Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
cmi-20200927_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, 201927, 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, 2019,27, 2020, there were 153,203,601148,006,581 shares of common stock outstanding with a par value of $2.50 per share.



1
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 nine months ended September 29, 201927, 2020 and September 30, 201829, 2019
3
Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 29, 201927, 2020 and September 30, 201829, 2019
4
Condensed Consolidated Balance Sheets at September 29, 201927, 2020 and December 31, 20182019
5
Condensed Consolidated Statements of Cash Flows for the nine months ended September 29, 201927, 2020 and September 30, 201829, 2019
6
Condensed Consolidated Statements of Changes in Equity for the three and nine months ended September 29, 201927, 2020 and September 30, 201829, 2019
7
9
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5554
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PART II. OTHER INFORMATION
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2
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 endedNine months ended
In millions, except per share amounts September 27,
2020		September 29,
2019		September 27,
2020		September 29,
2019
NET SALES (a) (Note 3)
$5,118 $5,768 $13,981 $17,993 
Cost of sales3,769 4,274 10,448 13,326 
GROSS MARGIN1,349 1,494 3,533 4,667 
OPERATING EXPENSES AND INCOME    
Selling, general and administrative expenses533 600 1,549 1,822 
Research, development and engineering expenses224 242 651 730 
Equity, royalty and interest income from investees (Note 5)98 68 342 256 
Other operating expense, net(20)(21)(35)(25)
OPERATING INCOME670 699 1,640 2,346 
Interest income4 14 15 38 
Interest expense25 26 71 87 
Other income, net37 68 119 174 
INCOME BEFORE INCOME TAXES686 755 1,703 2,471 
Income tax expense (Note 6)182 139 402 501 
CONSOLIDATED NET INCOME504 616 1,301 1,970 
Less: Net income (loss) attributable to noncontrolling interests3 (6)13 10 
NET INCOME ATTRIBUTABLE TO CUMMINS INC.$501 $622 $1,288 $1,960 
 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.    
Basic$3.39 $3.99 $8.69 $12.50 
Diluted$3.36 $3.97 $8.65 $12.45 
 
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING    
Basic147.9 155.9 148.3 156.8 
Dilutive effect of stock compensation awards1.0 0.7 0.6 0.6 
Diluted148.9 156.6 148.9 157.4 
(a) Includes sales to nonconsolidated equity investees of $311 million and $906 million for the three and nine months ended September 27, 2020, compared with $280 million and $882 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 endedNine months ended
In millions September 27,
2020		September 29,
2019		September 27,
2020		September 29,
2019
CONSOLIDATED NET INCOME$504 $616 $1,301 $1,970 
Other comprehensive income (loss), net of tax (Note 13)    
Change in pension and other postretirement defined benefit plans16 6 34 2 
Foreign currency translation adjustments111 (182)(62)(197)
Unrealized gain (loss) on derivatives18 (29)(63)(40)
Total other comprehensive income (loss), net of tax145 (205)(91)(235)
COMPREHENSIVE INCOME649 411 1,210 1,735 
Less: Comprehensive income (loss) attributable to noncontrolling interests13 (11)1 8 
COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC.$636 $422 $1,209 $1,727 
 
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

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CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEBALANCE SHEETS
(Unaudited)
In millions, except par valueSeptember 27,
2020		December 31,
2019
ASSETS  
Current assets  
Cash and cash equivalents$2,967 $1,129 
Marketable securities (Note 7)345 341 
Total cash, cash equivalents and marketable securities3,312 1,470 
Accounts and notes receivable, net
Trade and other3,291 3,387 
Nonconsolidated equity investees337 283 
Inventories (Note 8)3,470 3,486 
Prepaid expenses and other current assets652 761 
Total current assets11,062 9,387 
Long-term assets  
Property, plant and equipment8,753 8,699 
Accumulated depreciation(4,666)(4,454)
Property, plant and equipment, net4,087 4,245 
Investments and advances related to equity method investees1,418 1,237 
Goodwill1,288 1,286 
Other intangible assets, net990 1,003 
Pension assets1,010 1,001 
Other assets1,713 1,578 
Total assets$21,568 $19,737 
LIABILITIES  
Current liabilities  
Accounts payable (principally trade)$2,597 $2,534 
Loans payable (Note 9)129 100 
Commercial paper (Note 9)316 660 
Accrued compensation, benefits and retirement costs433 560 
Current portion of accrued product warranty (Note 10)646 803 
Current portion of deferred revenue (Note 3)540 533 
Other accrued expenses (Note 11)990 1,039 
Current maturities of long-term debt (Note 9)58 31 
Total current liabilities5,709 6,260 
Long-term liabilities  
Long-term debt (Note 9)3,609 1,576 
Pensions and other postretirement benefits571 591 
Accrued product warranty (Note 10)635 645 
Deferred revenue (Note 3)837 821 
Other liabilities (Note 11)1,566 1,379 
Total liabilities$12,927 $11,272 
Commitments and contingencies (Note 12)
 
