarily due to COVID-19 impacts resulting in decreased demand in the North American on-highway markets, which also negatively impacted our emission solutions, automated transmissions and turbo technologies businesses, reduced sales in our distribution product lines and decreased demand for power generation equipment. International demand (excludes the U.S. and Canada) declined by 20 percent, with lower sales in all geographic regions except for China's rebound from first quarter shutdowns. The decrease in international sales was principally due to COVID-19 impacts resulting in lower on-highwayoff-highway demand (mainly the light-commercial vehicle (LCV) market in China and truckinternational mining markets, construction markets in Western Europe, Asia Pacific and India and Brazil, which also negatively impacted our turbo technologiesoil and emission solutions businesses), lower off-highway demand in constructiongas markets in China, and India and unfavorable foreign currency impacts of 3 percent of international sales (primarily the British pound, Chinese renminbi, Euro and Australian dollar). Net sales in the U.S. and Canada improved less than 1 percent primarily due to increasedpartially offset by higher construction market demand in the pick-up truck market, increased emission solutions sales and sales of power generation equipment to data center customers, mostly offset byChina), decreased demand in the heavy-duty truck market and lower off-highway demand (primarily oil and gas and construction markets).
Worldwide revenues increased 2 percent in the nine months ended September 29, 2019, compared to the same period in 2018, as higher sales in Distribution were partially offset by lower sales in the Engine, Components and Power Systems segments. Net sales in the U.S. and Canada improved by 7 percent, primarily due to increased demand in the North American on-highway markets (mainly in the heavy-duty and medium-duty truck and pick-up markets) and sales of power generation equipment to data center customers, partially offset by lower off-highway demand in oil and gas markets. International demand (excludes the U.S. and Canada) declined by 5 percent, with lower sales in most markets (especially in Europe, India, China and Russia). The decrease in international sales was driven by lower on-highway demand (mainly in the LCV market in China and Russia and truck markets in Western Europe, China and India,, which also negatively impacted our emission solutions and turbo technologies businesses),businesses, lower demand for power generation equipment, reduced demand in all distribution product lines and unfavorable foreign currency impacts of 4 percent of international sales (primarily the Chinese renminbi, Euro, British pound,Brazilian real, Australian dollar Brazilian real and Indian rupee) and lower off-highway demand in construction markets inEuro).

29
China, partially offset by increased demand in China for both power generation equipment to data center customers and engines for oil and gas markets.
Table of Contents
The following tables contain sales and EBITDA (defined as earnings before interest expense, income taxes, noncontrolling interests, depreciation and amortization) by operating segment for the three and ninesix months ended September 29, 2019June 28, 2020 and SeptemberJune 30, 2018.2019. See the section titled "OPERATING SEGMENT RESULTS" for a more detailed discussion of net sales and EBITDA by operating segment including the reconciliation of segment EBITDA to net income attributable to Cummins Inc.
  Three months ended
Operating Segments September 29, 2019 September 30, 2018 Percent change
    Percent     Percent   2019 vs. 2018
In millions Sales of Total EBITDA Sales of Total EBITDA Sales EBITDA
Engine $2,416
 42 % $341
 $2,726
 46 % $405
 (11)% (16)%
Distribution 2,004
 35 % 186
 1,931
 32 % 155
 4 % 20 %
Components 1,650
 29 % 286
 1,754
 30 % 288
 (6)% (1)%
Power Systems 1,126
 19 % 158
 1,107
 19 % 163
 2 % (3)%
Electrified Power 9
 — % (36) 2
 — % (30) NM
 (20)%
Intersegment eliminations (1,437) (25)% 23
 (1,577) (27)% 2
 (9)% NM
Total $5,768
 100 % $958
 $5,943
 100 % $983
 (3)% (3)%

"NM" - not meaningful information
 Three months ended
Operating SegmentsJune 28, 2020June 30, 2019Percent change
 Percent  Percent 2020 vs. 2019
In millionsSalesof TotalEBITDASalesof TotalEBITDASalesEBITDA
Engine$1,423  37 %$150  $2,703  43 %$416  (47)%(64)%
Distribution1,605  42 %160  2,028  33 %172  (21)%(7)%
Components1,150  30 %141  1,846  30 %297  (38)%(53)%
Power Systems777  20 %91  1,203  19 %173  (35)%(47)%
New Power10  — %(38) 8  — %(33) 25 %(15)%
Intersegment eliminations(1,113) (29)%45  (1,567) (25)%33  (29)%36 %
Total$3,852  100 %$549  $6,221  100 %$1,058  (38)%(48)%
Net income attributable to Cummins was $622$276 million, or $3.97$1.86 per diluted share, on sales of $5.8$3.9 billion for the three months ended September 29, 2019,June 28, 2020, versus the comparable prior year period net income attributable to Cummins of $692$675 million, or $4.28$4.27 per diluted share, on sales of $5.9$6.2 billion. The decreases in net income and earnings per diluted share were driven by lower net sales, decreased gross margin and a higher effective tax rate, partially offset by prior restructuring actions, lower variable compensation and temporary salary reductions resulting in lower compensation expenses, increased equity, royalty and interest income from investees as China rebounded from first quarter shutdowns and lower favorable discrete tax items, partially offset by lower variable compensation expenses and favorable foreign currency fluctuations (primarily the British pound).net losses attributable to noncontrolling interests. The decreasesdecrease in gross margin and gross margin as a percentage wereof sales was primarily due to lower volumes, and tariff impacts, partially offset by favorable pricing,prior restructuring actions, lower material costsvariable compensation and temporary salary reductions resulting in decreased compensation expenses and reduced warranty expenses. Diluted earnings per common share for the three months ended September 29, 2019, benefited $0.04 from fewer weighted-average shares outstanding due to the stock repurchase program.
  Nine months ended
Operating Segments September 29, 2019 September 30, 2018 Percent change
    Percent     Percent   2019 vs. 2018
In millions Sales of Total EBITDA Sales of Total EBITDA Sales EBITDA
Engine $7,772
 43 % $1,195
 $7,868
 45 % $1,053
 (1)% 13 %
Distribution 6,033
 34 % 529
 5,778
 33 % 423
 4 % 25 %
Components 5,357
 30 % 908
 5,394
 30 % 752
 (1)% 21 %
Power Systems 3,406
 19 % 469
 3,427
 19 % 491
 (1)% (4)%
Electrified Power 20
 — % (98) 5
 — % (61) NM
 (61)%
Intersegment eliminations (4,595) (26)% 46
 (4,827) (27)% (78) (5)% NM
Total $17,993
 100 % $3,049
 $17,645
 100 % $2,580
 2 % 18��%

"NM" - not meaningful information
 Six months ended
Operating SegmentsJune 28, 2020June 30, 2019Percent change
 Percent  Percent 2020 vs. 2019
In millionsSalesof TotalEBITDASalesof TotalEBITDASalesEBITDA
Engine$3,581  40 %$515  $5,356  44 %$854  (33)%(40)%
Distribution3,419  39 %318  4,029  33 %343  (15)%(7)%
Components2,652  30 %420  3,707  30 %622  (28)%(32)%
Power Systems1,661  19 %168  2,280  19 %311  (27)%(46)%
New Power20  — %(81) 11  — %(62) 82 %(31)%
Intersegment eliminations(2,470) (28)%55  (3,158) (26)%23  (22)%NM
Total$8,863  100 %$1,395  $12,225  100 %$2,091  (28)%(33)%
"NM" - not meaningful information
Net income attributable to Cummins was $1,960$787 million, or $12.45$5.29 per diluted share, on sales of $18.0$8.9 billion for the ninesix months ended September 29, 2019,June 28, 2020, versus the comparable prior year period net income attributable to Cummins of $1,562$1,338 million, or $9.53$8.47 per diluted share, on sales of $17.6$12.2 billion. The increasesdecreases in net income and earnings per diluted share were driven by higherlower net sales, increaseddecreased gross margin an increase in gains on corporate owned life insurance, a lower effective tax rate (due to $30 million of favorable discrete tax items recognized inand unfavorable foreign currency fluctuations (primarily the first nine months of 2019Brazilian real, Chinese renminbi and the absence of a net $37 million of unfavorable discrete tax items recognized in the comparable period in 2018) andAustralian dollar), partially offset by prior restructuring actions, lower variable compensation and temporary salary reductions resulting in lower compensation expenses, partially offset by higher research, development and engineering expenses and lowerincreased equity, royalty and interest

income from investees.investees as China rebounded from first quarter shutdowns and favorable adjustments related to India Tax Law Changes in March 2020. The increasesdecreases in gross margin and gross margin as a percentage were mainlyof sales was primarily due to lower volumes, partially offset by prior restructuring actions, lower variable compensation and temporary salary reductions resulting in decreased compensation expenses, reduced warranty costs (due to absence of the $368 million engine system campaign accrual recorded in the first half of 2018), increased pricingexpenses and lower material costs, partially offset by tariff impacts, unfavorable foreign currency impacts (primarily the Australian dollar, Euro, Brazilian real, Canadian dollar and South African rand, partially offset by the British pound) and lower volumes. See Note 11, "PRODUCT WARRANTY LIABILITY," to the Condensed Consolidated Financial Statements for additional information on the engine system campaign.costs. Diluted earnings per common share for the ninesix months ended September 29, 2019,June 28, 2020, benefited $0.10$0.09 from fewer weighted-average shares outstanding, primarily due to the stock repurchase programs.programs in the first quarter of 2020.
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Table of Contents
We generated $2,343$357 million of cash from operations for the ninesix months ended September 29, 2019,June 28, 2020, compared to $1,388$1,220 million for the comparable period in 2018.2019, although we had a net use of cash from operations of $22 million for the three months ended June 28, 2020, due to the impacts of the pandemic. Refer to the section titled "Cash Flows" in the "LIQUIDITY AND CAPITAL RESOURCES" section for a discussion of items impacting cash flows.
On August 21, 2019, we entered into an amended and restated 364-day credit agreement that allows us to borrow up to $1.5 billion of unsecured funds at any time through August 18, 2020. This credit agreement amends and restates the prior $1.5 billion 364-day credit facility that matured on August 21, 2019.
Our debt to capital ratio (total capital defined as debt plus equity) at September 29, 2019,June 28, 2020, was 23.332.1 percent, compared to 23.121.9 percent at December 31, 2018.2019. The increase was primarily due to higher outstanding commercial paper.paper of $1,367 million since December 31, 2019. At September 29, 2019,June 28, 2020, we had $1.9$2.1 billion in cash and marketable securities on hand and access to our $3.5$5.5 billion credit facilities, if necessary, to meet currently anticipated working capital, investment and funding needs. In July 2019, our Board of Directors authorized an increase to our quarterly dividend of 15 percent from $1.14 per share to $1.311 per share.
We expect our effective tax rate for the full year of 2019 to approximate 21.5 percent, excluding any discrete tax items.
In the first ninesix months of 2019, the investment gain on our U.S. pension trust2020, we purchased $550 million, or 3.5 million shares of common stock, which was 14.7 percent while our U.K. pension trust gain was 18.9 percent. We anticipate making additional defined benefit pension contributions during the remainder of 2019 of $13 million for our U.S. and U.K. pension plans. Approximately $91 million of the estimated $123 million of U.S. and U.K. pension contributions for the full year are voluntary. We expect our 2019 net periodic pension cost to approximate $64 million.
On September 9, 2019, we acquired an 81 percent interest in Hydrogenics Corporation for total consideration of $235 million. The Hydrogen Company, a wholly-owned subsidiary of L’Air Liquide, S.A., will maintain a non-controlling interest in Hydrogenics. We accounted for the transaction as a business combination and included itall purchased in the Electrified Power segment in the thirdfirst quarter of 2019. See Note 15, "ACQUISITIONS," to our Condensed Consolidated Financial Statements for additional information.
2020.
On April 29, 2019, we announced that14, 2020, we were conducting a formal internal reviewapproved for the Federal Reserve Bank of our emissions certification process and compliance with emissions standards for our pick-up truck applications, following conversations with the U.S. Environmental Protection Agency and the California Air Resources Board regarding certification of our engines in the model year 2019 RAM 2500 and 3500 trucks. We voluntarily disclosed our formal internal reviewNew York's Commercial Paper Funding Facility to our regulators andassure access to other government agencies, the Department of Justice and the Securities and Exchange Commission (SEC). We are also fully cooperating with the government agencies’ information requests and inquiries. Duecommercial paper funding during volatile market conditions. See NOTE 9, "DEBT" to the continuing nature of our formal review, our ongoing cooperation with our regulators and other government agencies, and the presence of many unknown facts and circumstances, we cannot predict the final outcome of this review and these regulatory and agency processes, and we cannot provide assurance that the matter will not have a materially adverse impact on our results of operations and cash flows. See Note 13, "COMMITMENTS AND CONTINGENCIES," to our Condensed Consolidated Financial Statements for additional information.
On May 1, 2020, we entered into an additional 364-day credit facility agreement that allows us to borrow up to $2.0 billion of senior unsecured funds at any time through April 30, 2021. This program does not backstop or increase our borrowing capacity for our commercial paper programs. This increased our total committed credit capacity to $5.5 billion, less our outstanding commercial paper, for a net remaining capacity of $3.5 billion.
In October 2019,June 2020, we initiatedsettled a voluntary retirement program for eligible employeesportion of our February 2014 interest rate swap, which previously converted our $500 million debt issue, due in 2023, from fixed rate to floating rate based on a LIBOR spread. We will amortize the $30 million gain realized upon settlement over the remaining three year term of related debt. In July 2020, we settled the remaining $125 million of this interest rate swap and realized an additional $10 million gain to be amortized over the remaining term of the debt.
In the first six months of 2020, the investment loss on our U.S. pension trust was 0.2 percent while our U.K. pension trust gain was 10.3 percent. Investment performance in both trusts was negatively affected by the global recession and its impact on capital markets. During the remainder of 2020, we anticipate making $13 million in additional defined benefit pension contributions in the U.K. and $12 million in contributions to our U.S. Costs fornon-qualified benefit plans. We expect our 2020 annual net periodic pension cost to approximate $102 million.
As of the date of this program will be recognized infiling, our credit ratings and outlooks from the fourth quartercredit rating agencies remain unchanged.

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Table of 2019.Contents

RESULTS OF OPERATIONS
 Three months endedFavorable/Six months endedFavorable/
June 28,
2020		June 30,
2019		(Unfavorable)June 28,
2020		June 30,
2019		(Unfavorable)
In millions, except per share amountsAmountPercentAmountPercent
NET SALES$3,852  $6,221  $(2,369) (38)%$8,863  $12,225  $(3,362) (28)%
Cost of sales2,962  4,580  1,618  35 %6,679  9,052  2,373  26 %
GROSS MARGIN890  1,641  (751) (46)%2,184  3,173  (989) (31)%
OPERATING EXPENSES AND INCOME      
Selling, general and administrative expenses470  629  159  25 %1,016  1,222  206  17 %
Research, development and engineering expenses189  251  62  25 %427  488  61  13 %
Equity, royalty and interest income from investees115  96  19  20 %244  188  56  30 %
Other operating expense, net(10) (9) (1) 11 %(15) (4) (11) NM
OPERATING INCOME336  848  (512) (60)%970  1,647  (677) (41)%
Interest income4  12  (8) (67)%11  24  (13) (54)%
Interest expense23  29  6  21 %46  61  15  25 %
Other income, net45  40  5  13 %82  106  (24) (23)%
INCOME BEFORE INCOME TAXES362  871  (509) (58)%1,017  1,716  (699) (41)%
Income tax expense93  186  93  50 %220  362  142  39 %
CONSOLIDATED NET INCOME269  685  (416) (61)%797  1,354  (557) (41)%
Less: Net (loss) income attributable to noncontrolling interests(7) 10  17  NM10  16  6  38 %
NET INCOME ATTRIBUTABLE TO CUMMINS INC.$276  $675  $(399) (59)%$787  $1,338  $(551) (41)%
Diluted Earnings Per Common Share Attributable to Cummins Inc.$1.86  $4.27  $(2.41) (56)%$5.29  $8.47  $(3.18) (38)%
"NM" - not meaningful information
   Three months ended Favorable/ Nine months ended Favorable/
   September 29,
2019		 September 30,
2018		 (Unfavorable) September 29,
2019		 September 30,
2018		 (Unfavorable)
In millions, except per share amounts   Amount Percent   Amount Percent
NET SALES $5,768
 $5,943
 $(175) (3)% $17,993
 $17,645
 $348
 2 %
Cost of sales 4,274
 4,392
 118
 3 % 13,326
 13,454
 128
 1 %
GROSS MARGIN 1,494
 1,551
 (57) (4)% 4,667
 4,191
 476
 11 %
OPERATING EXPENSES AND INCOME  
  
  
 

  
  
  
 

Selling, general and administrative expenses 600
 604
 4
 1 % 1,822
 1,794
 (28) (2)%
Research, development and engineering expenses 242
 229
 (13) (6)% 730
 658
 (72) (11)%
Equity, royalty and interest income from investees 68
 90
 (22) (24)% 256
 315
 (59) (19)%
Other operating income (expense), net (21) (5) (16) NM
 (25) 1
 (26) NM
OPERATING INCOME 699
 803
 (104) (13)% 2,346
 2,055
 291
 14 %
Interest income 14
 9
 5
 56 % 38
 26
 12
 46 %
Interest expense 26
 30
 4
 13 % 87
 82
 (5) (6)%
Other income, net 68
 23
 45
 NM
 174
 44
 130
 NM
INCOME BEFORE INCOME TAXES 755
 805
 (50) (6)% 2,471
 2,043
 428
 21 %
Income tax expense 139
 107
 (32) (30)% 501
 466
 (35) (8)%
CONSOLIDATED NET INCOME 616
 698
 (82) (12)% 1,970
 1,577
 393
 25 %
Less: Net (loss) income attributable to noncontrolling interests (6) 6
 12
 NM
 10
 15
 5
 33 %
NET INCOME ATTRIBUTABLE TO CUMMINS INC. $622
 $692
 $(70) (10)% $1,960
 $1,562
 $398
 25 %
Diluted Earnings Per Common Share Attributable to Cummins Inc. $3.97
 $4.28
 $(0.31) (7)% $12.45
 $9.53
 $2.92
 31 %

"NM" - not meaningful information
 Three months endedFavorable/
(Unfavorable)		Six months endedFavorable/
(Unfavorable)
 June 28,
2020		June 30,
2019		June 28,
2020		June 30,
2019
Percent of salesPercentage PointsPercentage Points
Gross margin23.1 %26.4 %(3.3) 24.6 %26.0 %(1.4) 
Selling, general and administrative expenses12.2 %10.1 %(2.1) 11.5 %10.0 %(1.5) 
Research, development and engineering expenses4.9 %4.0 %(0.9) 4.8 %4.0 %(0.8) 

  Three months ended 
Favorable/
(Unfavorable)
 Nine months ended Favorable/
(Unfavorable)
  September 29,
2019		 September 30,
2018		  September 29,
2019		 September 30,
2018		 
Percent of sales   Percentage Points   Percentage Points
Gross margin 25.9% 26.1% (0.2) 25.9% 23.8% 2.1
Selling, general and administrative expenses 10.4% 10.2% (0.2) 10.1% 10.2% 0.1
Research, development and engineering expenses 4.2% 3.9% (0.3) 4.1% 3.7% (0.4)
Net Sales
Net sales for the three months ended September 29, 2019,June 28, 2020, decreased by $175$2,369 million versus the comparable period in 2018.2019. The primary drivers were as follows:
•Engine segment sales decreased 1147 percent due to lower demand in global construction markets, especially in China and North America, and lower volumes in theall North American heavy-duty truck market.on-highway markets.
•Components segment sales decreased 638 percent primarilylargely due to lower truck demand in Western Europe, India and China.
Unfavorable foreign currency fluctuations of 1 percent of total sales, primarily in the British pound, Chinese renminbi, Euro and Australian dollar.