EQUITY
Cummins Inc. shareholders’ equity  
Common stock, $2.50 par value, 500 shares authorized, 222.5 and 222.4 shares issued$2,385 $2,346 
Retained earnings15,118 14,416 
Treasury stock, at cost, 74.4 and 71.7 shares(7,696)(7,225)
Common stock held by employee benefits trust, at cost, 0.0 and 0.2 shares0 (2)
Accumulated other comprehensive loss (Note 13)(2,107)(2,028)
Total Cummins Inc. shareholders’ equity7,700 7,507 
Noncontrolling interests941 958 
Total equity$8,641 $8,465 
Total liabilities and equity$21,568 $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)
 Nine months ended
In millionsSeptember 27,
2020		September 29,
2019
CASH FLOWS FROM OPERATING ACTIVITIES  
Consolidated net income$1,301 $1,970 
Adjustments to reconcile consolidated net income to net cash provided by operating activities  
Depreciation and amortization499 493 
Deferred income taxes(7)(14)
Equity in income of investees, net of dividends(136)(44)
Pension and OPEB expense (Note 4)81 56 
Pension contributions and OPEB payments (Note 4)(102)(130)
Stock-based compensation expense22 37 
Restructuring payments (Note 14)(100)0 
Gain on corporate owned life insurance(50)(64)
Foreign currency remeasurement and transaction exposure(7)(54)
Changes in current assets and liabilities, net of acquisitions 
Accounts and notes receivable47 (101)
Inventories(50)(62)
Other current assets73 48 
Accounts payable109 (3)
Accrued expenses(236)(74)
Changes in other liabilities208 168 
Other, net(72)117 
Net cash provided by operating activities1,580 2,343 
CASH FLOWS FROM INVESTING ACTIVITIES  
Capital expenditures(268)(395)
Investments in internal use software(33)(50)
Investments in and advances to equity investees(30)(16)
Acquisitions of businesses, net of cash acquired (Note 15)0 (237)
Investments in marketable securities—acquisitions(422)(367)
Investments in marketable securities—liquidations (Note 7)408 296 
Cash flows from derivatives not designated as hedges(15)(86)
Other, net23 26 
Net cash used in investing activities(337)(829)
CASH FLOWS FROM FINANCING ACTIVITIES  
Proceeds from borrowings (Note 9)1,999 10 
Net (payments) borrowings of commercial paper(344)122 
Payments on borrowings and finance lease obligations(41)(47)
Net borrowings under short-term credit agreements6 53 
Distributions to noncontrolling interests(26)(33)
Dividend payments on common stock(582)(562)
Repurchases of common stock(550)(806)
Other, net102 65 
Net cash provided by (used in) financing activities564 (1,198)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS31 (59)
Net increase in cash and cash equivalents1,838 257 
Cash and cash equivalents at beginning of year1,129 1,303 
CASH AND CASH EQUIVALENTS AT END OF PERIOD$2,967 $1,560 
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.

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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 JUNE 28, 2020$556 $1,797 $14,811 $(7,729)$(1)$(2,242)$7,192 $938 $8,130 
Net income501 501 3 504 
Other comprehensive income, net of tax (Note 13)135 135 10 145 
Employee benefits trust activity5 1 6 — 6 
Cash dividends on common stock, $1.311 per share(194)(194)— (194)
Distributions to noncontrolling interests— (13)(13)
Stock-based awards13 33 46 — 46 
Other shareholder transactions14 14 3 17 
BALANCE AT SEPTEMBER 27, 2020$556 $1,829 $15,118 $(7,696)$0 $(2,107)$7,700 $941 $8,641 
BALANCE AT JUNE 30, 2019$556 $1,751 $13,897 $(6,082)$(4)$(1,840)$8,278 $918 $9,196 
Net income622 622 (6)616 
Other comprehensive loss, net of tax (Note 13)(200)(200)(5)(205)
Employee benefits trust activity6 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 awards1 4 5 — 5 
Other shareholder transactions8 8 56 64 
BALANCE AT SEPTEMBER 29, 2019$556 $1,766 $14,315 $(6,784)$(3)$(2,040)$7,810 $943 $8,753 
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.









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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
Nine 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 17)(4)(4)— (4)
Net income1,288 1,288 13 1,301 
Other comprehensive loss, net of tax (Note 13)(79)(79)(12)(91)
Issuance of common stock10 10 — 10 
Employee benefits trust activity27 2 29 — 29 
Repurchases of common stock(550)(550)— (550)
Cash dividends on common stock, $3.933 per share(582)(582)— (582)
Distributions to noncontrolling interests— (26)(26)
Stock-based awards(1)79 78 — 78 
Other shareholder transactions3 3 8 11 
BALANCE AT SEPTEMBER 27, 2020$556 $1,829 $15,118 $(7,696)$0 $(2,107)$7,700 $941 $8,641 
BALANCE AT DECEMBER 31, 2018$556 $1,715 $12,917 $(6,028)$(5)$(1,807)$7,348 $911 $8,259 
Net income1,960 1,960 10 1,970 
Other comprehensive loss, net of tax (Note 13)(233)(233)(2)(235)
Issuance of common stock2 2 — 2 
Employee benefits trust activity26 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 transactions25 25 57 82 
BALANCE AT SEPTEMBER 29, 2019$556 $1,766 $14,315 $(6,784)$(3)$(2,040)$7,810 $943 $8,753 