These decreases were partially offset by:
Distribution segment sales increased 4 percent primarily due to higher demand in North America and Western Europe, especiallypartially offset by higher demand in the power generation product line.China.
•Power Systems segment sales increased 2decreased 35 percent primarily due to higherlower demand in global mining markets and power generation markets in North America China and Eastern Europe, partially offset by lowerIndia and reduced industrial market demand in international mining markets and oil and gas markets in China and North America.
•Distribution segment sales decreased 21 percent principally due to lower demand in North America.
Net sales for the nine months ended September 29, 2019, increased $348 millionversus the comparable period in 2018. The primary driver was the Distribution segment as sales increased 4 percent, primarily due to higher demand in most geographic regions,America, especially in North America,the parts and increased demand in the power generationengine product line.lines.
This increase was partially offset by:
•Unfavorable foreign currency fluctuations of 2 percent of total sales, primarily in the Chinese renminbi, Euro, British pound,Brazilian real, Australian dollar Brazilian real and Indian rupee.British pound.
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Table of Contents
Net sales for the six months ended June 28, 2020, decreased $3,362 millionversus the comparable period in 2019. The primary drivers were as follows:
•Engine segment sales decreased 133 percent due to lower volumes in all North American on-highway markets.
•Components segment sales decreased 28 percent largely due to lower demand in North America and Western Europe, partially offset by higher demand in China.
•Power Systems segment sales decreased 27 percent primarily due to lower demand in China for LCVpower generation markets in North America and off-highway construction markets, lower global bus salesIndia and decreased medium-duty truckreduced industrial demand in Brazil, partially offset by higher volumesinternational mining markets and oil and gas market in China.
•Distribution segment sales decreased 15 percent principally due to lower demand in North American heavy-dutyAmerica, especially in the parts and pick-up truck markets.engine product lines.
•Unfavorable foreign currency fluctuations of 2 percent of total sales, primarily in the Chinese renminbi, Brazilian real, Australian dollar and Euro.
Sales to international markets (excluding the U.S. and Canada), based on location of customers, for the three and ninesix months ended September 29, 2019,June 28, 2020, were 3748 percent and 3842 percent of total net sales compared with 3938 percent and 4038 percent of total net sales for the comparable periods in 2018.2019. A more detailed discussion of sales by segment is presented in the “OPERATING SEGMENT RESULTS” section.
Cost of Sales
The types of expenses included in cost of sales are the following: parts and material consumption, including direct and indirect materials; salaries, wages and benefits; depreciation on production equipment and facilities and amortization of technology intangibles; estimated costs of warranty programs and campaigns; production utilities; production-related purchasing; warehousing, including receiving and inspection; engineering support costs; repairs and maintenance; production and warehousing facility property insurance; rent for production facilities and other production overhead.
Gross Margin
Gross margin decreased $57$751 million for the three months ended September 29, 2019June 28, 2020 and decreased 0.23.3 points as a percentage of sales, versus the comparable period in 2018.2019. The decreasesdecrease in gross margin and gross margin as a percentage wereof sales was primarily due to lower volumes, and tariff impacts, partially offset by favorable pricing,prior restructuring actions, lower material costsvariable compensation and temporary salary reductions resulting in decreased compensation expenses and reduced warranty expenses.
Gross margin increased $476decreased $989 million for the ninesix months ended September 29, 2019June 28, 2020 and increased 2.1decreased 1.4 points as a percentage of sales versus the comparable period in 2018.2019. The increasesdecrease in gross margin and gross margin as a percentage were mainlyof sales was primarily due to lower volumes, partially offset by prior restructuring actions, lower variable compensation and temporary salary reductions resulting in decreased compensation expenses, reduced warranty costs (due to absence of the $368 million engine system campaign accrual recorded in the first half of 2018), increased pricingexpenses and lower material costs, partially offset by tariff impacts, unfavorable foreign currency impacts (primarily the Australian dollar, Euro, Brazilian real, Canadian dollar and South African rand, partially offset by the British pound) and lower volumes. See Note 11, "PRODUCT WARRANTY LIABILITY," to the Condensed Consolidated Financial Statements for additional information.costs.
The provision for base warranties issued as a percent of sales for the three and ninesix months ended September 29, 2019,June 28, 2020, was 1.81.7 percent and 2.01.8 percent, respectively, compared to 2.02.1 percent and 1.92.1 percent for the comparable periods in 2018.2019. A detailed discussion of gross margin by segment is presented in the “OPERATING SEGMENT RESULTS” section.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $4$159 million for the three months ended September 29, 2019,June 28, 2020, versus the comparable period in 2018,2019, primarily due to prior restructuring actions, lower variable compensation and temporary salary reductions resulting in decreased compensation expenses, partially offset by higherreduced travel expenses and lower consulting and compensation expenses. Overall, selling, general and administrative expenses, as a percentage of sales, increased to 10.412.2 percent in the three months ended September 29, 2019,June 28, 2020, from 10.210.1 percent in the comparable period in 2018.2019. The increase in selling, general and administrative expenses as a percentage of sales was primarily due to sales declining faster than selling, general and administrative expenses decreased, despite lower compensation expenses.
Selling, general and administrative expenses increased $28decreased $206 million for the ninesix months ended September 29, 2019,June 28, 2020, versus the comparable period in 2018,2019, primarily due to higher consultingprior restructuring actions, lower variable compensation and temporary salary reductions resulting in decreased compensation expenses, partially offset byreduced travel expenses and lower variable

compensationconsulting expenses. Overall, selling, general and administrative expenses, as a percentage of sales, decreasedincreased to 10.111.5 percent in the ninesix months ended September 29, 2019,June 28, 2020, from 10.210.0 percent in the comparable period in 2018.2019. The increase in selling, general and administrative expenses as a percentage of sales was primarily due to sales declining faster than selling, general and administrative expenses decreased, despite lower compensation expenses.
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Table of Contents
Research, Development and Engineering Expenses
Research, development and engineering expenses increased $13decreased $62 million for the three months ended September 29, 2019,June 28, 2020, versus the comparable period in 2018,2019 primarily due to increased consultingprior restructuring actions, lower variable compensation and temporary salary reductions resulting in decreased compensation expenses and decreased expense recovery, partially offset by lower variable compensationreduced consulting expenses. Overall, research, development and engineering expenses as a percentage of sales increased to 4.24.9 percent in the three months ended September 29, 2019,June 28, 2020, from 3.94.0 percent in the comparable period in 2018.2019.
Research, development and engineering expenses increased $72decreased $61 million for the ninesix months ended September 29, 2019,June 28, 2020, versus the comparable period in 2018,2019 primarily due to increased compensation expense driven by headcount growth, including increased staffing for the Electrified Power segment, decreased expense recovery and increased consulting expenses, partially offset byprior restructuring actions, lower variable compensation and temporary salary reductions resulting in decreased compensation expenses and reduced consulting expenses. Overall, research, development and engineering expenses as a percentage of sales increased to 4.14.8 percent in the ninesix months ended September 29, 2019,June 28, 2020, from 3.74.0 percent in the comparable period in 2018.2019. Research activities continue to focus on development of new products to meet future emission standards around the world, improvements in fuel economy performance of diesel and natural gas poweredgas-powered engines and related components as well as development activities around fully electric, hybrid and hydrogen powertrain solutions.
Equity, Royalty and Interest Income from Investees
Equity, royalty and interest income from investees decreased $22increased $19 million for the three months ended September 29, 2019,June 28, 2020, versus the comparable period in 2018,2019, primarily due to lowerhigher earnings at Beijing Foton Cummins Engine Company, Ltd.Co., Tata Cummins Ltd. and Dongfeng Cummins Westport.Engine Co. as China rebounded from first quarter shutdowns.
Equity, royalty and interest income from investees decreased $59increased $56 million for the ninesix months ended September 29, 2019,June 28, 2020, versus the comparable period in 2018,2019, primarily due to lowera $37 million adjustment as the result of tax changes within India's 2020-2021 Union Budget of India (India Tax Law Changes) passed in March 2020, $18 million of technology fee revenue recorded in the first quarter of 2020 and higher earnings in China and India, especially at Tata Cummins Ltd., Beijing Foton Cummins Engine Company,Co., Ltd., Chongqing Cummins Engine Company, Ltd., and Dongfeng Cummins Emission Solutions Company, Ltd. as China rebounded from first quarter shutdowns, partially offset by weakness in most other investees as a result of the pandemic. See NOTE 6, "INCOME TAXES" to the
Condensed Consolidated Financial Statements for additional information on India Tax Law Changes.
Other Operating Income (Expense),Expense, Net
Other operating income (expense),expense, net was as follows:
 Three months endedSix months ended
In millionsJune 28,
2020		June 30,
2019		June 28,
2020		June 30,
2019
Amortization of intangible assets$(6) $(5) $(11) $(10) 
(Loss) gain on sale of assets, net(5) —  (6) 5  
Loss on write off of assets(3) —  (5) —  
Royalty income, net—  3  2  9  
Other, net4  (7) 5  (8) 
Total other operating expense, net$(10) $(9) $(15) $(4) 
  Three months ended Nine months ended
In millions September 29,
2019		 September 30,
2018		 September 29,
2019		 September 30,
2018
Loss on write off of assets (1)
 $(20) $(1) $(20) $(5)
Amortization of intangible assets (5) (5) (15) (15)
Gain (loss) on sale of assets, net (2) (1) 3
 2
Royalty income, net 3
 8
 12
 26
Other, net 3
 (6) (5) (7)
Total other operating income (expense), net $(21) $(5) $(25) $1

(1) Includes $19 million of charges related to ending production of the 5-liter ISV engine for the U.S. pick-up truck market during the three and nine months ended September 29, 2019.
Interest Income
Interest income increased $5decreased $8 million and $12$13 million for the three and ninesix months ended September 29, 2019,June 28, 2020, versus the comparable periods in 2018,2019, primarily due to higher average balances andlower rates of return on higher average cash and marketable securities.securities balances.
Interest Expense
Interest expense decreased $4$6 million and increased $5$15 million for the three and ninesix months ended September 29, 2019,June 28, 2020, versus the comparable periods in 2018. The three month decrease is2019, mainly due to lower average short-term borrowings. The nine month increase is primarily due to higher interest rates on relatively flat averagedespite an increase in short-term borrowings.

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Table of Contents
Other Income, Net
Other income, net was as follows:
 Three months endedSix months ended
In millionsJune 28,
2020		June 30,
2019		June 28,
2020		June 30,
2019
Gain on corporate owned life insurance$21  $18  $38  $55  
Non-service pension and other postretirement benefits credit16  18  32  36  
Gain on marketable securities, net7  3  4  7  
Rental income2  2  4  4  
Foreign currency loss, net(2) (2) (3) (8) 
Bank charges(7) (3) (10) (6) 
Other, net8  4  17  18  
Total other income, net$45  $40  $82  $106  
  Three months ended Nine months ended
In millions September 29,
2019		 September 30,
2018		 September 29,
2019		 September 30,
2018
Foreign currency gain (loss), net (1)
 $36
 $(6) $28
 $(30)
Non-service pension and other postretirement benefits credit 18
 15
 54
 45
Gain on corporate owned life insurance 9
 7
 64
 4
Rental income 2
 2
 6
 6
Gain on marketable securities, net 1
 —
 8
 —
Bank charges (3) (4) (9) (9)
Other, net 5
 9
 23
 28
Total other income, net $68
 $23
 $174
 $44

(1) Includes $35 million in gains from unwinding derivative instruments not designated as hedges as a result of foreign dividends paid during the three and nine months ended September 29, 2019.
Income Tax Expense
Our effective tax rate for 2019 is expected to approximate 21.5 percent, excluding any discrete items that may arise.
Our effective tax rates for the three and ninesix months ended September 29,June 28, 2020, were 25.7 percent and 21.6 percent, respectively. Our effective tax rates for the three and six months ended June 30, 2019, were 18.421.4 percent and 20.321.1 percent, respectively.respectively, and contained immaterial discrete items.
The three months ended September 29, 2019,June 28, 2020, contained $23unfavorable discrete items of $14 million, or $0.14 per share,primarily due to changes in tax reserves on certain U.S. tax matters.
The six months ended June 28, 2020, contained $4 million of favorable net discrete tax items, primarily due to withholding taxes and provision to return adjustments. The nine months ended September 29, 2019, contained $30 million, or $0.19 per share,favorable tax changes within India's 2020-2021 Union Budget of favorable net discrete tax items, primarily due to withholding taxes and provision to return adjustments.
Our effective tax rates for the three and nine months ended September 30, 2018 were 13.3 percent and 22.8 percent, respectively.
The three months ended September 30, 2018, contained $37 million, or $0.23 per share,India (India Tax Law Change) passed in March of favorable net discrete tax items, primarily due to $34 million of favorable discrete items related to the 2017 Tax Cuts and Jobs Act (Tax Legislation) and $3 million of other favorable discrete items.
The nine months ended September 30, 2018, contained $37 million, or $0.23 per share, of unfavorable net discrete tax items, primarily due to $48 million of unfavorable discrete items related to the Tax Legislation,2020, partially offset by $11 million of other favorable discrete items.
The changeunfavorable changes in tax reserves in the effectivesecond quarter of 2020. The India Tax Law Change eliminated the dividend distribution tax and replaced it with a lower rate withholding tax as the burden shifted from the dividend payor to the dividend recipient for a net favorable income statement impact of $35 million. See NOTE 6, "INCOME TAXES" to the three months ended September 29, 2019, versus the comparable period in 2018, was primarily due to favorable net discrete tax items related toCondensed Consolidated Financial Statements for additional information on India Tax Legislation. The change in the effective tax rate for the nine months ended September 29, 2019, versus the comparable period in 2018, was not significant.Law Changes.
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 ninesix months ended September 29, 2019,June 28, 2020, decreased $12$17 million and $5$6 million, respectively, versus the comparable periods in 2018,2019, primarily due to decreased earnings at Cummins India Limited and Eaton Cummins Joint Venture and CumminsVenture. The decreases for six months ended June 28, 2020, were partially offset by a $19 million unfavorable adjustment as the result of India Limited.Tax Law Changes passed in March 2020. See NOTE 6, "INCOME TAXES" to the Condensed Consolidated Financial Statements for additional information on India Tax Law Changes.
Net Income Attributable to Cummins Inc. and Diluted Earnings Per Common Share Attributable to Cummins Inc.
Net income and diluted earnings per common share attributable to Cummins Inc. for the three months ended September 29, 2019,June 28, 2020, decreased $70$399 million and $0.31$2.41 per diluted share versus the comparable period in 2018,2019, primarily due to lower net sales, decreased gross margin and a higher effective tax rate, partially offset by prior restructuring actions, lower variable compensation and temporary salary reductions resulting in lower compensation expenses, increased equity, royalty and interest income from investees as China rebounded from first quarter shutdowns and lower favorable discrete tax items, partially offset by lower variable compensation expenses and favorable foreign currency fluctuations (primarily the British pound). Diluted earnings per common share for the three months ended September 29, 2019, benefited $0.04 from fewer weighted-average shares outstanding duenet losses attributable to the stock repurchase program.noncontrolling interests.