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 beenwere 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 beenwere 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 nine 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 beenwere reclassified to conform to the presentationcurrent year presentation.
COVID-19
The outbreak of the current year.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, which continued to unfavorably impact market conditions through the end of the third quarter 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, distribution and technical center facilities around the world in March 2020. Although most of our manufacturing, distribution and technical center facilities re-opened early in the second quarter of 2020, many operated at reduced capacities and most of our global office buildings remained closed through the third 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 third 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 third quarters of 20192020 and 20182019 ended on September 2927 and September 30,29, 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 endedNine months ended
 September 27,
2020		September 29,
2019		September 27,
2020		September 29,
2019
Options excluded2,405 874,604 858,651 631,042 
 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, 2019,27, 2020, was $809$900 million. We expect to recognize the related revenue of $180$172 million over the next 12 months and $629$728 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 millionsSeptember 27,
2020		December 31,
2019
Unbilled revenue$79 $68 
Deferred revenue, primarily extended warranty1,377 1,354 
We recognized revenue of $79$84 million and $282$290 million for the three and nine months ended September 29, 2019,27, 2020, compared with $71$79 million and $277$282 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 nine months ended September 27, 2020 or September 29, 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 endedNine months ended
In millionsSeptember 27,
2020		September 29,
2019		September 27,
2020		September 29,
2019
United States$2,805 $3,414 $7,522 $10,461 
China705 481 2,037 1,698 
India166 185 406 643 
Other international1,442 1,688 4,016 5,191 
Total net sales$5,118 $5,768 $13,981 $17,993 
  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 endedNine months ended
In millionsSeptember 27,
2020		September 29,
2019		September 27,
2020		September 29,
2019
Heavy-duty truck$486 $635 $1,226 $2,112 
Medium-duty truck and bus389 525 1,177 1,765 
Light-duty automotive502 451 975 1,216 
Total on-highway1,377 1,611 3,378 5,093 
Off-highway240 211 755 786 
Total sales$1,617 $1,822 $4,133 $5,879 
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 endedNine months ended
In millionsSeptember 27,
2020		September 29,
2019		September 27,
2020		September 29,
2019
North America$1,126 $1,373 $3,409 $4,139 
Asia Pacific195 224 577 667 
Europe153 135 424 380 
China74 82 242 264 
Africa and Middle East47 60 136 170 
India42 46 101 142 
Russia41 33 126 113 
Latin America37 48 108 134 
Total sales$1,715 $2,001 $5,123 $6,009 
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 endedNine months ended
In millionsSeptember 27,
2020		September 29,
2019		September 27,
2020		September 29,
2019
Parts$719 $796 $2,155 $2,464 
Power generation415 466 1,166 1,292 
Service303 376 926 1,109 
Engines278 363 876 1,144 
Total sales$1,715 $2,001 $5,123 $6,009 
Components segment external sales by business were as follows:
Three months endedNine months ended
In millionsSeptember 27,
2020		September 29,
2019		September 27,
2020		September 29,
2019
Emission solutions$612 $660 $1,576 $2,144 
Filtration260 249 715 771 
Turbo technologies163 151 463 522 
Automated transmissions90 146 215 451 
Electronics and fuel systems76 47 223 167 
Total sales$1,201 $1,253 $3,192 $4,055 
  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 endedNine months ended
In millionsSeptember 27,
2020		September 29,
2019		September 27,
2020		September 29,
2019
Power generation$334 $372 $827 $1,060 
Industrial167 227 477 704 
Generator technologies66 84 191 266 
Total sales$567 $683 $1,495 $2,030 
  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 endedNine months ended
In millionsSeptember 27,
2020		September 29,
2019		September 27,
2020		September 29,
2019
Defined benefit pension contributions$11 $33 $77 $110 
OPEB payments, net9 5 25 20 
Defined contribution pension plans18 23 70 80 
During the remainder of 2019,2020, we anticipate making $7 million in additional defined benefit pension contributions of $13in the U.K. and $7 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 millionsSeptember 27,
2020		September 29,
2019		September 27,
2020		September 29,
2019		September 27,
2020		September 29,
2019
Service cost $29
 $30
 $6
 $7
 $—
 $—
Service cost$33 $29 $8 $6 $0 $0 
Interest cost 27
 25
 10
 10
 3
 3
Interest cost24 27 8 10 2 3 
Expected return on plan assets (47) (49) (16) (17) —
 —
Expected return on plan assets(49)(47)(19)(16)0 0 
Amortization of prior service costAmortization of prior service cost0 0 1 0 0 0 
Recognized net actuarial loss 4
 8
 3
 7
 —
 —
Recognized net actuarial loss10 4 9 3 0 0 
Net periodic benefit cost $13
 $14
 $3
 $7
 $3
 $3
Net periodic benefit cost$18 $13 $7 $3 $2 $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
 Nine months ended
In millionsSeptember 27,
2020		September 29,
2019		September 27,
2020		September 29,
2019		September 27,
2020		September 29,
2019
Service cost$100 $87 $22 $19 $0 $0 
Interest cost71 81 26 32 5 8 
Expected return on plan assets(146)(142)(56)(52)0 0 
Amortization of prior service cost1 1 2 1 0 0 
Recognized net actuarial loss30 12 26 9 0 0 
Net periodic benefit cost$56 $39 $20 $9 $5 $8 

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 endedNine months ended
In millionsSeptember 27,
2020		September 29,
2019		September 27,
2020		September 29,
2019
Manufacturing entities
Beijing Foton Cummins Engine Co., Ltd.$30 $15 $81 $56 
Dongfeng Cummins Engine Company, Ltd.20 10 54 40 
Chongqing Cummins Engine Company, Ltd.7 10 27 32 
All other manufacturers22 
(1)
21 100 
(1)(2)
76 
Distribution entities
Komatsu Cummins Chile, Ltda.6 6 23 19 
All other distributors1 1 1 0 
Cummins share of net income86 63 286 223 
Royalty and interest income12 5 56 33 
Equity, royalty and interest income from investees$98 $68 $342 $256 
(1) Includes impairment charges of $10 million and $13 million for the three and nine months ended September 27, 2020, respectively, for a joint venture in the Power Systems segment.
(2) Includes $37 million in adjustments related to tax changes within India's 2020-2021 Union Budget of India (India Tax Law Change) passed in March 2020. See NOTE 6, "INCOME TAXES" for additional information on India Tax Law Change.
  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 raterates for the year is expectedthree and nine months ended September 27, 2020, were 26.5 percent and 23.6 percent, respectively.
The three months ended September 27, 2020, contained unfavorable discrete items of $31 million, or $0.21 per share, consisting of $17 million of changes in tax reserves, $8 million of provision to approximate 21.5 percent, excluding anyreturn adjustments relating to tax returns filed for 2019 and $6 million of net other discrete items.
The nine months ended September 27, 2020, contained $27 million, or $0.18 per share, of unfavorable net discrete tax items, that may arise.primarily due to $34 million of unfavorable changes in tax reserves and $8 million of provision to return adjustments, partially offset by $15 million of favorable tax changes within India's 2020-2021 Union Budget of India (India Tax Law Change) passed in March 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.
The India Tax Law Change resulted in the following adjustments to the Condensed Consolidated Statements of Net Income for the nine months ended September 27, 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.
Our effective tax rates for the three and nine months ended September 29, 2019, were 18.4 percent and 20.3 percent, respectively.
The three months ended September 29, 2019, contained favorable discrete items of $23 million, or $0.14 per share, of favorable net discrete tax items, primarily due to withholding taxes and provision to return adjustments. The nine months ended September 29, 2019,27, 2020, contained $30 million, or $0.19 per share, 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.
13
The three months ended September 30, 2018, contained $37 million, or $0.23 per share, 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, partially offset by $11 million of other favorable discrete items. See Note 4. "INCOME TAXES" of the Notes to the Consolidated Financial Statements of our 2018 Form 10-K for additional information.

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.

 September 27,
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$167 $5 $172 $180 $3 $183 
Certificates of deposit151 0 151 133 0 133 
Equity mutual funds18 3 21 19 4 23 
Bank debentures0 0 0 1 0 1 
Debt securities1 0 1 1 0 1 
Total marketable securities$337 $8 $345 $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 months of 2019ended September 27, 2020 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:
Nine months ended
In millionsSeptember 27,
2020		September 29,
2019
Proceeds from sales of marketable securities$283 $179 
Proceeds from maturities of marketable securities125 117 
Investments in marketable securities - liquidations$408 $296 
  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 millionsSeptember 27,
2020		December 31,
2019
Finished products$2,182 $2,214 
Work-in-process and raw materials1,416 1,395 
Inventories at FIFO cost3,598 3,609 
Excess of FIFO over LIFO(128)(123)
Total inventories$3,470 $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 millionsSeptember 27,
2020		December 31,
2019
Loans payable (1)
$129 $100 
Commercial paper316 
(2)
660 
(3)
(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 0.03 percent at September 27, 2020. This includes $116 million of borrowings under the EUR program that were at a negative weighted-average interest rate of 0.27 percent and $200 million of borrowings under the U.S. program at a weighted-average rate of 0.20 percent.
(3) The weighted-average interest rate, inclusive of all brokerage fees, was 1.82 percent at December 31, 2019. All borrowings were at positive interest rates.
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. At September 27, 2020, there were 0 outstanding borrowings under the CPFF program.
Revolving Credit Facilities
On August 21, 2019,19, 2020, 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 throughprior to August 18, 2020.2021. This credit agreement amends and restates the prior $1.5 billion 364-day credit facility that matured on August 21, 2019.19, 2020.
On August 24, 2020, we terminated our 364-day credit facility that had been entered into on May 1, 2020, concurrent with the $2 billion bond issuance on August 24, 2020, described below.
We have access to committed credit facilities that total $3.5 billion, including the new $1.5 billion 364-day facility that expires August 19, 202018, 2021 and aour $2.0 billion five-year facility that expires on August 22, 2023. We intend to 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, 2019,27, 2020, the $902$316 million of outstanding commercial paper effectively reduced the $3.5 billion of revolving credit capacity to $2.6 billion and$3.2 billion.
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At September 27, 2020, we also had an additional $200$191 million available for borrowings under our international and other domestic credit facilities.