Net income and diluted earnings per common share attributable to Cummins Inc. for the ninesix months ended September 29, 2019, increased $398June 28, 2020, decreased $551 million and $2.92$3.18 per diluted share versus the comparable period in 2018,2019, primarily due to higherlower net sales, increaseddecreased gross margin an increase in gains on corporate owned life insurance, a lower effective tax rate (due to $30 million of favorable discrete tax items recognized inand unfavorable foreign currency fluctuations (primarily the first nine months of 2019Brazilian real, Chinese renminbi and the absence of a net $37 million of unfavorable discrete tax items recognized in the comparable period in 2018) andAustralian dollar), partially offset by prior restructuring actions, lower variable compensation and temporary salary reductions resulting in lower compensation expenses, partially offset by higher research, development and engineering expenses and lowerincreased equity, royalty and interest income from investees.investees as China rebounded from first quarter shutdowns and favorable adjustments related to India Tax Law Changes in March 2020. Diluted earnings per common share for the ninesix months ended September 29, 2019,June 28, 2020, benefited $0.10$0.09 from fewer weighted-average shares outstanding, primarily due to the stock repurchase programs.programs in the first quarter of 2020.
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Comprehensive Income - Foreign Currency Translation Adjustment
The foreign currency translation adjustment was a net loss of $182$11 million and $197$173 million, respectively, for the three and ninesix months ended September 29, 2019,June 28, 2020, compared to a net loss of $159$99 million and $374$15 million, respectively, for the three and ninesix months ended SeptemberJune 30, 20182019, and was driven by the following:
Three months ended
June 28, 2020June 30, 2019
In millionsTranslation adjustmentPrimary currency driver vs. U.S. dollarTranslation adjustmentPrimary currency driver vs. U.S. dollar
Wholly-owned subsidiaries$(7) Brazilian real, Indian rupee, offset by Australian dollar, South African rand$(82) British pound, Chinese renminbi
Equity method investments1  British pound, Chinese renminbi, offset by Indian rupee(17) Chinese renminbi
Consolidated subsidiaries with a noncontrolling interest(5) Indian rupee—   
Total$(11) $(99) 
Six months ended
June 28, 2020June 30, 2019
In millionsTranslation adjustmentPrimary currency driver vs. U.S. dollarTranslation adjustmentPrimary currency driver vs. U.S. dollar
Wholly-owned subsidiaries$(131) Brazilian real, Indian rupee, Chinese renminbi, British pound$(8) British pound offset by Indian rupee
Equity method investments(20) Chinese renminbi, Indian rupee(10) British pound
Consolidated subsidiaries with a noncontrolling interest(22) Indian rupee3  Indian rupee
Total$(173) $(15) 

36
  Three months ended
  September 29, 2019 September 30, 2018
In millions Translation adjustment Primary currency driver vs. U.S. dollar Translation adjustment Primary currency driver vs. U.S. dollar
Wholly-owned subsidiaries $(153) British pound, Chinese renminbi, Brazilian real $(106) Chinese renminbi, Indian rupee, British pound, Brazilian real
Equity method investments (24) Chinese renminbi (36) Chinese renminbi, Indian rupee
Consolidated subsidiaries with a noncontrolling interest (5) Indian rupee (17) Indian rupee
Total $(182)   $(159)  

Table of Contents
  Nine months ended
  September 29, 2019 September 30, 2018
In millions Translation adjustment Primary currency driver vs. U.S. dollar Translation adjustment Primary currency driver vs. U.S. dollar
Wholly-owned subsidiaries $(161) British pound, Chinese renminbi, Brazilian real $(268) Indian rupee, British pound, Chinese renminbi, Brazilian real
Equity method investments (34) Chinese renminbi, British pound (65) Chinese renminbi, Indian rupee, British pound
Consolidated subsidiaries with a noncontrolling interest (2) Indian rupee (41) Indian rupee
Total $(197)   $(374)  

OPERATING SEGMENT RESULTS
Our reportable operating segments consist of the Engine, Distribution, Components, Power Systems and ElectrifiedNew Power segments. This reporting structure is organized according to the products and markets each segment serves. We use segment EBITDA as a primary basis for the Chief Operating Decision Maker to evaluate the performance of each of our reportable operating segments. We believe EBITDA is a useful measure of our operating performance as it assists investors and debt holders in comparing our performance on a consistent basis without regard to financing methods, capital structure, income taxes or depreciation and amortization methods, which can vary significantly depending upon many factors. Segment amounts exclude certain expenses not specifically identifiable to segments. See Note 16,15, "OPERATING SEGMENTS," to the Condensed Consolidated Financial Statements for additional information.
Our results for the first half of 2020 were significantly impacted by COVID-19, which caused manufacturing and supplier plant closures in China in early 2020 and other targeted shut-downs beginning in late March 2020 in response to both customer plant closures and government actions to slow the spread of the virus. Plants closed in China during the first quarter were reopened in late March 2020; however, additional plants and distribution locations around the world were shut down or working at reduced capacities early in the second quarter. Although these actions did not have a material effect on our results of operations in the first quarter, they materially impacted our second quarter results and we expect them to continue to have significant impacts on our results of operations, financial condition and cash flows throughout the remainder of 2020. Our Board of Directors continues to monitor and evaluate all of these factors along with the continuing impacts of the COVID-19 pandemic on our business and operations.
Following is a discussion of results for each of our operating segments.
Engine Segment Results
Financial data for the Engine segment was as follows:
 Three months ended Favorable/ Nine months ended Favorable/ Three months endedFavorable/Six months endedFavorable/
 September 29, September 30, (Unfavorable) September 29, September 30, (Unfavorable) June 28,June 30,(Unfavorable)June 28,June 30,(Unfavorable)
In millions 2019 2018 Amount Percent 2019 2018 Amount PercentIn millions20202019AmountPercent20202019AmountPercent
External sales $1,822
 $2,082
 $(260) (12)% $5,879
 $5,945
 $(66) (1)%External sales$937  $2,073  $(1,136) (55)%$2,516  $4,057  $(1,541) (38)%
Intersegment sales 594
 644
 (50) (8)% 1,893
 1,923
 (30) (2)%Intersegment sales486  630  (144) (23)%1,065  1,299  (234) (18)%
Total sales 2,416
 2,726
 (310) (11)% 7,772
 7,868
 (96) (1)%Total sales1,423  2,703  (1,280) (47)%3,581  5,356  (1,775) (33)%
Research, development and engineering expenses 79
 74
 (5) (7)% 245
 229
 (16) (7)%Research, development and engineering expenses65  88  23  26 %145  166  21  13 %
Equity, royalty and interest income from investees 34
 55
 (21) (38)% 152
 189
 (37) (20)%Equity, royalty and interest income from investees84  62  22  35 %162  118  44  37 %
Interest income 5
 3
 2
 67 % 13
 8
 5
 63 %Interest income1  4  (3) (75)%5  8  (3) (38)%
Segment EBITDA 341
 405
 (64) (16)% 1,195
 1,053
 142
 13 %Segment EBITDA150  416  (266) (64)%515  854  (339) (40)%
                
  
  
 Percentage Points  
  
 Percentage Points   Percentage Points  Percentage Points
Segment EBITDA as a percentage of total sales 14.1% 14.9%  
 (0.8) 15.4% 13.4%  
 2.0
Segment EBITDA as a percentage of total sales10.5 %15.4 % (4.9) 14.4 %15.9 % (1.5) 
Sales for our Engine segment by market were as follows:
 Three months endedFavorable/Six months endedFavorable/
June 28,June 30,(Unfavorable)June 28,June 30,(Unfavorable)
In millions20202019AmountPercent20202019AmountPercent
Heavy-duty truck$415  $970  $(555) (57)%$1,165  $1,949  $(784) (40)%
Medium-duty truck and bus391  739  (348) (47)%1,009  1,460  (451) (31)%
Light-duty automotive180  480  (300) (63)%533  862  (329) (38)%
Total on-highway986  2,189  (1,203) (55)%2,707  4,271  (1,564) (37)%
Off-highway437  514  (77) (15)%874  1,085  (211) (19)%
Total sales$1,423  $2,703  $(1,280) (47)%$3,581  $5,356  $(1,775) (33)%
  Percentage Points  Percentage Points
On-highway sales as percentage of total sales69 %81 % (12) 76 %80 % (4) 
37
  Three months ended Favorable/ Nine months ended Favorable/
  September 29, September 30, (Unfavorable) September 29, September 30, (Unfavorable)
In millions 2019 2018 Amount Percent 2019 2018 Amount Percent
Heavy-duty truck $851
 $958
 $(107) (11)% $2,800
 $2,693
 $107
 4 %
Medium-duty truck and bus 645
 699
 (54) (8)% 2,105
 2,168
 (63) (3)%
Light-duty automotive 478
 517
 (39) (8)% 1,340
 1,363
 (23) (2)%
Total on-highway 1,974
 2,174
 (200) (9)% 6,245
 6,224
 21
 — %
Off-highway 442
 552
 (110) (20)% 1,527
 1,644
 (117) (7)%
Total sales $2,416
 $2,726
 $(310) (11)% $7,772
 $7,868
 $(96) (1)%
                 
   
  
 Percentage Points  
  
 Percentage Points
On-highway sales as percentage of total sales 82% 80%  
 2
 80% 79%  
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Unit shipments by engine classification (including unit shipments to Power Systems and off-highway engine units included in their respective classification) were as follows:
 Three months ended Favorable/ Nine months ended Favorable/ Three months endedFavorable/Six months endedFavorable/
 September 29, September 30, (Unfavorable) September 29, September 30, (Unfavorable) June 28,June 30,(Unfavorable)June 28,June 30,(Unfavorable)
 2019 2018 Amount Percent 2019 2018 Amount Percent 20202019AmountPercent20202019AmountPercent
Heavy-duty 28,000
 34,600
 (6,600) (19)% 96,900
 93,200
 3,700
 4 %Heavy-duty15,900  35,000  (19,100) (55)%41,700  68,900  (27,200) (39)%
Medium-duty 63,200
 76,000
 (12,800) (17)% 218,600
 233,500
 (14,900) (6)%Medium-duty44,900  76,400  (31,500) (41)%106,100  155,400  (49,300) (32)%
Light-duty 62,600
 76,800
 (14,200) (18)% 183,100
 207,200
 (24,100) (12)%Light-duty29,800  64,100  (34,300) (54)%79,200  120,500  (41,300) (34)%
Total unit shipments 153,800
 187,400
 (33,600) (18)% 498,600
 533,900
 (35,300) (7)%Total unit shipments90,600  175,500  (84,900) (48)%227,000  344,800  (117,800) (34)%
Sales
Engine segment sales for the three months ended September 29, 2019,June 28, 2020, decreased $310$1,280 million versus the comparable period in 2018.2019. The following were the primary drivers by market:
Off-highway sales decreased $110 million primarily due to lower demand in global construction markets, especially in China and North America.
•Heavy-duty truck sales decreased $107$555 million principally due to lower volumes in the North American heavy-duty truck market with decreasedlower shipments of 1873 percent.
•
•Medium-duty truck and bus sales decreased $348 million mainly due to lower demand in the North American medium-duty truck and bus markets with decreased unit shipments of 55 percent.
•Light-duty truck and bus sales decreased $54 million mainly due to lower demand in Brazil medium-duty truck markets and global bus markets, especially in North America.
Light-duty automotive sales decreased $39$300 million primarily due to lower LCV sales in China, partially offset by higher pick-up sales to Chrysler.
•Unfavorable foreign currency fluctuations, primarily in North America.the Chinese renminbi and Brazilian real.
Engine segment sales for the ninesix months ended September 29, 2019,June 28, 2020, decreased $96$1,775 million versus the comparable period in 2018.2019. The following were the primary drivers by market:
Off-highway•Heavy-duty truck sales decreased $117$784 million primarilyprincipally due to lower demandvolumes in construction markets in China and India.the North American heavy-duty truck market with lower shipments of 54 percent.
•Medium-duty truck and bus sales decreased $63$451 million principallymainly due to decreased global bus sales and lower demand in North American medium-duty truck demand in Brazil, partially offset by increased medium-dutyand bus markets with decreased shipments of 36 percent.
•Light-duty truck automotive sales in North America.decreased $329 million primarily due to lower pick-up sales to Chrysler.
•Unfavorable foreign currency fluctuations, primarily in the Chinese renminbi, Brazilian real and Euro.
These decreases were partially offset by increased heavy-duty truck sales of $107 million mainly due to higher volumes in North America with increased shipments of 5 percent.Chinese renminbi.
Segment EBITDA
Engine segment EBITDA for the three months ended September 29, 2019,June 28, 2020, decreased $64$266 million versus the comparable period in 2018,2019, primarily due to lower gross margin, a $33 million charge related to ending production of the 5-liter ISV engine for the U.S. pick-up truck marketpartially offset by lower selling, general and administrative expenses, decreased research, development and engineering expenses and increased equity, royalty and interest income from investees. The decrease in gross margin was mainly due to lower volumes, and tariff impacts, partially offset by improved pricing.decreased warranty expenses, lower material costs and prior restructuring actions, lower variable compensation and temporary salary reductions resulting in lower compensation expenses. The decrease in selling, general and administrative expenses and research, development and engineering expenses was primarily due to prior restructuring actions, lower variable compensation and temporary salary reductions resulting in decreased compensation expenses and reduced consulting expenses. The increase in equity, royalty and interest income from investees was principally due to higher earnings at Beijing Foton Cummins Engine Co., Ltd. and Dongfeng Cummins Engine Co. as China rebounded from first quarter shutdowns.
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Engine segment EBITDA for the six months ended June 28, 2020, decreased $339 million versus the comparable period in 2019, primarily due to lower gross margin, partially offset by lower selling, general and administrative expenses, increased equity, royalty and interest income from investees and lower research, development and engineering expenses. The decrease in gross margin was mainly due to lower volumes, partially offset by prior restructuring actions, lower variable compensation and temporary salary reductions resulting in lower compensation expenses, reduced material costs and decreased warranty expenses. Selling, general and administrative expenses and research, development and engineering expenses decreased principally due to restructuring actions, lower variable compensation and temporary salary reductions resulting in decreased compensation expenses and reduced consulting expenses. The increase in equity, royalty and interest income from investees was largely due to lowerhigher earnings at Tata Cummins Ltd., mainly due to an $18 million adjustment related to India Tax Law Changes passed in March 2020, $18 million of technology fee revenue recorded in the first quarter of 2020 and higher earnings at Beijing Foton Cummins Engine Co., Tata Cummins, Ltd and Cummins Westport.
Engine segment EBITDA for the nine months ended September 29, 2019, increased $142 million versus the comparable period in 2018, primarily due to higher gross margin, partially offset by decreased equity, royalty and interest incomeLtd. as China rebounded from investees, a $33 million charge related to ending production of the 5-liter ISV engine for the U.S. pick-up truck market and increased selling, general and administrative expenses and higher research, development and engineering expenses. The increase in gross margin was mainly duefirst quarter shutdowns. See NOTE 6, "INCOME TAXES" to the absence of a $184 million engine system campaign accrual recorded in the first half of 2018, improved pricing and favorable mix, partially offset by lower volumes and tariff impacts. Selling, general and administrative expenses increased principally due to higher consulting expenses and increased compensation expenses, partially offset by decreased variable compensation expenses. The increase in research, development and engineering expenses was primarily due to lower expense recovery and higher consulting expenses, partially offset by lower variable compensation expenses. The decrease in equity, royalty and interest income from investees was largely due to lower earnings at Tata Cummins, Ltd. and Beijing Foton Cummins Engine Co.Condensed Consolidated Financial Statements for additional information on India Tax Law Changes.

Distribution Segment Results
Financial data for the Distribution segment was as follows:
  Three months ended Favorable/ Nine months ended Favorable/
  September 29, September 30, (Unfavorable) September 29, September 30, (Unfavorable)
In millions 2019 2018 Amount Percent 2019 2018 Amount Percent
External sales $2,001
 $1,927
 $74
 4 % $6,009
 $5,762
 $247
 4 %
Intersegment sales 3
 4
 (1) (25)% 24
 16
 8
 50 %
Total sales 2,004
 1,931
 73
 4 % 6,033
 5,778
 255
 4 %
Research, development and engineering expenses 7
 5
 (2) (40)% 21
 15
 (6) (40)%
Equity, royalty and interest income from investees 12
 9
 3
 33 % 35
 33
 2
 6 %
Interest income 4
 4
 —
 — % 12
 9
 3
 33 %
Segment EBITDA 186
 155
 31
 20 % 529
 423
 106
 25 %
                 
      Percentage Points     Percentage Points
Segment EBITDA as a percentage of total sales 9.3% 8.0%  
 1.3
 8.8% 7.3%  
 1.5

 Three months endedFavorable/Six months endedFavorable/
 June 28,June 30,(Unfavorable)June 28,June 30,(Unfavorable)
In millions20202019AmountPercent20202019AmountPercent
External sales$1,601  $2,015  $(414) (21)%$3,408  $4,008  $(600) (15)%
Intersegment sales4  13  (9) (69)%11  21  (10) (48)%
Total sales1,605  2,028  (423) (21)%3,419  4,029  (610) (15)%
Research, development and engineering expenses4  7  3  43 %11  14  3  21 %
Equity, royalty and interest income from investees11  12  (1) (8)%32  23  9  39 %
Interest income1  4  (3) (75)%2  8  (6) (75)%
Segment EBITDA160  172  (12) (7)%318  343  (25) (7)%
   Percentage Points  Percentage Points
Segment EBITDA as a percentage of total sales10.0 %8.5 % 1.5  9.3 %8.5 % 0.8  

Sales for our Distribution segment by region were as follows:
 Three months endedFavorable/Six months endedFavorable/
 June 28,June 30,(Unfavorable)June 28,June 30,(Unfavorable)
In millions20202019AmountPercent20202019AmountPercent
North America$1,041  $1,384  $(343) (25)%$2,287  $2,783  $(496) (18)%
Asia Pacific190  223  (33) (15)%386  443  (57) (13)%
Europe136  124  12  10 %272  247  25  10 %
China101  102  (1) (1)%169  184  (15) (8)%
Russia44  45  (1) (2)%86  80  6  8 %
Africa and Middle East38  55  (17) (31)%89  110  (21) (19)%
Latin America32  46  (14) (30)%71  86  (15) (17)%
India23  49  (26) (53)%59  96  (37) (39)%
Total sales$1,605  $2,028  $(423) (21)%$3,419  $4,029  $(610) (15)%
39
  Three months ended Favorable/ Nine months ended Favorable/
  September 29, September 30, (Unfavorable) September 29, September 30, (Unfavorable)
In millions 2019 2018 Amount Percent 2019 2018 Amount Percent
North America $1,374
 $1,333
 $41
 3 % $4,157
 $3,962
 $195
 5 %
Asia Pacific 224
 224
 —
 — % 667
 625
 42
 7 %
Europe 135
 113
 22
 19 % 382
 388
 (6) (2)%
China 82
 78
 4
 5 % 266
 240
 26
 11 %
Africa and Middle East 60
 55
 5
 9 % 170
 177
 (7) (4)%
Latin America 48
 42
 6
 14 % 134
 125
 9
 7 %
India 47
 49
 (2) (4)% 143
 144
 (1) (1)%
Russia 34
 37
 (3) (8)% 114
 117
 (3) (3)%
Total sales $2,004
 $1,931
 $73
 4 % $6,033
 $5,778
 $255
 4 %
Table of Contents
Sales for our Distribution segment by product line were as follows:
 Three months ended Favorable/ Nine months ended Favorable/ Three months endedFavorable/Six months endedFavorable/
 September 29, September 30, (Unfavorable) September 29, September 30, (Unfavorable) June 28,June 30,(Unfavorable)June 28,June 30,(Unfavorable)
In millions 2019 2018 Amount Percent 2019 2018 Amount PercentIn millions20202019AmountPercent20202019AmountPercent
Parts $798
 $800
 $(2) — % $2,475
 $2,425
 $50
 2 %Parts$654  $833  $(179) (21)%$1,441  $1,677  $(236) (14)%
Power generation 467
 359
 108
 30 % 1,297
 1,031
 266
 26 %Power generation377  427  (50) (12)%753  830  (77) (9)%
Service 376
 372
 4
 1 % 1,112
 1,094
 18
 2 %Service297  373  (76) (20)%625  736  (111) (15)%
Engines 363
 400
 (37) (9)% 1,149
 1,228
 (79) (6)%Engines277  395  (118) (30)%600  786  (186) (24)%
Total sales $2,004
 $1,931
 $73
 4 % $6,033
 $5,778
 $255
 4 %Total sales$1,605  $2,028  $(423) (21)%$3,419  $4,029  $(610) (15)%
Sales
Distribution segment sales for the three months ended September 29, 2019, increased $73June 28, 2020, decreased $423 million versus the comparable period in 2018.2019. The following were the primary drivers by region:
•North American sales increased $41decreased $343 million, representing 5681 percent of the total change in Distribution segment sales, primarily due to increaseddecreased demand in the power generationall product line mostly for improved data center orders, partially offset by decreasedlines, especially parts and engine sales in oil and gas markets..
Sales in Europe increased $22 million mainly due to higher volumes in whole goods.