Long-term Debt
On August 24, 2020, we issued $2 billion aggregate principal amount of senior unsecured notes consisting of $500 million aggregate principal amount of 0.75% senior unsecured notes due in 2025, $850 million aggregate principal amount of 1.50% senior unsecured notes due in 2030 and $650 million aggregate principal amount of 2.60% senior unsecured notes due in 2050. We received net proceeds of $1.98 billion. The senior unsecured notes pay interest semi-annually on March 1 and September 1, commencing on March 1, 2021. The indenture governing the senior unsecured notes contains covenants that, among other matters, limit (i) our ability to consolidate or merge into, or sell, assign, convey, lease, transfer or otherwise dispose of all or substantially all of our and our subsidiaries' assets to another person, (ii) our and certain of our subsidiaries' ability to create or assume liens and (iii) our and certain of our subsidiaries' ability to engage in sale and leaseback transactions.
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 RateSeptember 27,
2020		December 31,
2019
Long-term debt  
Senior notes, due 2023(1)
3.65%$500 $500 
Senior notes, due 20250.75%500 — 
Debentures, due 20276.75%58 58 
Debentures, due 20287.125%250 250 
Senior notes, due 20301.50%850 — 
Senior notes, due 20434.875%500 500 
Senior notes, due 20502.60%650 — 
Debentures, due 2098(2)
5.65%165 165 
Other debt130 59 
Unamortized discount and deferred issuance costs(73)(50)
Fair value adjustments due to hedge on indebtedness50 35 
Finance leases87 90 
Total long-term debt3,667 1,607 
Less: Current maturities of long-term debt58 31 
Long-term debt$3,609 $1,576 
(1) In June and July 2020, we settled our February 2014 interest rate swap. See "Interest Rate Risk" below for additional information.
(2) The effective interest rate 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$38 $51 $29 $525 $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$17 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$52 million in "Other comprehensive income" for the three and nine months ended September 29, 2019 was $28 million.27, 2020, respectively.
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In June and July of 2020, we settled 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 $24 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 millionsSeptember 27,
2020		December 31,
2019
Fair value of total debt (1)
$4,532 $2,706 
Carrying value of total debt4,112 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


Nine months ended
In millionsSeptember 27,
2020		September 29,
2019
Balance, beginning of year$2,389 $2,208 
Provision for base warranties issued277 360 
Deferred revenue on extended warranty contracts sold172 254 
Provision for product campaigns issued27 163 
Payments made during period(424)(431)
Amortization of deferred revenue on extended warranty contracts(169)(174)
Changes in estimates for pre-existing product warranties(41)(16)
Foreign currency translation and other(6)(9)
Balance, end of period$2,225 $2,355 
We recognized supplier recoveries of $3$5 million and $64$16 million for the three and nine months ended September 29, 2019,27, 2020, compared with $3 million and $16$64 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 millionsSeptember 27,
2020		December 31,
2019		Balance Sheet Location
Deferred revenue related to extended coverage programs  
Current portion$249 $227 Current portion of deferred revenue
Long-term portion695 714 Deferred revenue
Total$944 $941  
Product warranty  
Current portion$646 $803 Current portion of accrued product warranty
Long-term portion635 645 Accrued product warranty
Total$1,281 $1,448  
Total warranty accrual$2,225 $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, 2019,27, 2020, the remaining accrual balance was $279$157 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 millionsSeptember 27, 2020December 31, 2019
Marketing accruals$220 $176 
Other taxes payable203 228 
Current portion of operating lease liabilities133 131 
Income taxes payable102 52 
Other332 452 
Other accrued expenses$990 $1,039 
Other liabilities included the following:
In millionsSeptember 27, 2020December 31, 2019
Operating lease liabilities$322 $370 
Deferred income taxes301 306 
One-time transition tax293 293 
Accrued compensation185 206 
Mark-to-market valuation on interest rate locks81 12 
Other long-term liabilities384 192 
Other liabilities$1,566 $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.
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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, 2019,27, 2020, the maximum potential loss related to these guarantees was $54$40 million.
We have arrangements with certain suppliers that require us to purchase minimum volumes or be subject to monetary penalties. At September 29, 2019,27, 2020, if we were to stop purchasing from each of these suppliers, the aggregate amount of the penalty would be approximately $54$37 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, 2019,27, 2020, the total commitments under these contracts were $33$30 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$94 million at September 29, 2019.27, 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
derivatives		Total
attributable to
Cummins Inc.		Noncontrolling
interests		Total
Balance at June 28, 2020$(716)$(1,436)$(90)$(2,242)  
Other comprehensive income before reclassifications      
Before-tax amount0 101 23 124 $10 $134 
Tax benefit (expense)0 0 (5)(5)0 (5)
After-tax amount0 101 18 119 10 129 
Amounts reclassified from accumulated other comprehensive income (loss)(1)
16 0 0 16 0 16 
Net current period other comprehensive income (loss)16 101 18 135 $10 $145 
Balance at September 27, 2020$(700)$(1,335)$(72)$(2,107)  
Balance at June 30, 2019$(675)$(1,156)$(9)$(1,840)  
Other comprehensive income (loss) before reclassifications      
Before-tax amount0 (177)(39)(216)$(5)$(221)
Tax benefit (expense)0 0 8 8 0 8 
After-tax amount0 (177)(31)(208)(5)(213)
Amounts reclassified from accumulated other comprehensive income (loss)(1)
6 0 2 8 0 8 
Net current period other comprehensive income (loss)6 (177)(29)(200)$(5)$(205)
Balance at September 29, 2019$(669)$(1,333)$(38)$(2,040)  
(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 nine months ended:
In millionsChange in
pensions and
other
postretirement
defined benefit
plans		Foreign
currency
translation
adjustment		Unrealized 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 (loss) before reclassifications      
Before-tax amount(19)(54)(75)(148)$(12)$(160)
Tax benefit (expense)5 4 16 25 0 25 
After-tax amount(14)(50)(59)(123)(12)(135)
Amounts reclassified from accumulated other comprehensive loss(1)
48 0 (4)44 0 44 
Net current period other comprehensive income (loss)34 (50)(63)
(2)
(79)$(12)$(91)
Balance at September 27, 2020$(700)$(1,335)$(72)$(2,107)  
Balance at December 31, 2018$(671)$(1,138)$2 $(1,807)  
Other comprehensive income (loss) before reclassifications      
Before-tax amount(22)(194)(47)(263)$(2)$(265)
Tax benefit (expense)5 (1)11 15 0 15 
After-tax amount(17)(195)(36)(248)(2)(250)
Amounts reclassified from accumulated other comprehensive loss(1)
19 0 (4)15 — 15 
Net current period other comprehensive income (loss)2 (195)(40)(233)$(2)$(235)
Balance at September 29, 2019$(669)$(1,333)$(38)$(2,040)  
(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)Table of Contents Amounts
NOTE 14. RESTRUCTURING ACTIONS
In November 2019, we announced our intentions to reduce our global workforce in response to the continued deterioration in our global markets in the second 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 form of voluntary and involuntary employee separation programs. To the extent these programs involve voluntary separations, a liability is generally recorded at the time offers to employees are netaccepted. To the extent these programs provide separation benefits in accordance with pre-existing agreements or policies, a liability is recorded once the amount is probable and reasonably estimable. We incurred a charge of tax. Reclassifications out$119 million ($90 million after-tax) in the fourth quarter of accumulated other comprehensive income (loss)2019 for these actions which impacted approximately 2,300 employees. The voluntary actions were completed by December 31, 2019 and the related tax effects are immaterial for separate disclosure.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(100)
Change in estimate(6)
Balance at September 27, 2020$10 