These increases were partially offset by unfavorable•Unfavorable foreign currency fluctuations, principally in the Australian dollar, Brazilian real, Chinese renminbi and Euro.South African rand.
Distribution segment sales for the ninesix months ended September 29, 2019, increased $255June 28, 2020, decreased $610 million versus the comparable period in 2018.2019. The following were the primary drivers by region:
•North American sales increased $195decreased $496 million, representing 7681 percent of the total change in Distribution segment sales, largelyprimarily due to increaseddecreased demand in the power generationall product line mostly for improved data center orderslines, especially parts and increased part sales, partially offset by decreased engine sales in oil and gas markets.
Asia Pacific sales increased $42 million primarily due to higher volumes in whole goods.
These increases were partially offset by unfavorable•Unfavorable foreign currency fluctuations, mainlyprincipally in the Australian dollar, Euro,Brazilian real, Chinese renminbi, Canadian dollarSouth African rand and Indian rupee.Euro.
Segment EBITDA
Distribution segment EBITDA for the three months ended September 29, 2019, increased $31June 28, 2020, decreased $12 million versus the comparable period in 2018,2019, primarily due to higher gross margin. The increase inlower gross margin was mainly due to improved pricing and increased volumes.

Distribution segment EBITDA for the nine months ended September 29, 2019, increased $106 million versus the comparable period in 2018, primarily due to higher gross margin, partially offset by unfavorable foreign currency fluctuations (primarily in the(especially Australian dollar, South African rand and Canadian dollar). The increase in gross margin was mainly due to higher volumes, improved pricing and favorable mix, partially offset by increased compensation expense and unfavorable foreign currency fluctuations (primarily in the Australian dollar, South African rand, Canadian dollar, Indian rupee and Chinese renminbi).
Components Segment Results
Financial data for the Components segment was as follows:
  Three months ended Favorable/ Nine months ended Favorable/
  September 29, September 30, (Unfavorable) September 29, September 30, (Unfavorable)
In millions 2019 2018 Amount Percent 2019 2018 Amount Percent
External sales $1,253
 $1,297
 $(44) (3)% $4,055
 $4,012
 $43
 1 %
Intersegment sales 397
 457
 (60) (13)% 1,302
 1,382
 (80) (6)%
Total sales 1,650
 1,754
 (104) (6)% 5,357
 5,394
 (37) (1)%
Research, development and engineering expenses 73
 71
 (2) (3)% 223
 195
 (28) (14)%
Equity, royalty and interest income from investees 9
 12
 (3) (25)% 30
 42
 (12) (29)%
Interest income 2
 1
 1
 100 % 6
 4
 2
 50 %
Segment EBITDA 286
 288
 (2) (1)% 908
 752
 156
 21 %
                 
      Percentage Points     Percentage Points
Segment EBITDA as a percentage of total sales 17.3% 16.4%  
 0.9
 16.9% 13.9%  
 3.0

Sales for our Components segment by business were as follows:
  Three months ended Favorable/ Nine months ended Favorable/
  September 29, September 30, (Unfavorable) September 29, September 30, (Unfavorable)
In millions 2019 2018 Amount Percent 2019 2018 Amount Percent
Emission solutions $745
 $769
 $(24) (3)% $2,427
 $2,385
 $42
 2 %
Filtration 310
 308
 2
 1 % 966
 952
 14
 1 %
Turbo technologies 279
 317
 (38) (12)% 933
 1,012
 (79) (8)%
Electronics and fuel systems 170
 210
 (40) (19)% 580
 637
 (57) (9)%
Automated transmissions 146
 150
 (4) (3)% 451
 408
 43
 11 %
Total sales $1,650
 $1,754
 $(104) (6)% $5,357
 $5,394
 $(37) (1)%

Sales
Components segment sales for the three months ended September 29, 2019, decreased $104 million versus the comparable period in 2018. The following were the primary drivers by business:
Electronics and fuel systems sales decreased $40 million primarily due to loweremerging market demand in North America, India and Western Europe.
Turbo technologies sales decreased $38 million mainly due to weaker market demand in Western Europe, North America and India.
Emission solutions sales decreased $24 million primarily due to weaker demand in India, Western Europe, Asia Pacific and China, partially offset by stronger demand in North America.
Unfavorable foreign currency fluctuations principally in the Chinese renminbi, Euro and British pound.
Components segment sales for the nine months ended September 29, 2019, decreased $37 million versus the comparable period in 2018. The following were the primary drivers by business:
Turbo technologies sales decreased $79 million primarily due to lower demand in Western Europe, India, North America and China.
Electronics and fuel systems sales decreased $57 million mainly due to lower market demand in North America, Western Europe and India.
Unfavorable foreign currency fluctuations primarily in the Chinese renminbi, Euro and British pound.
These changes were partially offset by:
Automated transmissions sales increased $43 million primarily due to increased heavy-duty truck demand in North America.
Emission solutions sales increased $42 million mainly due to stronger demand in North America, partially offset by weaker demand in Asia Pacific, China, India and Western Europe.
Segment EBITDA
Components segment EBITDA for the three months ended September 29, 2019, was relatively flat versus the comparable period in 2018, as lower gross margin wascurrencies), partially offset by lower selling, general and administrative expenses. The decrease in gross margin was mainly due to lower volumes, and unfavorable pricing, partially offset by prior restructuring actions, lower material costs. Selling,variable compensation and temporary salary reductions resulting in decreased compensation expenses and favorable pricing. The increase in gross margin as a percentage of sales was primarily due to prior restructuring actions, lower variable compensation and temporary salary reductions resulting in decreased compensation expenses and favorable pricing. The decrease in selling, general and administrative expenses decreasedwas due to prior restructuring actions, lower variable compensation expense.and temporary salary reductions resulting in decreased compensation expenses and reduced travel expenses, partially offset by higher consulting expenses.
ComponentsDistribution segment EBITDA for the ninesix months ended September 29, 2019, increased $156June 28, 2020, decreased $25 million versus the comparable period in 2018, as higher2019, primarily due to lower gross margin wasand unfavorable foreign currency fluctuations (especially the Australian dollar and emerging market currencies), partially offset by increased research, developmentlower selling, general and engineeringadministrative expenses and lowerhigher equity, royalty and interest income from investees. The increasedecrease in gross margin was mainly due to the absence of a $184 million engine system campaign accrual recorded in the first half of 2018, lower material costs and favorable mix, partially offset by lower volumes reduced pricing and unfavorable foreign currency fluctuations (primarily in(especially the Chinese renminbi, Brazilian real, Australian dollar, EuroSouth African rand and Canadian dollar).emerging market currencies), partially offset by prior restructuring actions, lower variable compensation and temporary salary reductions resulting in decreased compensation expenses and favorable pricing. The increase in research, development and engineering expensesgross margin as a percentage of sales was mainlyprimarily due to prior restructuring actions, lower expense recovery, increasedvariable compensation and temporary salary reductions resulting in decreased compensation expenses and additional spendingfavorable pricing. The decrease in the automated transmissions business,selling, general and administrative expenses was due to prior restructuring actions, lower variable compensation and temporary salary reductions resulting in decreased compensation expenses and reduced travel expenses, partially offset by lower variable compensationhigher consulting expenses. The decreaseincrease in equity, royalty and interest income from investees was largely due to lowerhigher earnings at DongfengKomatsu Cummins Emission Solutions Co., LtdChile, Ltda. and Shanghai Fleetguard Filter Co.Valvoline Cummins Ltd. due to a $5 million adjustment related to India Tax Law Changes passed in March 2020. See NOTE 6, "INCOME TAXES" to the Condensed Consolidated Financial Statements for additional information on India Tax Law Changes.
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Components Segment Results
Financial data for the Components segment was as follows:
 Three months endedFavorable/Six months endedFavorable/
 June 28,June 30,(Unfavorable)June 28,June 30,(Unfavorable)
In millions20202019AmountPercent20202019AmountPercent
External sales$876  $1,401  $(525) (37)%$1,991  $2,802  $(811) (29)%
Intersegment sales274  445  (171) (38)%661  905  (244) (27)%
Total sales1,150  1,846  (696) (38)%2,652  3,707  (1,055) (28)%
Research, development and engineering expenses55  75  20  27 %123  150  27  18 %
Equity, royalty and interest income from investees12  11  1  9 %33  21  12  57 %
Interest income1  2  (1) (50)%2  4  (2) (50)%
Segment EBITDA141  297  (156) (53)%420  622  (202) (32)%
   Percentage Points  Percentage Points
Segment EBITDA as a percentage of total sales12.3 %16.1 % (3.8) 15.8 %16.8 % (1.0) 
Sales for our Components segment by business were as follows:
 Three months endedFavorable/Six months endedFavorable/
 June 28,June 30,(Unfavorable)June 28,June 30,(Unfavorable)
In millions20202019AmountPercent20202019AmountPercent
Emission solutions$472  $828  $(356) (43)%$1,136  $1,682  $(546) (32)%
Filtration255  331  (76) (23)%567  656  (89) (14)%
Turbo technologies216  319  (103) (32)%486  654  (168) (26)%
Electronics and fuel systems164  212  (48) (23)%338  410  (72) (18)%
Automated transmissions43  156  (113) (72)%125  305  (180) (59)%
Total sales$1,150  $1,846  $(696) (38)%$2,652  $3,707  $(1,055) (28)%
Sales
Components segment sales for the three months ended June 28, 2020, decreased $696 million versus the comparable period in 2019. The following were the primary drivers by business:
•Emission solutions sales decreased $356 million primarily due to weaker demand in North America and Western Europe, partially offset by stronger demand as China rebounded from first quarter shutdowns.
•Automated transmissions sales decreased $113 million primarily due to lower heavy-duty truck demand in North America.
•Turbo technologies sales decreased $103 million mainly due to weaker market demand in North America.
•Unfavorable foreign currency fluctuations, principally in the Chinese renminbi and Brazilian real.
Components segment sales for the six months ended June 28, 2020, decreased $1,055 million versus the comparable period in 2019. The following were the primary drivers by business:
•Emission solutions sales decreased $546 million primarily due to weaker demand in North America and Western Europe, partially offset by stronger demand as China rebounded from first quarter shutdowns.
•Automated transmissions sales decreased $180 million primarily due to lower heavy-duty truck demand in North America.
•Turbo technologies sales decreased $168 million primarily due to lower demand in North America and Western Europe.
•Unfavorable foreign currency fluctuations, primarily in the Chinese renminbi, Brazilian real and Euro.
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Segment EBITDA
Components segment EBITDA for the three months ended June 28, 2020, decreased $156 million versus the comparable period in 2019, mainly due to lower gross margin, partially offset by lower selling, general and administrative expenses and decreased research, development and engineering expenses. The decrease in gross margin was mainly due to lower volumes and unfavorable mix, partially offset by restructuring actions, lower variable compensation and temporary salary reductions resulting in decreased compensation expenses and decreased warranty expenses. Selling, general and administrative expenses and research, development and engineering expenses decreased due to prior restructuring actions, lower variable compensation and temporary salary reductions resulting in decreased compensation expenses and reduced consulting expenses.
Components segment EBITDA for the six months ended June 28, 2020, decreased $202 million versus the comparable period in 2019, mainly due to lower gross margin and unfavorable foreign currency fluctuations (primarily in the Chinese renminbi and Brazilian real), partially offset by lower selling, general and administrative expenses, decreased research, development and engineering expenses and increased equity, royalty and interest income from investees. The decrease in gross margin was mainly due to lower volumes, partially offset by prior restructuring actions, lower variable compensation and temporary salary reductions resulting in decreased compensation expenses and decreased warranty expenses. Selling, general and administrative expenses and research, development and engineering expenses decreased due to prior restructuring actions, lower variable compensation and temporary salary reductions resulting in decreased compensation expenses and reduced consulting expenses. The increase in equity, royalty and interest income from investees was largely due to higher earnings at Fleetguard Filtration Systems India Pvt. due to a $14 million adjustment related to India Tax Law Changes passed in March 2020. See NOTE 6, "INCOME TAXES" to the Condensed Consolidated Financial Statements for additional information on India Tax Law Changes.
Power Systems Segment Results
Financial data for the Power Systems segment was as follows:
  Three months ended Favorable/ Nine months ended Favorable/
  September 29, September 30, (Unfavorable) September 29, September 30, (Unfavorable)
In millions 2019 2018 Amount Percent 2019 2018 Amount Percent
External sales $683
 $636
 $47
 7 % $2,030
 $1,922
 $108
 6 %
Intersegment sales 443
 471
 (28) (6)% 1,376
 1,505
 (129) (9)%
Total sales 1,126
 1,107
 19
 2 % 3,406
 3,427
 (21) (1)%
Research, development and engineering expenses 58
 57
 (1) (2)% 171
 174
 3
 2 %
Equity, royalty and interest income from investees 13
 14
 (1) (7)% 39
 51
 (12) (24)%
Interest income 3
 1
 2
 NM
 7
 5
 2
 40 %
Segment EBITDA 158
 163
 (5) (3)% 469
 491
 (22) (4)%
                 
      Percentage Points     Percentage Points
Segment EBITDA as a percentage of total sales 14.0% 14.7%  
 (0.7) 13.8% 14.3%  
 (0.5)

 Three months endedFavorable/Six months endedFavorable/
 June 28,June 30,(Unfavorable)June 28,June 30,(Unfavorable)
In millions20202019AmountPercent20202019AmountPercent
External sales$428  $724  $(296) (41)%$928  $1,347  $(419) (31)%
Intersegment sales349  479  (130) (27)%733  933  (200) (21)%
Total sales777  1,203  (426) (35)%1,661  2,280  (619) (27)%
Research, development and engineering expenses41  57  16  28 %95  113  18  16 %
Equity, royalty and interest income from investees9  11  (2) (18)%18  26  (8) (31)%
Interest income1  2  (1) (50)%2  4  (2) (50)%
Segment EBITDA91  173  (82) (47)%168  311  (143) (46)%
   Percentage Points  Percentage Points
Segment EBITDA as a percentage of total sales11.7 %14.4 % (2.7) 10.1 %13.6 % (3.5) 
Sales for our Power Systems segment by product line were as follows:
  Three months ended Favorable/ Nine months ended Favorable/
  September 29, September 30, (Unfavorable) September 29, September 30, (Unfavorable)
In millions 2019 2018 Amount Percent 2019 2018 Amount Percent
Power generation $647
 $636
 $11
 2 % $1,882
 $1,873
 $9
 — %
Industrial 392
 380
 12
 3 % 1,244
 1,277
 (33) (3)%
Generator technologies 87
 91
 (4) (4)% 280
 277
 3
 1 %
Total sales $1,126
 $1,107
 $19
 2 % $3,406
 $3,427
 $(21) (1)%
 Three months endedFavorable/Six months endedFavorable/
 June 28,June 30,(Unfavorable)June 28,June 30,(Unfavorable)
In millions20202019AmountPercent20202019AmountPercent
Power generation$424  $668  $(244) (37)%$943  $1,235  $(292) (24)%
Industrial291  432  (141) (33)%587  852  (265) (31)%
Generator technologies62  103  (41) (40)%131  193  (62) (32)%
Total sales$777  $1,203  $(426) (35)%$1,661  $2,280  $(619) (27)%
Sales
Power Systems segment sales for the three months ended September 29, 2019, increased $19June 28, 2020, decreased $426 million versus the comparable period in 2018.2019. The following were the primary drivers by product line:
Industrial•Power generation sales increased $12decreased $244 million due to higher demand in global mining markets and most international markets, especially Latin America and Australia, partially offset by lower demand in North AmericanAmerica and India.
•Industrial sales decreased $141 million due to lower demand in international mining markets and decreased demand in oil and gas markets.
Power generation sales increased $11 million due to higher demandmarkets in North America, China and Eastern Europe, partially offset by lower demand in Western Europe and the Middle East.North America.
These increases were partially offset by unfavorable
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•Unfavorable foreign currency fluctuations, primarilyprincipally in the British pound, Chinese renminbi and Chinese renminbi.Indian rupee.
Power Systems segment sales for the ninesix months ended September 29, 2019,June 28, 2020, decreased $21$619 million versus the comparable period in 2018.2019. The following were the primary drivers by product line:
Industrial•Power generation sales decreased $33$292 million due to lower demand in North AmericanAmerica and India.
•Industrial sales decreased $265 million due to lower demand in international mining markets and decreased demand in oil and gas markets in China and international mining markets, partially offset by higher demand in certain international markets, especially the oil and gas market in China.North America.
•Unfavorable foreign currency fluctuations, primarily in the Chinese renminbi, British pound and Indian rupee and Chinese renminbi.
These decreases were partially offset by increased power generation sales of $9 million, primarily due to stronger demand in North America and China, mostly offset by weaker demand in Western Europe, the Middle East and Australia.

rupee.
Segment EBITDA
Power Systems segment EBITDA for the three months ended September 29, 2019,June 28, 2020, decreased $5$82 million versus the comparable period in 2018,2019, primarily due to lower gross margin, partially offset by lower selling, general and administrative expenses and decreased research, development and engineering expenses. The decrease in gross margin was mainly due to unfavorable mix.lower volumes, partially offset by prior restructuring actions, lower variable compensation and temporary salary reductions resulting in decreased compensation expenses and lower warranty expenses. Selling, general and administrative expenses and research, development and engineering expenses decreased primarily due to prior restructuring actions, lower variable compensation expense.

and temporary salary reductions resulting in decreased compensation expenses, reduced consulting expenses and lower travel expenses.
Power Systems segment EBITDA for the ninesix months ended September 29, 2019,June 28, 2020, decreased $22$143 million versus the comparable period in 2018,2019, primarily due to lower gross margin and decreasedlower equity, royalty and interest income from investees, partially offset by favorable foreign currency fluctuations (primarily in the British pound and Indian rupee), lower selling, general and administrative expenses and a gain on sale of assets.decreased research, development and engineering expenses. The decrease in gross margin was mainly due to decreasedlower volumes, and unfavorable mix, partially offset by improved pricing,prior restructuring actions, lower variable compensation and temporary salary reductions resulting in decreased compensation expenses and favorable foreign currency fluctuations (primarily in the British pound and Indian rupee).lower warranty expenses. Selling, general and administrative expenses decreased primarily due to prior restructuring actions, lower variable compensation and temporary salary reductions resulting in decreased compensation expenses, reduced travel expenses and lower consulting expenses. Research, development and engineering expenses decreased principally due to prior restructuring actions, lower variable compensation and temporary salary reductions resulting in decreased compensation expenses partially offset by higherand reduced consulting expenses. The decrease in equity, royalty and interest income from investees was largely due to lower earnings at Cummins Cogeneration Ltd. and Chongqing Cummins Engine Company,Co., Ltd.
ElectrifiedNew Power Segment Results
The ElectrifiedNew Power segment designs, manufactures, sells and supports electrified power systems ranging from fully electric to hybrid along with innovative components and with the acquisition of Hydrogenics Corporation in the third quarter of 2019, also offers hydrogen generation, andsubsystems, including battery, fuel cell products.and hydrogen production technologies. The ElectrifiedNew Power segment is currently in the development phase with a primary focus on research and development activities around fully electricfor our power systems, components and hybrid powertrain solutions.subsystems. Financial data for the ElectrifiedNew Power segment was as follows:
 Three months endedFavorable/Six months endedFavorable/
 June 28,June 30,(Unfavorable)June 28,June 30,(Unfavorable)
In millions20202019AmountPercent20202019AmountPercent
Total external sales$10  $8  $2  25 %$20  $11  $9  82 %
Research, development and engineering expenses24  24  —  — %53  45  (8) (18)%
Segment EBITDA(38) (33) (5) (15)%(81) (62) (19) (31)%

43
  Three months ended Favorable/ Nine months ended Favorable/
  September 29, September 30, (Unfavorable) September 29, September 30, (Unfavorable)
In millions 2019 2018 Amount Percent 2019 2018 Amount Percent
Total sales (mostly external) $9
 $2
 $7
 NM
 $20
 $5
 $15
 NM
Research, development and engineering expenses 25
 22
 (3) (14)% 70
 45
 (25) (56)%
Segment EBITDA (36) (30) (6) (20)% (98) (61) (37) (61)%

"NM" - not meaningful information
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Reconciliation of Segment EBITDA to Net Income Attributable to Cummins Inc.
The table below reconciles the segment information to the corresponding amounts in the Condensed Consolidated Statements of Net Income:
 Three months endedSix months ended
In millionsJune 28,
2020		June 30,
2019		June 28,
2020		June 30,
2019
TOTAL SEGMENT EBITDA$504  $1,025  $1,340  $2,068  
Intersegment eliminations (1)
45  33  55  23  
TOTAL EBITDA549  1,058  1,395  2,091  
Less:
Interest expense23  29  46  61  
Depreciation and amortization (2)
164  158  332  314  
INCOME BEFORE INCOME TAXES362  871  1,017  1,716  
Less: Income tax expense93  186  220  362  
CONSOLIDATED NET INCOME269  685  797  1,354  
Less: Net (loss) income attributable to noncontrolling interest(7) 10  10  16  
NET INCOME ATTRIBUTABLE TO CUMMINS INC.$276  $675  $787  $1,338  
(1) Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three and six months ended June 28, 2020 and June 30, 2019.
(2) Depreciation and amortization, as shown on a segment basis, excludes the amortization of debt discount and deferred costs included in the Condensed Consolidated Statements of Net Income as "Interest expense." The amortization of debt discount and deferred costs was $1 million and $1 million for the six months ended June 28, 2020 and June 30, 2019, respectively.

44
  Three months ended Nine months ended
In millions September 29,
2019		 September 30,
2018		 September 29,
2019		 September 30,
2018
TOTAL SEGMENT EBITDA $935
 $981
 $3,003
 $2,658
Intersegment elimination (1)
 23
 2
 46
 (78)
TOTAL EBITDA 958
 983
 3,049
 2,580
Less:        
Interest expense 26
 30
 87
 82
Depreciation and amortization (2)
 177
 148
 491
 455
INCOME BEFORE INCOME TAXES 755
 805
 2,471
 2,043
Less: Income tax expense 139
 107
 501
 466
CONSOLIDATED NET INCOME 616
 698
 1,970
 1,577
Less: Net (loss) income attributable to noncontrolling interest (6) 6
 10
 15
NET INCOME ATTRIBUTABLE TO CUMMINS INC. $622
 $692
 $1,960
 $1,562

(1) Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three and nine months ended September 29, 2019 and September 30, 2018, respectively.Table of Contents
(2) Depreciation and amortization, as shown on a segment basis, excludes the amortization of debt discount and deferred costs included in the Condensed Consolidated Statements of Net Income as "Interest expense." The amortization of debt discount and deferred costs was $2 million and $1 million for the nine month periods ended September 29, 2019 and September 30, 2018, respectively.

OUTLOOK
Our outlook reflects the following positive trendscash savings measures and challenges to our business, primarily with respect to the ongoing pandemic, that we expect could impact our revenue and earnings potential for the remainder of 2019.2020.
Positive TrendsCash Savings Measures
North American pick-up truck demand will remain strong.•We expect to realize annualized savings from prior restructuring and other actions of approximately $250 million to $300 million. Actions related to this restructuring were substantially complete at the end of March 2020.
Power generation markets will remain stable, with increased demand in global data center markets.•In response to the unknown duration and severity of COVID-19, we are taking the following additional temporary actions to manage the use of cash:
Challenges
Industry production of heavy-duty trucks in North America will decline.
Demand in truck and construction markets in China is expected to decline.
Weak economic conditions in India may continue to negatively impact demand across◦We are reducing our businesses.
Demand in North American construction markets is expected to weaken.
Lower commodity prices andplanned capital expenditures by mining companies25 percent to between $500 million and $525 million for the year.
◦We implemented a tiered payroll cut across our workforce, which will end after September 30, 2020.
◦We suspended share repurchases during the second quarter of 2020.
Challenges
•We expect customer shutdowns and the impact of lower economic activity, driven by COVID-19, will negatively impact our results of operations, financial position and cash flows.
•Supply chain constraints related to COVID-19 will likely impact our revenues negatively and result in increased costs.
•In response to the pandemic we closed or slowed certain global manufacturing facilities in the first and second quarters. At the end of the second quarter our global manufacturing facilities had reopened; however, it is possible these facilities may be closed again in response to future outbreaks.
•We may close or restructure additional manufacturing and distribution facilities as we evaluate the appropriate size and structure of our manufacturing and distribution capacity, which could result in additional charges.
•In response to COVID-19, we will incur additional operating costs as we implement safety and sanitization procedures to protect our employees, customers, vendors and other stakeholders utilizing our facilities, which could limit our ability to further reduce operating costs.
•Due to the ongoing impact of COVID-19 and attempts to control its spread, we are expecting significantly weaker demand in a majority of our geographic markets and regions for mining engines.the remainder of 2020.
Demand in oil and gas markets in North America will remain weak.
•Uncertainty in the U.K. surrounding its ability to negotiate its withdrawal from the European Uniontrade agreements as a sovereign country could have material negative impacts on our European operations in the near and long-term.
Cost increases dueCOVID-19
We expect the COVID-19 pandemic to U.S. trade tariffs with China will continue.
Prolonged trade disputes could negatively impact our financial performance. Because the magnitude and duration of the pandemic and its economic consequences are unclear, the pandemic’s impact on our performance is difficult to predict. The three principle areas we anticipate COVID-19 to negatively impact our financial performance are through its impact on customer demand, the impact on our ability to procure parts from suppliers and our ability to operate our manufacturing and distribution facilities.
Customer Demand – The majority of our major customers, including PACCAR, Navistar, Daimler and FCA experienced extended production shutdowns related to the pandemic in the second quarter. We expect customers to ramp up their production over time as they reopen their facilities. The speed at which customers increase production is highly uncertain and will be determined by supply chain constraints, market demand and trigger additional costs.government decisions to keep economies open.

Supply Chain Impact – Supplier shutdowns may result in parts shortages and negatively impact our ability to manufacture products and meet aftermarket demand. In addition, industry parts shortages may impact the timing of when customer facilities reopen and the speed at which customers ramp up production, negatively impacting demand for our products. Lower demand increases the risk that certain suppliers will face financial issues, potentially impacting their ability to supply parts.

Operations Impact - Our manufacturing and distribution locations are generally considered critical services and the majority of our facilities remain open to meet customer demand. In an effort to contain the spread of COVID-19, maintain the well-being of our employees, ensure compliance with governmental requirements or respond to declines in demand from customers, we
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closed or partially shut down certain office, manufacturing and distribution facilities around the world at the end of the first quarter and into the second quarter. We have taken, and will continue to take, a variety of steps to reduce the risk of employees contracting COVID-19 at work. These steps include social distancing, expanded cleaning and sanitization, adjusting work hours and temperature checks. All manufacturing and distribution facilities are now opened, but many of them are operating at reduced capacities and remain subject to future closure if deemed necessary for the safety of our employees or to comply with future government mandates.
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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 managementmanagement's attention. Working capital and balance sheet measures are provided in the following table:
Dollars in millions September 29,
2019		 December 31,
2018
Working capital (1)
 $3,503
 $3,434
Current ratio 1.52
 1.54
Accounts and notes receivable, net $3,934
 $3,866
Days' sales in receivables 59
 57
Inventories $3,821
 $3,759
Inventory turnover 4.5
 4.9
Accounts payable (principally trade) $2,830
 $2,822
Days' payable outstanding 60
 56
Total debt $2,661
 $2,476
Total debt as a percent of total capital 23.3% 23.1%

(1)Working capital includes cash and cash equivalents.
Dollars in millionsJune 28,
2020		December 31,
2019
Working capital (1)
$2,918  $3,127  
Current ratio1.42  1.50  
Accounts and notes receivable, net$3,441  $3,670  
Days' sales in receivables73  58  
Inventories$3,655  $3,486  
Inventory turnover3.7  4.7  
Accounts payable (principally trade)$2,281  $2,534  
Days' payable outstanding66  58  
Total debt$3,841  $2,367  
Total debt as a percent of total capital32.1 %21.9 %
 (1) Working capital includes cash and cash equivalents.
Cash Flows
Cash and cash equivalents were impacted as follows:
  Nine months ended  
In millions September 29,
2019		 September 30,
2018		 Change
Net cash provided by operating activities $2,343
 $1,388
 $955
Net cash used in investing activities (829) (519) (310)
Net cash used in financing activities (1,198) (960) (238)
Effect of exchange rate changes on cash and cash equivalents (59) (56) (3)
Net increase (decrease) in cash and cash equivalents $257
 $(147) $404
 Six months ended 
In millionsJune 28,
2020		June 30,
2019		Change
Net cash provided by operating activities$357  $1,220  $(863) 
Net cash used in investing activities(234) (411) 177  
Net cash provided by (used in) financing activities460  (711) 1,171  
Effect of exchange rate changes on cash and cash equivalents39  (4) 43  
Net increase in cash and cash equivalents$622  $94  $528  
Net cash provided by operating activities increased $955decreased $863 million for the ninesix months ended September 29, 2019,June 28, 2020, versus the comparable period in 2018,2019, primarily due to higherlower consolidated net income of $393$557 million, lowerhigher working capital requirements of $367 million, lower deferred income taxes of $153$133 million and higherlower equity in income of investees, net of dividends from equity investees of $64$81 million. During the first ninesix months of 2019,2020, the lowerhigher working capital requirements resulted in a cash outflow of $192$601 million compared to a cash outflow of $559$468 million in the comparable period in 2018.2019, mainly due to lower accounts payable and accrued expenses and higher inventory as the result of much lower demand, partially offset by lower accounts and notes receivable as the result of significantly lower sales.
Net cash used in investing activities increased $310decreased $177 million for the ninesix months ended September 29, 2019,June 28, 2020, versus the comparable period in 2018,2019, primarily due to the acquisitionlower capital expenditures of Hydrogenics for $235$90 million higherand lower net investments inacquisitions of marketable securities of $53 million and increased capital expenditures of $34$75 million.
Net cash used inprovided by financing activities increased $238$1,171 million for the ninesix months ended September 29, 2019,June 28, 2020, versus the comparable period in 2018,2019, primarily due to lowerhigher net borrowings of commercial paper of $380$1,713 million, partially offset by lowerhigher repurchases of common stock of $73$450 million, and increasedlower net borrowings under short-term credit agreementsagreement of $44$53 million and higher dividend payments on common stock of $30 million.
The effect of exchange rate changes on cash and cash equivalents for the ninesix months ended September 29, 2019,June 28, 2020, versus the comparable period in 2018,2019, increased $3$43 million primarily due to an unfavorable $13 million fluctuationfavorable fluctuations in the British pound of $56 million, partially offset by favorableunfavorable fluctuations in the Chinese renminbi and Indian rupee and Chinese renminbi.rupee.