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Table of Contents
NOTE 15. ACQUISITIONSACQUISITION
AcquisitionsThe Hydrogenics Corporation acquisition for the nine months ended September 29, 2019 and September 30, 2018 werewas as follows:
Entity Acquired (Dollars in millions)Date of AcquisitionAdditional Percent Interest AcquiredPayments to Former OwnersTotal Purchase Consideration
Type of Acquisition(1)
Goodwill Acquired
Intangibles Recognized(2)
Net Sales Previous Fiscal Year Ended
2019
Hydrogenics Corporation9/09/1981%$235 $235 COMB$161 $161 $34 
(1) The newly consolidated entity was accounted for as business combinations (COMB) and was included in the New Power segment on the date of acquisition.
(2) Intangible assets acquired in the business combination were mostly technology and customer related, the majority of which will be amortized over a period of up to 20 years from the date of the acquisition.
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

23
(1) Newly consolidated entities were accounted for as business combinations (COMB) and were included in the Electrified Power Segment on the dateTable of acquisition.Contents
(2) Intangible assets acquired in business combinations were mostly technology and customer related, the majority of which will be amortized over a period of up to 20 years from 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 periods in accordance with the purchase contract.

Hydrogenics Corporation
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 maintainmaintains a non-controlling19 percent noncontrolling interest in Hydrogenics.Hydrogenics Corporation of $56 million, based on the publicly traded share price of Hydrogenics at the acquisition date, which was representative of its fair value. We accounted for the transaction as a business combination and included it in the ElectrifiedNew Power segment in the third quarter of 2019. We have not yet assigned this business to aour New Power reporting unit, which included both our electrified power and fuel cell businesses, for goodwill impairment purposes. The preliminary purchase price allocation was as follows:
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,As of December 31, 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" towill be amortized over periods ranging from 3 to 20 years. WeThe final purchase price allocation was as follows:
In millions
Inventory$21 
Other current assets25 
Intangible assets
Technology assets96 
Customer relationships29 
In-process research and development35 
Other intangible assets1 
Goodwill161 
Other assets18 
Current liabilities(53)
Other liabilities(42)
Total business valuation291 
Less: Noncontrolling interest56 
Total purchase consideration$235 
Technology assets represent the value of both the existing fuel cells and generation equipment. These assets were valued using the relief-from-royalty method, which is a combination of the income approach and market approach that values a subject asset based on an estimate of the relief from the royalty expense that would be incurred if the subject asset were licensed from a third-party. Key assumptions are also validating our calculationsexpected revenue, the royalty rate, the estimated remaining useful life and the discount rate. This value is considered a level 3 measurement under the GAAP fair value hierarchy. 
Customer relationship assets represent the value of the long-term strategic relationship the business has with its significant customers. The assets were valued using an income approach, specifically the multi-period excess earnings method, which identifies an estimated stream of revenues and expenses for a particular group of assets from which deductions of portions of the projected economic benefits, attributable to assets other than the subject asset (contributory assets), are deducted in order to isolate the prospective earnings of the subject asset. Key assumptions are expected revenue, related expenses, the estimated remaining useful life and the discount rate. These assets are each being amortized over 15 to deferred tax20 years. Annual amortization of the intangible assets for the next five years was expected to approximate $8 million.
In-process research and liabilities.development assets represent acquired research and development assets that have been initiated, achieved material progress, but have not yet resulted in a technologically feasible or commercially viable project. These assets were valued using the relief-from-royalty method, as described above. These assets will not be amortized until they have been completed, but will be tested annually for impairment until that time.
"Goodwill"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. 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.
24
Table of Contents
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 or losses before interest expense, income taxes, noncontrolling interests, depreciation and amortization)amortization and noncontrolling interests) 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)or losses of corporate owned life insurance to individual segments. EBITDA may not be consistent with measures used by other companies.

25
Table of Contents
Summarized financial information regarding our reportable operating segments for the three months ended is shown in the table below:
In millionsIn millionsEngineDistributionComponentsPower SystemsNew PowerTotal Segments
Intersegment Eliminations (1)
Total
Three months ended September 27, 2020Three months ended September 27, 2020    
External salesExternal sales$1,617 $1,715 $1,201 $567 $18 $5,118 $— $5,118 
Intersegment salesIntersegment sales495 6 340 414 0 1,255 (1,255)— 
Total salesTotal sales2,112 1,721 1,541 981 18 6,373 (1,255)5,118 
Research, development and engineering expensesResearch, development and engineering expenses72 9 64 53 26 224 — 224 
Equity, royalty and interest income (loss) from investeesEquity, royalty and interest income (loss) from investees74 13 13 0 (2)98 — 98 
Interest incomeInterest income1 1 1 1 0 4 — 4 
EBITDAEBITDA382 182 261 101 (40)886 (10)876 
Depreciation and amortization (2)
Depreciation and amortization (2)
51 30 47 32 5 165 — 165 
In millions Engine Distribution Components Power Systems Electrified Power Total Segments 
Intersegment Eliminations (1)
 Total
Three months ended September 29, 2019  
    
  
      
  
Three months ended September 29, 2019      
External sales $1,822
 $2,001
 $1,253
 $683
 $9
 $5,768
 $—
 $5,768
External sales$1,822 $2,001 $1,253 $683 $9 $5,768 $— $5,768 
Intersegment sales 594
 3
 397
 443
 —
 1,437
 (1,437) —
Intersegment sales594 3 397 443 0 1,437 (1,437)— 
Total sales 2,416
 2,004
 1,650
 1,126
 9
 7,205
 (1,437) 5,768
Total sales2,416 2,004 1,650 1,126 9 7,205 (1,437)5,768 
Research, development and engineering expenses 79
 7
 73
 58
 25
 242
 —
 242
Research, development and engineering expenses79 7 73 58 25 242 — 242 
Equity, royalty and interest income from investees 34
 12
 9
 13
 —
 68
 —
 68
Equity, royalty and interest income from investees34 12 9 13 0 68 — 68 
Interest income 5
 4
 2
 3
 —
 14
 —
 14
Interest income5 4 2 3 0 14 — 14 
Segment EBITDA 341
 186
 286
 158
 (36) 935
 23
 958
EBITDAEBITDA341 186 286 158 (36)935 23 958 
Depreciation and amortization (2)
 50
 29
 67
 29
 2
 177
 —
 177
Depreciation and amortization (2)
50 29 67 29 2 177 — 177 
                
Three months ended September 30, 2018  
  
  
  
      
  
External sales $2,082
 $1,927
 $1,297
 $636
 $1
 $5,943
 $—
 $5,943
Intersegment sales 644
 4
 457
 471
 1
 1,577
 (1,577) —
Total sales 2,726
 1,931
 1,754
 1,107
 2
 7,520
 (1,577) 5,943
Research, development and engineering expenses 74
 5
 71
 57
 22
 229
 —
 229
Equity, royalty and interest income from investees 55
 9
 12
 14
 —
 90
 —
 90
Interest income 3
 4
 1
 1
 —
 9
 —
 9
Segment EBITDA 405
 155
 288
 163
 (30) 981
 2
 983
Depreciation and amortization (2)
 46
 27
 44
 29
 2
 148
 —
 148
(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 27, 2020 and September 29, 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 September 27, 2020 and September 29, 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



















26
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 nine months ended is shown in the table below:
In millionsEngineDistributionComponentsPower SystemsNew PowerTotal Segments
Intersegment Eliminations (1)
Total
Nine months ended September 27, 2020      
External sales$4,133 $5,123 $3,192 $1,495 $38 $13,981 $— $13,981 
Intersegment sales1,560 17 1,001 1,147 0 3,725 (3,725)— 
Total sales5,693 5,140 4,193 2,642 38 17,706 (3,725)13,981 
Research, development and engineering expenses217 20 187 148 79 651 — 651 
Equity, royalty and interest income (loss) from investees236 45 46 18 (3)342 — 342 
Interest income6 3 3 3 0 15 — 15 
EBITDA897 500 681 269 (121)2,226 45 2,271 
Depreciation and amortization(2)
155 91 142 96 13 497 — 497 
Nine months ended September 29, 2019      
External sales$5,879 $6,009 $4,055 $2,030 $20 $17,993 $— $17,993 
Intersegment sales1,893 24 1,302 1,376 0 4,595 (4,595)— 
Total sales7,772 6,033 5,357 3,406 20 22,588 (4,595)17,993 
Research, development and engineering expenses245 21 223 171 70 730 — 730 
Equity, royalty and interest income from investees152 35 30 39 0 256 — 256 
Interest income13 12 6 7 0 38 — 38 
EBITDA1,195 529 908 469 (98)3,003 46 3,049 
Depreciation and amortization(2)
151 86 160 88 6 491 — 491 
(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 27, 2020 and September 29, 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 $2 million and $2 million for the nine months ended September 27, 2020 and September 29, 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
27