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Sources of Liquidity
We generate significant ongoing cash flow. Cash provided by operations is typically our principal source of liquidity with $2,343$357 million generated in the ninesix months ended September 29, 2019.June 28, 2020, although we had a net use of cash from operations of $22 million for the three months ended June 28, 2020, due to the impacts of the pandemic. Our sources of liquidity included:include:
  September 29, 2019
In millions Total U.S. International Primary location of international balances
Cash and cash equivalents $1,560
 $431
 $1,129
 China, Singapore, Netherlands, Mexico, Belgium, Australia
Marketable securities (1)
 303
 61
 242
 India
Total $1,863
 $492
 $1,371
  
Available credit capacity 
      
Revolving credit facilities (2)
 $2,598
      
International and other uncommitted domestic credit facilities $200
      

(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 $1.5 billion, maturing August 2023 and August 2020, respectively, are maintained primarily to provide backup liquidity for our commercial paper borrowings and general corporate purposes. At September 29, 2019, we had $902 million of commercial paper outstanding, which effectively reduced the available capacity under our revolving credit facilities to $2.6 billion.
June 28, 2020
In millionsTotalU.S.InternationalPrimary location of international balances
Cash and cash equivalents$1,751  $836  $915  Singapore, China, Mexico, Belgium, Australia
Marketable securities (1)
353  80  273  India
Total$2,104  $916  $1,188  
Available credit capacity
Revolving credit facilities (2)
$3,473  
International and other uncommitted domestic credit facilities$189  
(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 $1.5 billion, maturing August 2023 and August 2020, respectively, are maintained primarily to provide backup liquidity for our commercial paper borrowings and general corporate purposes. On May 1, 2020, we entered into an additional 364-day credit facility agreement that allows us to borrow up to $2.0 billion of senior unsecured funds at any time through April 30, 2021. This program does not backstop or increase our borrowing capacity for our commercial paper programs. At June 28, 2020, we had $2,027 million of commercial paper outstanding, which effectively reduced the available capacity under our revolving credit facilities to $3.5 billion.
Cash, Cash Equivalents and Marketable Securities
A significant portion of our cash flow is generated outside the U.S. We manage our worldwide cash requirements considering available funds among the many subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. As a result, we do not anticipate any local liquidity restrictions to preclude us from funding our operating needs with local resources.
Debt Facilities and Other Sources of Liquidity
On August 21, 2019,May 1, 2020, we entered into an amended and restatedadditional 364-day credit facility agreement that allows us to borrow up to $1.5$2.0 billion of senior unsecured funds at any time through August 18, 2020.April 30, 2021. This credit agreement amends and restates the prior $1.5 billion 364-dayprogram does not backstop or increase our borrowing capacity for our commercial paper programs. Amounts payable under this revolving credit facility that maturedwill rank pro rata with all of our unsecured, unsubordinated indebtedness. Advances under the facility bear interest at (i) an alternate base rate or (ii) a rate equal to the adjusted LIBOR plus an applicable margin based on August 21, 2019.the credit ratings of our outstanding senior unsecured long-term debt. Based on our current long-term debt ratings, the applicable margin on adjusted LIBOR rate loans was 1.25 percent per annum as of June 28, 2020. Advances under the facility may be prepaid without premium or penalty, subject to customary breakage costs. This agreement includes various covenants, including, among others, maintaining a net debt to total capital leverage ratio of no more than 0.65 to 1.0.
We have access to committed credit facilities that total $3.5$5.5 billion, including the newa $1.5 billion 364-day facility that expires August 19, 2020, and a $2.0 billion five-year facility that expires on August 22, 2023.2023 and our new $2.0 billion 364-day facility that expires on April 30, 2021. We intend togenerally maintain credit facilities of a similarat the current or higher aggregate amountamounts by renewing or replacing these facilities at or before expiration. These revolving credit facilities are maintained primarily to provide backup liquidity for our commercial paper borrowings and for general corporate purposes.
We can issue up to $3.5 billion of unsecured, short-term promissory notes ("commercial paper")(commercial paper) pursuant to our boardthe Board of Directors (the Board) authorized commercial paper programs. The programs facilitate the private placement of unsecured short-term debt through third partythird-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 facility and commercial program should not exceed $3.5 billion. See Note 10,9, "DEBT," to our Condensed Consolidated Financial Statements for additional information.
On April 14, 2020, we were approved for the Federal Reserve Bank of New York’s Commercial Paper Funding Facility (CPFF) program to assure access to the commercial paper funding markets during volatile credit market conditions. The CPFF was intended to provide a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle (SPV). The facility allows us, based on our current short-term credit rating, to issue three-month unsecured commercial paper at a rate equal to a + 110 basis point spread over the three-month overnight index swap rate on the date of issuance. The maximum amount of
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commercial paper that we may issue at any time through this program is $1.5 billion less the total principal amount of all other outstanding commercial paper that we have issued. We retain full access to our Board authorized $3.5 billion commercial paper program, as reduced by any amounts issued under this facility. The SPV is currently scheduled to cease purchasing commercial paper on March 17, 2021. As of June 28, 2020, we issued $230 million of commercial paper under the CPFF program.
At June 28, 2020, we had $2.0 billion of commercial paper outstanding, which effectively reduced the available capacity under our revolving credit facilities to $3.5 billion.
Supply Chain Financing
We currently have supply chain financing programs with financial intermediaries, which provide certain vendors the option to be paid by financial intermediaries earlier than the due date on the applicable invoice. When a vendor utilizes the program and receives an early payment from a financial intermediary, they take a discount on the invoice. We then pay the financial intermediary the face amount of the invoice on the regularly scheduled due date. We do not reimburse vendors for any costs they incur for participation in the program and their participation is completely voluntary. As a well-known seasoned issuer, we filed an automatic shelf registration for an undetermined amount of debt and equity securities withresult, all amounts owed to the SEC on February 13, 2019. 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.financial intermediaries are presented as "Accounts payable" in our Condensed Consolidated Balance Sheets

.
Uses of Cash
Stock Repurchases
In October 2018, ourDecember 2019, the Board of Directors authorized the acquisition of up to $2$2.0 billion of additional common stock upon completion of the 2018 repurchase plan. In October 2018, the Board authorized the acquisition of up to $2.0 billion of additional common stock. In the first ninesix months of 2019,2020, we made the following purchases under the 2018 stock repurchase program:
In millions, except per share amountsShares
Purchased		Average Cost
Per Share		Total Cost of
Repurchases
Remaining
Authorized
Capacity (1)
March 293.5  $156.90  $550  $85  
June 28—  —  —  85  
Total3.5  156.90  $550  
(1) The remaining authorized capacity under these plans was calculated based on the cost to purchase the shares but excludes commission expenses in accordance with the authorized plan.
In millions, except per share amounts Shares
Purchased		 Average Cost
Per Share		 Total Cost of
Repurchases		 
Remaining
Authorized
Capacity (1)
March 31 0.7
 $137.80
 $100
 $1,806
June 30 —
 —
 —
 1,806
September 29 4.6
 152.57
 706
 1,100
Total 5.3
 $150.57
 $806
  

(1) The remaining authorized capacity under these plans was calculated based on the cost to purchase the shares but excludes commission expenses in accordance with the authorized plan.
After September 29, 2019, we continued
We suspended share repurchases during the second quarter of 2020 to purchase an additional 1.6 million shares for $256 million through October 29, 2019, in-line with our 2019 commitment to return cash to our shareholders. We intend to repurchase outstanding shares from time to time during 2019 to enhance shareholder value and to offset the dilutive impact of employee stock-based compensation plans.conserve cash.
Dividends
In July 2019, our2020, the Board of Directors authorized an increasevoted to our quarterlymaintain the third quarter dividend of 15 percent from $1.14 per share topayment at $1.311 per share.
We paid dividends of $562$388 million during the ninesix months ended September 29, 2019.June 28, 2020.
AcquisitionRestructuring Actions
On September 9,In November 2019, we acquired an 81 percent interestannounced our intentions to reduce our global workforce in Hydrogenics Corporation for total consideration of $235 million. The Hydrogen Company, a wholly-owned subsidiary of L’Air Liquide, S.A., will maintain a non-controlling interestresponse to the continued deterioration in Hydrogenics. We accounted for the transaction as a business combination and included itour global markets in the Electrified Power segmentsecond half of 2019, as well as expected reductions in orders in most U.S. and international markets in 2020. In the fourth quarter of 2019, we began executing restructuring actions, primarily in the thirdform of voluntary and involuntary employee separation programs. We incurred a charge of $119 million ($90 million after-tax) in the fourth quarter of 2019.2019 for these actions which impacted approximately 2,300 employees. We expect to incur an additional $29 million in cash payments during the remainder of 2020. See Note 15, "ACQUISITIONS,14, "RESTRUCTURING ACTIONS," to the Condensed Consolidated Financial Statements,for additional information.information.
Capital Expenditures
Capital expenditures, including spending on internal use software, for the ninesix months ended September 29, 2019,June 28, 2020, were $445$173 million versus $416$276 million in the comparable period in 2018.2019. While we continue to make targeted investments, we reduced our planned 2020 spending (previously estimated at $675 million to $700 million) in response to the weaker outlook for global growth due to the impact of COVID-19. We plan to spend an estimated $650$500 million to $700$525 million in 20192020 on capital expenditures, as we continueexcluding internal use software, with product launches and facility improvements. Approximately 50approximately 40 percent of our capitalthese expenditures are expected to be invested outside of the U.S. in 2019. In addition, we plan to spend an estimated $65$50 million to $75$60 million on internal use software in 2019.2020.
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Pensions
Our global pension plans, including our unfunded and non-qualified plans, were 115113 percent funded at December 31, 2018.2019. Our U.S. defined benefit plan, which represents approximately 5453 percent of the worldwide pension obligation, was 131133 percent funded, and our U.K. defined benefit plan was 115109 percent funded. 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 ninesix months of 2019,2020, the investment gainloss on our U.S. pension trust was 14.70.2 percent while our U.K. pension trust gain was 18.910.3 percent. Investment performance in both trusts was negatively affected by the global recession and its impact on capital markets. Approximately 7574 percent of our pension plan assets are held in highly liquid investments such as fixed income and equity securities. The remaining 2526 percent of our plan assets are held in less liquid, but market valued investments, including real estate, private equity, venture capital, opportunistic credit and insurance contracts. WeDuring the remainder of 2020, we anticipate making $13 million in additional defined benefit pension contributions duringin the remainder of 2019 of $13U.K. and $12 million forin contributions to our U.S. and U.K. pensionnon-qualified benefit plans. Approximately $91 million of the estimated $123 million of U.S. and U.K. pension contributions for the full year are voluntary. 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 20192020 annual net periodic pension cost to approximate $64$102 million.

Current Maturities of Short and Long-Term Debt
We had $902 million$2.0 billion of commercial paper outstanding at September 29, 2019,June 28, 2020, that matures in less than one year. The maturity schedule of our existing long-term debt does not require significant cash outflows until 2023.2023 when our 3.65% senior notes are due. Required annual long-term debt principal payments range from $9$22 million to $507$524 million over the next five years (including the remainder of 2019)2020). See Note 10,9, "DEBT," to the Condensed Consolidated Financial Statements for additional information.
Credit Ratings
In June of 2020, Moody's Investors Service, Inc. reviewed and reaffirmed our credit rating and stable outlook. Our ratings and outlook from each of the credit rating agencies as of the date of filing are shown in the table below.
Long-TermShort-TermShort-Term
Credit Rating Agency (1)
Senior Debt RatingDebt RatingOutlook
Standard and Poor’s Rating ServicesA+A1A1Stable
Moody’s Investors Service, Inc.A2P1P1Stable

(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
OurDespite the global recession and volatility in the capital markets due to the pandemic, 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 existing cash and marketable securities, operating cash flow and liquidityincreased revolving credit facilities provide us with the financial flexibility needed to fund working capital, common stock repurchases, acquisitions,targeted capital expenditures, dividend payments, projected pension obligations and debt service obligations.obligations through 2020 and beyond. We continue to generate significant cash from operations on a year-to-date basis and maintain access to our expanded revolving credit facilities and commercial paper programprograms as noted above.

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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 20182019 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 our Board of Directors. Our critical accounting estimates disclosed in the Form 10-K address the estimation of liabilities for warranty programs, accounting for income taxes, pension benefits and goodwill impairment.
A discussion of our critical accounting estimates may be found in the “Management’s Discussion and Analysis” section of our 20182019 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 ninesix months of 2019.2020.
RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 17,16, "RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS," in the Notes to Condensed Consolidated Financial Statements for additional information.
ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk
A discussion of quantitative and qualitative disclosures about market risk may be found in Item 7A of our 20182019 Form 10-K. There have been no material changes in this information since the filing of our 20182019 Form 10-K. 
ITEM 4.  Controls and Procedures
Evaluation of Disclosure Controls and Procedures 
As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, our CEO and our CFO concluded that our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to management, including our CEO and CFO, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter ended September 29, 2019,June 28, 2020, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 

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PART II.  OTHER INFORMATION
ITEM 1.  Legal Proceedings
We are subject to numerous lawsuits and claims arising out of the ordinary course of our business, including actions related to product liability; personal injury; the use and performance of our products; warranty matters; product recalls; patent, trademark or other intellectual property infringement; contractual liability; the conduct of our business; tax reporting in foreign jurisdictions; distributor termination; workplace safety; and environmental matters. We also have been identified as a potentially responsible party at multiple waste disposal sites under U.S. federal and related state environmental statutes and regulations and may have joint and several liability for any investigation and remediation costs incurred with respect to such sites. We have denied liability with respect to many of these lawsuits, claims and proceedings and are vigorously defending such lawsuits, claims and proceedings. We carry various forms of commercial, property and casualty, product liability and other forms of insurance; however, such insurance may not be applicable or adequate to cover the costs associated with a judgment against us with respect to these lawsuits, claims and proceedings. We do not believe that these lawsuits are material individually or in the aggregate. While we believe we have also established adequate accruals pursuant to U.S. generally accepted accounting principles for our expected future liability with respect to pending lawsuits, claims and proceedings, where the nature and extent of any such liability can be reasonably estimated based upon then presently available information, there can be no assurance that the final resolution of any existing or future lawsuits, claims or proceedings will not have a material adverse effect on our business, results of operations, financial condition or cash flows.
We conduct significant business operations in Brazil that are subject to the Brazilian federal, state and local labor, social security, tax and customs laws. While we believe we comply with such laws, they are complex, subject to varying interpretations and we are often engaged in litigation regarding the application of these laws to particular circumstances.
On April 29, 2019, we announced that we were conducting a formal internal review of our emissions certification process and compliance with emissionsemission standards for our pick-up truck applications, following conversations with the U.S. Environmental Protection Agency (EPA) and the California Air Resources Board (CARB) regarding certification of our engines in model year 2019 RAM 2500 and 3500 trucks. This review is being conducted with external advisors to ensure the certification and compliance processes for all of our pick-up truck applications are consistent with our internal policies, engineering standards and applicable laws. In addition, we voluntarily disclosed our formal internal review to ourthe regulators and to other government agencies, the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC), and have been working cooperatively with them to ensure a complete and thorough review. During conversations with the EPA and CARB about the effectiveness of our pick-up truck applications, the regulators raised concerns that certain aspects of our emissions systems may reduce the effectiveness of our emissions control systems and thereby act as defeat devices. As a result, our internal review focuses, in part, on the regulators’ concerns. We are working closely with the regulators to enhance our emissionemissions systems to improve the effectiveness of all of our pick-up truck applications and to fully address the regulators’ requirements. Based on discussions with the regulators, we have developed a new calibration for the engines in model year 2019 RAM 2500 and 3500 trucks that has been included in all engines shipped since September 2019. During our discussions, the regulators have asked us to look at other model years and other engines, though the primary focus of our review has been the model year 2019 RAM. We are also fully cooperating with the DOJ's and the SEC's information requests and inquiries. Due to the continuing nature of our formal review, our ongoing cooperation with our regulators and other government agencies, and the presence of many unknown facts and circumstances, we cannot predict the final outcome of this review and these regulatory and agency processes, and we cannot provide assurance that the matter will not have a materially adverse impact on our results of operations and cash flows.
ITEM 1A.  Risk Factors
InSet forth below and elsewhere in this Quarterly Report on Form 10-Q are some of the principal risks and uncertainties that could cause our actual business results to differ materially from any forward-looking statements contained in this Report and could individually, or in combination, have a material adverse effect on our results of operations, financial position and cash flows. These risk factors should be considered in addition to other information set forthour cautionary comments concerning forward-looking statements in this report, youReport, including statements related to markets for our products and trends in our business that involve a number of risks and uncertainties. Our separate section above, “CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION,” should consider otherbe considered in addition to the following statements. The risk factors discussedbelow amend and supersede the risk factors previously disclosed in Part I, “Item 1A. Risk Factors” in ourItem 1A to the Annual Report on Form 10-K of Cummins Inc. for the year ended December 31, 20182019.
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A sustained market slowdown due to the impacts from the COVID-19 pandemic, other public health crises, epidemics or pandemics or otherwise, could have a material and adverse effect on our results of operations, financial condition and cash flows.
The coronavirus disease of 2019 (COVID-19) pandemic has triggered a significant downturn in our markets globally and these challenging market conditions could continue for an extended period of time. Most global economies have slowed, with much uncertainty as to when these markets will recover. If any or all of these major markets were to endure a sustained slowdown or recession due to the impacts of the COVID-19 pandemic, other public health crises, epidemics or pandemics or otherwise decline, it could have a material adverse effect on our results of operations, financial condition and cash flows.
Our manufacturing and supply chain abilities may be materially and adversely impacted by an extended shutdown or disruption of our operations due to the COVID-19 pandemic which could materially and adversely affect our business,results of operations, financial condition or future results. and cash flows.
The risks describedoutbreak of COVID-19 spread throughout the world and became a global pandemic with the resultant economic impacts evolving into a worldwide recession. The pandemic triggered a significant downturn in our 2018 Annual Report markets globally and these challenging market conditions could continue for an extended period of time. In an effort to contain the spread of COVID-19, maintain the well-being of our employees and stakeholders, match the reduced demand from our customers and in accordance with governmental requirements, we closed or partially shut down certain office, manufacturing and distribution facilities around the world in March 2020. These closures expanded and continued into the second quarter of 2020. Most of our manufacturing and distribution facilities were open early in the second quarter of 2020, although operating at reduced capacities, while many of our global office buildings remained closed throughout the second quarter. While the impacts of the pandemic and the resulting global recession are expected to be temporary, the duration of the production and supply chain disruptions, and related financial impacts, cannot be estimated at this time. Should the reduced manufacturing and distribution capacities continue for an extended period of time or worsen, the impact on Form 10-Kour production and supply chain could have a material adverse effect on our results of operations, financial condition and cash flows.
We are vulnerable to supply shortages from single-sourced suppliers, including suppliers that may be impacted by the COVID-19 pandemic, and any delay in receiving critical supplies could have a material adverse effect on our results of operations, financial condition and cash flows.
During 2019, we single sourced approximately 19 percent of the total types of parts in our product designs, compared to approximately 20 percent in 2018. Any delay in our suppliers' deliveries may adversely affect our operations at multiple manufacturing locations, forcing us to seek alternative supply sources to avoid serious disruptions. Delays may be caused by factors affecting our suppliers (including the COVID-19 pandemic, capacity constraints, labor disputes, economic downturns, availability of credit or impaired financial condition), suppliers' allocations to other purchasers, weather emergencies, natural disasters, or acts of war or terrorism. In particular, if the "CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION"COVID-19 pandemic continues and results in this Quarterly reportextended periods of travel, commercial and other restrictions, we could continue to incur global supply disruptions. Any extended delay in receiving critical supplies could impair our ability to deliver products to our customers and have a material adverse effect on our results of operations, financial condition and cash flows.
We face the challenge of accurately aligning our capacity with our demand.
Our markets are not the only riskscyclical in nature and we face.face periods when demand fluctuates significantly higher or lower than our normal operating levels, including COVID-19 related shut-downs. Accurately forecasting our expected volumes and appropriately adjusting our capacity are important factors in determining our results of operations and cash flows. We manage our capacity by adjusting our manufacturing workforce, capital expenditures and purchases from suppliers. In periods of weak demand we may face under-utilized capacity and un-recovered overhead costs, while in periods of strong demand we may experience unplanned costs and could fail to meet customer demand. We cannot guarantee that we will be able to adequately adjust our manufacturing capacity in response to significant changes in customer demand, which could harm our business. In addition, the following risk factor is providedCOVID-19 pandemic and related reductions in demand forced certain of our customer’s facilities around the world to supplementclose or partially shut down operations, inhibiting our ability to forecast demand and updatecaused related closures and partial shut-downs of certain of our manufacturing facilities. If we overestimate our demand and overbuild our capacity, we may have significantly underutilized assets and we may experience reduced margins. If we do not accurately align our manufacturing capabilities with demand it could have a material adverse effect on our results of operations, financial condition and cash flows.
Financial distress, particularly related to the risk factors previously disclosedCOVID-19 pandemic, or a change-in-control of one of our large truck OEM customers could have a material adverse impact on our results of operations, financial condition and cash flows.
We recognize significant sales of engines and components to a few large on-highway truck OEM customers in North America which have been an integral part of our positive business results for several years. If one of our large truck OEM customers experiences financial distress due to the COVID-19 pandemic, bankruptcy or a change-in-control, such circumstance could
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likely lead to significant reductions in our Annual Reportsales volumes, commercial disputes, receivable collection issues, and other negative consequences that could have a material adverse impact on Form 10-K for the year ended December 31, 2018. Additional risks and uncertainties not currently known to us or that we currently judge to be immaterial also may materially adversely affect our business,results of operations, financial condition or operating results.and cash flows.
We are conducting a formal internal review of our emissionsemission certification process and compliance with emissionsemission standards with respect to our pick-up truck applications and are working with the EPA and CARB, as well as the DOJDepartment of Justice (DOJ) and SEC, to address their questions about these applications. The results of this formal review and regulatory and government agency processes, or the discovery of any noncompliance issues, could have a materiallymaterial adverse impact on our results of operations and cash flows.

We previously announced that we are conducting a formal internal review of our emissions certification process and compliance with emissionsemission standards with respect to all of our pick-up truck applications, following conversations with the EPA and CARB regarding certification of our engines for model year 2019 RAM 2500 and 3500 trucks. During conversations with the EPA and CARB about the effectiveness of our pick-up truck applications, the regulators raised concerns that certain aspects of our emissions systems may reduce the effectiveness of our emissions control systems and thereby act as defeat devices. As a result, our internal review focuses, in part, on the regulators’ concerns. We are working closely with the regulators to enhance our emissions systems to improve the effectiveness of all of our pick-up truck applications and to fully address ourthe regulators’ requirements. Based on discussions with the regulators, we have developed a new calibration for the engines in model year 2019 RAM 2500 and 3500 trucks that has been included in all engines shipped since September 2019. During our discussions, the regulators have asked us to look at other model years and other engines, though the primary focus of our review has been the model year 2019 RAM. We will continue to work together closely with the relevant regulators to develop and implement recommendations for improvement as part of our ongoing commitment to compliance. We are also fully cooperating with the DOJ's and the SEC's information requests and inquiries.
Dueinquiries.Due to the continuing nature of the formal review, our ongoing cooperation with ourthe regulators and other government agencies, and the presence of many unknown facts and circumstances, we are not yet able to estimate the financial impact of these matters. It is possible that the consequences of any remediation plans resulting from our formal review and these regulatory and agency processes could have a materiallymaterial adverse impact on our results of operations and cash flows in the periods in which these emissions certification issues are addressed.
Our products are subject to extensive statutory and regulatory requirements that can significantly increase our costs and, along with increased scrutiny from regulatory agencies and unpredictability in the adoption, implementation and enforcement of increasingly stringent emission standards by multiple jurisdictions around the world, could have a material adverse impact on our results of operations, financial condition and cash flows.
Our engines are subject to extensive statutory and regulatory requirements governing emissions and noise, including standards imposed by the EPA, the EU, state regulatory agencies (such as the CARB) and other regulatory agencies around the world. Regulatory agencies are making certification and compliance with emissions and noise standards more stringent and subjecting diesel engine products to an increasing level of scrutiny. The discovery of noncompliance issues could have a material adverse impact on our results of operations, financial condition and cash flows.
Developing engines and components to meet more stringent and changing regulatory requirements, with different implementation timelines and emission requirements, makes developing engines efficiently for multiple markets complicated and could result in substantial additional costs that may be difficult to recover in certain markets. While we have met previous deadlines, our ability to comply with existing and future regulatory standards will be essential for us to maintain our competitive advantage in the engine markets we serve. The successful development and introduction of new and enhanced products in order to comply with new regulatory requirements are subject to other risks, such as delays in product development, cost over-runs and unanticipated technical and manufacturing difficulties.
In addition to these risks, the nature and timing of government implementation and enforcement of increasingly stringent emission standards in our worldwide markets are unpredictable and subject to change. Any delays in implementation or enforcement could result in a loss of our competitive advantage and could have a material adverse impact on our results of operations, financial condition and cash flows.
The COVID-19 pandemic created disruptions and turmoil in global credit and financial markets and ongoing impacts could have a material adverse effect on our results of operations, financial condition and cash flows.
The COVID-19 pandemic created disruptions and turmoil in the global credit and financial markets and made it more difficult and costly for us to access capital on favorable terms to meet our liquidity needs. The disruptions to the global credit and financial markets could also have material negative impacts on business operations and financial positions of our customers and suppliers, which may negatively impact our orders, sales and supply chain. If the impacts of the COVID-19 pandemic on global credit and financial markets continue, or worsen, it could negatively impact our business, along with the financial condition of
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our customers and suppliers, and it could have a material adverse impact on our results of operations, financial condition and cash flows.
Government actions to stabilize credit markets and financial institutions or other industries may not be effective.
The U.S. government recently enacted legislation, and created several programs, to help preserve and stabilize credit markets and financial institutions and restore liquidity, including the Emergency Economic Stabilization Act of 2008, the Federal Reserve’s Commercial Paper Funding Facility (CPFF) and Money Market Investor Funding Facility and the Federal Deposit Insurance Corporation’s (FDIC) Temporary Liquidity Guarantee Program. There is no assurance that these programs will have beneficial effects in the credit markets or on general economic conditions, will address credit or liquidity issues of companies that participate in the programs or will reduce volatility or uncertainty in the financial markets. The failure of these programs to have their intended effects could have a material adverse effect on the financial markets and economies in general, which in turn could have a material adverse effect on our financial condition and cash flows. To the extent that we participate in these programs or other programs, there is no assurance that we will continue to be eligible or qualify to participate or that such programs will remain available for sufficient periods of time or on acceptable terms to benefit us, and the expiration of such programs could have unintended material adverse effects on us. Further, as a condition to participating in any such program, we may need to accept terms and limitations that could adversely affect us in other ways.
Our products are subject to recall for performance or safety-related issues.
Our products are subject to recall for performance or safety-related issues. Product recalls subject us to reputational risk, loss of current and future customers, reduced revenue and product recall costs. Product recall costs are incurred when we decide, either voluntarily or involuntarily, to recall a product through a formal campaign to solicit the return of specific products due to known or suspected performance or safety issues. Any significant product recalls could have material adverse effects on our results of operations, financial condition and cash flows. See Note 10, "PRODUCT WARRANTY LIABILITY" to the Condensed Consolidated Financial Statements for additional information.
The development of new technologies may materially reduce the demand for our current products and services.
We are investing in new products and technologies, including electrified powertrains, hydrogen generation and fuel cells, for planned introduction into certain existing and new markets. Given the early stages of development of some of these new products and technologies, there can be no guarantee of the future market acceptance and investment returns with respect to these planned products. The increased adoption of electrified powertrains in some market segments could result in lower demand for current diesel or natural gas engines and components and, over time, reduce the demand for related parts and service revenues from diesel or natural gas powertrains. Furthermore, it is possible that we may not be successful in developing segment-leading electrified powertrains and some of our existing customers could choose to develop their own electrified or alternate fuel powertrains, or source from other manufacturers, and any of these factors could have a material adverse impact on our results of operations, financial condition and cash flows.
We operate our business on a global basis and policy changes affecting international trade could adversely impact the demand for our products and our competitive position.
We manufacture, sell and service products globally and rely upon a global supply chain to deliver the raw materials, components, systems and parts that we need to manufacture and service our products. Changes in government policies on foreign trade and investment can affect the demand for our products and services, cause non-U.S. customers to shift preferences toward domestically manufactured or branded products and impact the competitive position of our products or prevent us from being able to sell products in certain countries. Our business benefits from free trade agreements, such as the new United States-Mexico-Canada Agreement and the U.S. trade relationship with China, Brazil and France and efforts to withdraw from, or substantially modify such agreements or arrangements, in addition to the implementation of more restrictive trade policies, such as more detailed inspections, higher tariffs (including, but not limited to, additional tariffs on the import of steel or aluminum), import or export licensing requirements, exchange controls or new barriers to entry, could adversely impact our production costs, customer demand and our relationships with customers and suppliers. Any of these consequences could have a material adverse effect on our results of operations, financial condition and cash flows.
A slowdown in infrastructure development and/or depressed commodity prices could adversely affect our business.
Infrastructure development and strong commodity prices have been significant drivers of our historical growth, but as the pace of investment in infrastructure slowed in recent years (especially in China and Brazil), commodity prices were significantly lower and demand for our products in off-highway markets was weak. Weakness in commodity prices, including any negative impacts on commodity prices such as oil, gas and coal, adversely impacted mining industry participants’ demand for vehicles and equipment that contain our engines and other products over the past several years. Continued deterioration in infrastructure
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and commodities markets, including the impacts from COVID-19, could adversely affect our customers’ demand for vehicles and equipment and, as a result, could adversely affect our business.
The U.K.’s exit from the European Union (EU) could materially and adversely impact our results of operations, financial condition and cash flows.
On January 31, 2020, the U.K. exited from the EU (BREXIT). Additionally, the results of the U.K.’s BREXIT has caused, and may continue to cause, volatility in global stock markets, currency exchange rate fluctuations and global economic uncertainty. Although it is unknown what the terms of the U.K.’s future relationship with the EU will be, it is possible that there will be higher tariffs or greater restrictions on imports and exports between the U.K. and the EU and increased regulatory complexities. The effects of BREXIT will depend on any agreements the U.K. makes to retain access to EU markets either during a transitional period or on a permanent basis. These measures could potentially disrupt our supply chain, including delays of imports and exports, limited access to human capital within some of the target markets and jurisdictions in which we operate and adverse changes to tax benefits or liabilities in these or other jurisdictions. In addition, BREXIT could lead to legal uncertainty and potentially divergent national laws and regulations, including with respect to emissions and similar certifications granted to us by the EU, as the U.K. determines which EU laws to replace or replicate. Any of these effects of BREXIT, among others, could have a material adverse impact on our results of operations, financial condition and cash flows.
We may be adversely impacted by work stoppages and other labor matters.
At December 31, 2019, we employed approximately 61,615 persons worldwide. Approximately 19,048 of our employees worldwide were represented by various unions under collective bargaining agreements that expire between 2020 and 2024. While we have no reason to believe that we will be materially impacted by work stoppages or other labor matters, there can be no assurance that future issues with our labor unions will be resolved favorably or that we will not encounter future strikes, work stoppages, or other types of conflicts with labor unions or our employees. Any of these consequences may have an adverse effect on us or may limit our flexibility in dealing with our workforce. In addition, many of our customers and suppliers have unionized work forces. Work stoppages or slowdowns experienced by us, our customers or suppliers, including any work stoppages or slowdowns related to the COVID-19 pandemic, could result in slowdowns or closures that would have a material adverse effect on our results of operations, financial condition and cash flow.
We rely on our executive leadership team and other key personnel.
We depend on the skills, institutional knowledge, working relationships, and continued services and contributions of key personnel, including our executive leadership team. In addition, our ability to achieve our operating and strategic goals depends on our ability to identify, hire, train and retain qualified individuals. We compete with other companies both within and outside of our industry for talented personnel and we may lose key personnel or fail to attract, train and retain other talented personnel. Any such loss or failure could have material adverse effects on our results of operations, financial condition and cash flows.
In particular, our continued success will depend in part on our ability to retain the talents and dedication of key employees. If key employees terminate their employment or become ill as a result of the COVID-19 pandemic or otherwise, our business activities may be adversely affected and our management team’s attention may be diverted. In addition, we may not be able to locate suitable replacements for any key employees who leave.
Lower-than-anticipated market acceptance of our new or existing products or services, including reductions in demand for diesel engines, could have a material adverse impact on our results of operations, financial condition and cash flows.
Although we conduct market research before launching new or refreshed engines and introducing new services, many factors both within and outside our control affect the success of new or existing products and services in the marketplace. Offering engines and services that customers desire and value can mitigate the risks of increasing price competition and declining demand, but products and services that are perceived to be less than desirable (whether in terms of price, quality, overall value, fuel efficiency or other attributes) can exacerbate these risks. With increased consumer interconnectedness through the internet, social media and other media, mere allegations relating to poor quality, safety, fuel efficiency, corporate responsibility or other key attributes can negatively impact our reputation or market acceptance of our products or services, even if such allegations prove to be inaccurate or unfounded.
Our truck manufacturers and OEM customers may discontinue outsourcing their engine supply needs.
Several of our engine customers, including PACCAR, Volvo, Navistar, Chrysler, Daimler, Dongfeng and Tata, are truck manufacturers or OEMs that manufacture engines for some of their own vehicles. Despite their own engine manufacturing abilities, these customers have historically chosen to outsource certain types of engine production to us due to the quality of our engine products, our emission compliance capabilities, our systems integration, their customers' preferences, their desire for cost reductions, their desire for eliminating production risks and their desire to maintain company focus. However, there can be
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no assurance that these customers will continue to outsource, or outsource as much of, their engine production in the future. In addition, increased levels of OEM vertical integration could result from a number of factors, such as shifts in our customers' business strategies, acquisition by a customer of another engine manufacturer, the inability of third-party suppliers to meet product specifications and the emergence of low-cost production opportunities in foreign countries. Any significant reduction in the level of engine production outsourcing from our truck manufacturer or OEM customers could have a material adverse effect on our results of operations, financial condition and cash flows.
Our plan to reposition our portfolio of product offerings through exploration of strategic acquisitions and divestitures may expose us to additional costs and risks.
Part of our strategic plan is to improve our revenue growth, gross margins and earnings by exploring the repositioning of our portfolio of product line offerings through the pursuit of potential strategic acquisitions and/or divestitures to provide future strategic, financial and operational benefits and improve shareholder value. There can be no assurance that we will be able to identify suitable candidates or consummate these transactions on favorable terms. The successful identification and completion of any strategic transaction depends on a number of factors that are not entirely within our control, including the availability of suitable candidates and our ability to negotiate terms acceptable to all parties involved, conclude satisfactory agreements and obtain all necessary regulatory approvals. Accordingly, we may not be able to successfully negotiate and complete specific transactions. The exploration, negotiation and consummation of strategic transactions may involve significant expenditures by us, which may adversely affect our results of operations at the time such expenses are incurred, and may divert management’s attention from our existing business. Strategic transactions also may have adverse effects on our existing business relationships with suppliers and customers.If required, the financing for strategic acquisitions could result in an increase in our indebtedness, dilute the interests of our shareholders or both. Any acquisition may not be accretive to us for a significant period of time following the completion of such acquisition. Also, our ability to effectively integrate any potential acquisition into our existing business and culture may not be successful, which could jeopardize future financial and operational performance for the combined businesses. In addition, if an acquisition results in any additional goodwill or increase in other intangible assets on our balance sheet and subsequently becomes impaired, we would be required to record a non-cash impairment charge, which could result in a material adverse effect on our financial condition.Similarly, any strategic divestiture of a product line or business may reduce our revenue and earnings, reduce the diversity of our business, result in substantial costs and expenses and cause disruption to our employees, customers, vendors and communities in which we operate.
Our information technology systems and our products are exposed to potential security breaches or other disruptions which may adversely impact our competitive position, reputation, results of operations, financial condition and cash flows.
We rely on the capacity, reliability and security of our information technology systems and data security infrastructure in connection with various aspects of our business activities. We also rely on our ability to expand and continually update these systems and related infrastructure in response to the changing needs of our business. As we implement new systems, they may not perform as expected. We face the challenge of supporting our older systems and implementing necessary upgrades. In addition, some of these systems are managed by third-party service providers and are not under our direct control. If we experience a problem with an important information technology system, including during system upgrades and/or new system implementations, the resulting disruptions could have an adverse effect on our business and reputation. As customers adopt and rely on cloud-based digital technologies and services we offer, any disruption of the confidentiality, integrity or availability of those services could have an adverse effect on our business and reputation.
The data handled by our information technology systems is vulnerable to security threats. Our operations routinely involve receiving, storing, processing and transmitting sensitive information pertaining to our business, customers, dealers, suppliers, employees and other sensitive matters. While we continually work to safeguard our systems and mitigate potential risks, there is no assurance that these actions will be sufficient to prevent information technology security threats, such as security breaches, computer malware, computer viruses and other "cyber attacks," which are increasing in both frequency and sophistication, along with power outages or hardware failures. These threats could result in unauthorized public disclosures of information, create financial liability, subject us to legal or regulatory sanctions, disrupt our ability to conduct our business, result in the loss of intellectual property or damage our reputation with customers, dealers, suppliers and other stakeholders. As a result of the COVID-19 pandemic and resulting government actions to restrict movement, a large percentage of our salaried employees are working remotely. This remote working environment may pose a heightened risk for security breaches or other disruptions of our information technology systems.
In addition, our products, including our engines, contain interconnected and increasingly complex systems that control various processes and these systems are potentially subject to "cyber attacks" and disruption. The impact of a significant information
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technology event on either of our information technology systems or our products could have a material adverse effect on our competitive position, reputation, results of operations, financial condition and cash flows.
We may experience difficulties and delays or unexpected costs in completing our cost reduction actions and announced restructuring initiatives, including achieving any anticipated savings and other benefits of these initiatives.
During the fourth quarter of 2019 and continuing into 2020 we are undertaking cost reduction actions and announced restructuring initiatives to respond to the slowdown in our global markets. As we implement these initiatives, we may not realize anticipated savings or other benefits from one or more of the initiatives in the amounts or within the time periods we expect. Other events or circumstances, such as implementation difficulties and delays or unexpected costs, may occur which could result in us not realizing our targeted cost reductions. We are also subject to the risks of negative publicity and business disruption in connection with our restructuring and other cost reduction initiatives. If we are unable to realize the expected savings or benefits from these initiatives, certain aspects of our business may be adversely affected. If we experience any of these circumstances or otherwise fail to realize the anticipated savings or benefits from our restructuring and cost reduction initiatives, our results of operations could be materially and adversely affected.
We may fail to realize all of the expected enhanced revenue, earnings and cash flow from our investment in the Eaton Cummins Automated Transmission Technologies joint venture.
Our ability to realize all of the expected enhanced revenue, earnings, and cash flow from our 2017 investment in the Eaton Cummins Automated Transmission Technologies joint venture will depend, in substantial part, on our ability to successfully launch the automated transmission products in North America and China and achieve our projected market penetration in those regions. While we believe we will ultimately achieve these objectives, it is possible that we will be unable to achieve all of the goals within our anticipated time frame or in the anticipated amounts. If we are not able to successfully complete our automated transmission strategy, the anticipated enhanced revenue, earnings, and cash flows resulting from this joint venture may not be realized fully or may take longer to realize than expected. As part of the purchase accounting associated with the formation of the joint venture, significant goodwill and intangible asset balances were recorded on the consolidated balance sheet. If cash flows from the joint venture fall short of our anticipated amounts, these assets could be subject to non-cash impairment charges, negatively impacting our earnings.
We are exposed to political, economic and other risks that arise from operating a multinational business.
Our business is subject to the political, economic and other risks that are inherent in operating in numerous countries. These risks include:
•public health crises, including the spread of a contagious disease, such as COVID-19, and other catastrophic events;
•the difficulty of enforcing agreements and collecting receivables through foreign legal systems;
•trade protection measures and import or export licensing requirements;
•the imposition of taxes on foreign income and tax rates in certain foreign countries that exceed those in the U.S.;
•the imposition of tariffs, exchange controls or other restrictions;
•difficulty in staffing and managing widespread operations and the application of foreign labor regulations;
•required compliance with a variety of foreign laws and regulations; and
•changes in general economic and political conditions in countries where we operate, particularly in emerging markets.
As we continue to operate our business globally, our success will depend, in part, on our ability to anticipate and effectively manage these and other related risks. There can be no assurance that the consequences of these and other factors relating to our multinational operations will not have a material adverse effect upon us.
We face significant competition in the markets we serve.
The markets in which we operate are highly competitive. We compete worldwide with a number of other manufacturers and distributors that produce and sell similar products. We primarily compete in the market with diesel engines and related diesel products; however, new technologies continue to be developed for gasoline, natural gas, electrification and other technologies and we will continue to face new competition from these expanding technologies. Our products primarily compete on the basis of price, performance, fuel economy, emissions compliance, speed of delivery, quality and customer support. We also face competitors in some emerging markets who have established local practices and long standing relationships with participants in
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these markets. There can be no assurance that our products will be able to compete successfully with the products of other companies and in other markets.
Increasing global competition among our customers may affect our existing customer relationships and restrict our ability to benefit from some of our customers' growth.
As our customers in emerging markets continue to grow in size and scope, they are increasingly seeking to export their products to other countries. This has meant greater demand for our advanced engine technologies to help these customers meet the more stringent emissions requirements of developed markets, as well as greater demand for access to our distribution systems for purposes of equipment servicing. As these emerging market customers enter into, and begin to compete in more developed markets, they may increasingly begin to compete with our existing customers in these markets. Our further aid to emerging market customers could adversely affect our relationships with developed market customers. In addition, to the extent the competition does not correspond to overall growth in demand, we may see little or no benefit from this type of expansion by our emerging market customers.
We are subject to foreign currency exchange rate and other related risks.
We conduct operations in many areas of the world involving transactions denominated in a variety of currencies. We are subject to foreign currency exchange rate risk to the extent that our costs are denominated in currencies other than those in which we earn revenues. In addition, since our financial statements are denominated in U.S. dollars, changes in foreign currency exchange rates between the U.S. dollar and other currencies have had, and will continue to have, an impact on our results of operations, financial condition and cash flows. The U.S. dollar strengthened in recent years resulting in material unfavorable impacts on our revenues in those years. If the U.S. dollar continues strengthening against other currencies, we will experience additional volatility in our financial statements.While we customarily enter into financial transactions that attempt to address these risks and many of our supply agreements with customers include foreign currency exchange rate adjustment provisions, there can be no assurance that foreign currency exchange rate fluctuations will not adversely affect our future results of operations and cash flows. In addition, while the use of currency hedging instruments may provide us with some protection from adverse fluctuations in foreign currency exchange rates, by utilizing these instruments we potentially forego the benefits that might result from favorable fluctuations in foreign currency exchange rates.We also face risks arising from the imposition of foreign exchange controls and currency devaluations. Foreign exchange controls may limit our ability to convert foreign currencies into U.S. dollars or to remit dividends and other payments by our foreign subsidiaries or businesses located in or conducted within a country imposing controls. Currency devaluations result in a diminished value of funds denominated in the currency of the country instituting the devaluation. See Management's Discussion and Analysis for additional information.
Our products are exposed to variability in material and commodity costs.
Our businesses establish prices with our customers in accordance with contractual time frames; however, the timing of material and commodity market price increases may prevent us from passing these additional costs on to our customers through timely pricing actions. Additionally, higher material and commodity costs around the world may offset our efforts to reduce our cost structure. While we customarily enter into financial transactions and contractual pricing adjustment provisions with our customers that attempt to address some of these risks (notably with respect to copper, platinum and palladium), there can be no assurance that commodity price fluctuations will not adversely affect our results of operations and cash flows. In addition, while the use of commodity price hedging instruments and contractual pricing adjustments may provide us with some protection from adverse fluctuations in commodity prices, by utilizing these instruments, we potentially forego the benefits that might result from favorable fluctuations in price. As a result, higher material and commodity costs, as well as hedging these commodity costs during periods of decreasing prices, could result in declining margins.
We derive significant earnings from investees that we do not directly control, with more than 50 percent of these earnings from our China-based investees.
For 2019, we recognized $330 million of equity, royalty and interest income from investees, compared to $394 million in 2018. Approximately half of our equity, royalty and interest income from investees is from four of our 50 percent owned joint ventures in China - Beijing Foton Cummins Engine Co., Ltd., Dongfeng Cummins Engine Company, Ltd., Chongqing Cummins Engine Company, Ltd. and Dongfeng Cummins Emission Solutions Co. Ltd. As a result, although a significant percentage of our net income is derived from these unconsolidated entities, we do not unilaterally control their management or their operations, which puts a substantial portion of our net income at risk from the actions or inactions of these entities. A
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significant reduction in the level of contribution by these entities to our net income would likely have a material adverse effect on our results of operations and cash flows.
Unanticipated changes in our effective tax rate, the adoption of new tax legislation or exposure to additional income tax liabilities could adversely affect our profitability.
We are subject to income taxes in the U.S. and numerous international jurisdictions. Our income tax provision and cash tax liability in the future could be adversely affected by changes in earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws and the discovery of new information in the course of our tax return preparation process. The carrying value of deferred tax assets, which are predominantly in the U.S., is dependent on our ability to generate future taxable income in the U.S. We are also subject to ongoing tax audits. These audits can involve complex issues, which may require an extended period of time to resolve and can be highly judgmental. Tax authorities may disagree with certain tax reporting positions taken by us and, as a result, assess additional taxes against us. We regularly assess the likely outcomes of these audits in order to determine the appropriateness of our tax provision. The amounts ultimately paid upon resolution of these or subsequent tax audits could be materially different from the amounts previously included in our income tax provision and, therefore, could have a material impact on our tax provision.
Our global operations are subject to laws and regulations that impose significant compliance costs and create reputational and legal risk.
Due to the international scope of our operations, we are subject to a complex system of commercial and trade regulations around the world. Recent years have seen an increase in the development and enforcement of laws regarding trade compliance and anti-corruption, such as the U.S. Foreign Corrupt Practices Act and similar laws from other countries, as well as new regulatory requirements regarding data privacy, such as the European Union General Data Protection Regulation. Our numerous foreign subsidiaries, affiliates and joint venture partners are governed by laws, rules and business practices that differ from those of the U.S. The activities of these entities may not comply with U.S. laws or business practices or our Code of Business Conduct. Violations of these laws may result in severe criminal or civil sanctions, could disrupt our business and result in an adverse effect on our reputation, business and results of operations, financial condition and cash flows. We cannot predict the nature, scope or effect of future regulatory requirements to which our operations might be subject or the manner in which existing laws might be administered or interpreted.
Our business is exposed to potential product liability claims.
We face an inherent business risk of exposure to product liability claims in the event that our products' failure to perform to specification results, or is alleged to result, in property damage, bodily injury and/or death. At any given time, we are subject to various and multiple product liability claims, any one of which, if decided adversely to us, may have a material adverse effect on our reported results of operation in the period in which our liability with respect to any such claim is recognized. While we maintain insurance coverage with respect to certain product liability claims, we may not be able to obtain such insurance on acceptable terms in the future, if at all, and any such insurance may not provide adequate coverage against product liability claims. In addition, product liability claims can be expensive to defend and can divert the attention of management and other personnel for significant periods of time, regardless of the ultimate outcome. Furthermore, even if we are successful in defending against a claim relating to our products, claims of this nature could cause our customers to lose confidence in our products and us.
Our operations are subject to increasingly stringent environmental laws and regulations.
Our plants and operations are subject to increasingly stringent environmental laws and regulations in all of the countries in which we operate, including laws and regulations governing air emission, discharges to water and the generation, handling, storage, transportation, treatment and disposal of waste materials. While we believe that we are in compliance in all material respects with these environmental laws and regulations, there can be no assurance that we will not be adversely impacted by costs, liabilities or claims with respect to existing or subsequently acquired operations, under either present laws and regulations or those that may be adopted or imposed in the future. We are also subject to laws requiring the cleanup of contaminated property. If a release of hazardous substances occurs at or from any of our current or former properties or at a landfill or another location where we have disposed of hazardous materials, we may be held liable for the contamination and the amount of such liability could be material.
Significant declines in future financial and stock market conditions, particularly those related to the global recession due to the COVID-19 pandemic, could diminish our pension plan asset performance and adversely impact our results of operations, financial condition and cash flow.
We sponsor both funded and unfunded domestic and foreign defined benefit pension and other retirement plans. Our pension cost and the required contributions to our pension plans are directly affected by the value of plan assets, the projected and actual
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rates of return on plan assets and the actuarial assumptions we use to measure our defined benefit pension plan obligations, including the discount rate at which future projected and accumulated pension obligations are discounted to a present value. We could experience increased pension cost due to a combination of factors, including the decreased investment performance of pension plan assets, decreases in the discount rate and changes in our assumptions relating to the expected return on plan assets.Significant declines in current and future financial and stock market conditions related to the COVID-19 pandemic could cause material losses in our pension plan assets, which could result in increased pension cost in future years and adversely impact our results of operations, financial condition and cash flow. Depending upon the severity and length of market declines and government regulatory changes, we may be legally obligated to make pension payments in the U.S. and perhaps other countries and these contributions could be material.
Future bans or limitations on the use of diesel-powered vehicles or other applications could have a material adverse impact on our business over the long term.
In an effort to limit greenhouse gas emissions and combat climate change, multiple countries and cities have announced that they plan to implement a ban on the use in their cities or countries of diesel-powered products in the near or distant future. These countries include China, India and Germany. In addition, California government officials have called for the state to phase out sales of diesel-powered vehicles by 2040. To the extent that these types of bans are actually implemented in the future on a broad basis, or in one or more of our key markets, our business over the long-term could experience material adverse impacts.
We are exposed to risks arising from the price and availability of energy.
The level of demand for our products and services is influenced in multiple ways by the price and availability of energy. High energy costs generally drive greater demand for better fuel economy in almost all countries in which we operate. Some of our engine products have been developed with a primary purpose of offering fuel economy improvements, and if energy costs decrease or increase less than expected, demand for these products may likewise decrease. The relative unavailability of electricity in some emerging market countries also influences demand for our electricity generating products, such as our diesel generators. If these countries add energy capacity by expanding their power grids at a rate equal to or faster than the growth in demand for energy, the demand for our generating products could also decrease or increase less than would otherwise be the case.
ITEM 2.  Unregistered Sales of Equity Securities and Use of Proceeds
The following information is provided pursuant to Item 703 of Regulation S-K:
 
  Issuer Purchases of Equity Securities
Period 
Total
Number of
Shares
Purchased(1)
 Average
Price Paid
per Share		 Total Number of
Shares Purchased
as Part of Publicly
Announced
Plans or Programs		 
Maximum
Number of Shares
that May Yet Be
Purchased Under the
Plans or Programs(2)
July 1 - August 4 —
 $—
 —
 34,380
August 5 - September 1 3,097,771
 148.51
 3,097,471
 38,313
September 2 - September 29 1,531,491
 160.82
 1,526,685
 34,160
Total 4,629,262
 152.58
 4,624,156
  

(1)  Shares purchased represent shares under our Key Employee Stock Investment Plan established in 1969 (there is no maximum repurchase limitation in this plan) and our Board of Directors authorized share repurchase program.
Issuer Purchases of Equity Securities
Period
Total
Number of
Shares
Purchased (1)
Average
Price Paid
per Share		Total Number of
Shares Purchased
as Part of Publicly
Announced
Plans or Programs
Maximum
Number of Shares
that May Yet Be
Purchased Under the
Plans or Programs (2)
March 30 - May 3— $— — 88,555 
May 4 - May 31— — — 87,933 
June 1 - June 28— — — 84,503 
Total— — — 
(1) Shares purchased represent shares under the Board authorized share repurchase program.
(2) These values reflect the sum of shares held in loan status under our Key Employee Stock Investment Plan. The repurchase program authorized by the Board does not limit the number of shares that may be purchased and was excluded from this column. The dollar value remaining available for future purchases under the 2018 program at June 28, 2020, was $85 million.
(2)  These values reflect the sum of shares held in loan status under our Key Employee Stock Investment Plan. The repurchase program authorized by the Board of Directors does not limit the number of shares that may be purchased and was excluded from this column. The dollar value remaining available for future purchases under the 2018 program at September 29, 2019, was $1.1 billion.
In October 2018, ourDecember 2019, the Board of Directors authorized the acquisition of up to $2$2.0 billion of additional common stock upon completion of the 2018 repurchase plan. In October 2018, the Board authorized the acquisition of up to $2.0 billion of additional common stock. During the three months ended September 29, 2019,June 28, 2020, we repurchased $706 million ofdid not repurchase any common stock under thisthe 2018 authorization.
During the three months ended September 29, 2019,June 28, 2020, we repurchased 5,106did not repurchase any shares of common stock from employees in connection with the Key Employee Stock Investment Plan which allows certain employees, other than officers, to purchase shares of common stock on an installment basis up to an established credit limit. Loans are issued for five-year terms at a fixed interest rate established at the date of purchase and may be refinanced after their initial five-year period for an additional five-year period. Participants must hold shares for a minimum of six months from date of purchase. If the shares are sold before the loan is paid off, the employee must wait six months before another share purchase may be made. We hold participants’ shares
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as security for the loans and would, in effect, repurchase shares if the participant defaulted in repayment of the loan. There is no maximum amount of shares that we may purchase under this plan. Effective May 1, 2020, we no longer repurchase shares of common stock associated with participants' sales. Shares are now sold as open-market transactions via a third-party broker.  
ITEM 3.  Defaults Upon Senior Securities
Not applicable. 
ITEM 4.  Mine Safety Disclosures
Not applicable. 

ITEM 5.  Other Information
Not applicable. 
ITEM 6. Exhibits
The exhibits listed in the following Exhibit Index are filed as part of this Quarterly Report on Form 10-Q.
CUMMINS INC.
EXHIBIT INDEX
Exhibit No.Description of Exhibit
Exhibit No.Description of Exhibit
10.2
Amendment No. 1, dated as of August 21, 2019, by and among Cummins Inc., certain of its subsidiaries party thereto, the lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.2 to the Current Report on on Form 8-K filed by Cummins Inc. with the Securities and Exchange Commission on August 21, 2019 (File No.001-04949)).
101.INS*
101.INS*Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. 
101.SCH*Inline XBRL Taxonomy Extension Schema Document.
101.CAL*Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
* Filed with this quarterly report on Form 10-Q are the following documents formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Net Income for the three and ninesix months ended September 29,June 28, 2020 and June 30, 2019, and September 30, 2018, (ii) the Condensed Consolidated Statements of Comprehensive Income for the three and ninesix months ended September 29,June 28, 2020 and June 30, 2019, and September 30, 2018, (iii) the Condensed Consolidated Balance Sheets at September 29, 2019June 28, 2020 and December 31, 2018,2019, (iv) the Condensed Consolidated Statements of Cash Flows for the ninesix months ended September 29,June 28, 2020 and June 30, 2019, and September 30, 2018, (v) the Condensed Consolidated Statements of Changes in Equity for the three and ninesix months ended September 29,June 28, 2020 and June 30, 2019 and September 30, 2018 and (vi) Notes to Condensed Consolidated Financial Statements.


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Cummins Inc.
Date:October 29, 2019July 28, 2020
By:/s/ MARK A. SMITHBy:/s/ CHRISTOPHER C. CLULOW
Mark A. SmithChristopher C. Clulow
Vice President and Chief Financial OfficerVice President-Corporate Controller
(Principal Financial Officer)(Principal Accounting Officer)

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