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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 endedNine months ended
In millionsSeptember 27,
2020		September 29,
2019		September 27,
2020		September 29,
2019
Total EBITDA$876 $958 $2,271 $3,049 
Less:
Depreciation and amortization165 177 497 491 
Interest expense25 26 71 87 
Income before income taxes$686 $755 $1,703 $2,471 
  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. 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 FASBFinancial Accounting Standards Board (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 related to accounting for credit losses on financial instruments. This amendmentstandard 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 nine months ended September 27, 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 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 September 27, 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.

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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 the 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;
•competitor activity;
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•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.
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, which continued to unfavorably
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impact market conditions through the end of the third quarter 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, distribution and technical center facilities around the world in March 2020. Although most of our manufacturing, distribution and technical center facilities re-opened early in the second quarter of 2020, many operated at reduced capacities and most of our global office buildings remained closed through the third 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 (the Board) 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 nine months 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 and continued to affect third quarter results, and we expect them to continue to impact our results of operations, financial condition and cash flows throughout the remainder of 2020.
Worldwide revenues decreased 311 percent in the three months ended September 29, 2019,27, 2020, compared to the same period in 2018,2019, due to lower demand in all major operating segments and most geographic regions of the world as we experienced the anticipated 2020 down cycle in most of our markets and the continuing economic impacts of COVID-19. Net sales in the U.S. and Canada declined 18 percent, primarily due to COVID-19 impacts resulting in decreased demand in North American on-highway markets, which also negatively impacted our emission solutions and automated transmissions businesses and reduced sales in our distribution product lines. International demand (excludes the U.S. and Canada) was flat as lower sales in Enginemost geographic regions was offset by increased demand in China and Components segments werea $44 million value added tax (VAT) recovery approved by the Brazilian tax authorities. Excluding the VAT recovery, the decrease in international sales was principally due to lower off-highway demand (mainly international mining markets, construction markets in Western Europe and Asia Pacific 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 1 percent of international sales (primarily the Brazilian real), partially offset by higher demand in on-highway markets (mainly light commercial vehicle (LCV) and heavy-duty truck in China), which also positively impacted our emission solutions, electronics and fuel systems and turbo technologies businesses.
Worldwide revenues decreased 22 percent in the nine months ended September 27, 2020, compared to the same period in 2019, as we experienced lower demand in all major operating segments and all geographic regions, except China, due to the economic impacts of COVID-19 and the anticipated 2020 down cycle in most of our related markets. Net sales in the DistributionU.S. and Power Systems segments.Canada declined 28 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, decreased demand for power generation equipment and lower demand in off-highway markets (especially construction and oil and gas). International demand (excludes the U.S. and Canada) declined by 814 percent, with lower sales in most regions.all geographic regions except China and a $44 million VAT recovery. 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 India and Brazil,Asia Pacific, oil and gas markets in China and international marine markets, partially offset by higher construction market demand in China), decreased demand in on-highway markets (mainly medium-duty truck markets), which also negatively impacted our turbo technologies and emission solutions businesses),businesses, lower off-highwaydemand for power generation equipment, reduced demand in construction markets in China and Indiaall distribution product lines 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 increased demand in the pick-up truck market, increased emission solutions sales and sales of power generation equipment to data center customers, mostly offset by 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 negatively impacted our emission solutions and turbo technologies businesses), 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 in

China,Euro), partially offset by increasedhigher demand in China for both power generation equipment to data center customersthe off-highway construction and engines for oil and gas markets.the heavy-duty constructions markets in China.
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The following tables contain sales and EBITDA (defined as earnings or losses before interest expense, income taxes, noncontrolling interests, depreciation and amortization)amortization and noncontrolling interests) by operating segment for the three and nine months ended September 29, 201927, 2020 and September 30, 2018.29, 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 SegmentsSeptember 27, 2020September 29, 2019Percent change
 Percent  Percent 2020 vs. 2019
In millionsSalesof TotalEBITDASalesof TotalEBITDASalesEBITDA
Engine$2,112 41 %$382 $2,416 42 %$341 (13)%12 %
Distribution1,721 34 %182 2,004 35 %186 (14)%(2)%
Components1,541 30 %261 1,650 29 %286 (7)%(9)%
Power Systems981 19 %101 1,126 19 %158 (13)%(36)%
New Power18 — %(40)9 — %(36)100 %(11)%
Intersegment eliminations(1,255)(24)%(10)(1,437)(25)%23 (13)%NM
Total$5,118 100 %$876 $5,768 100 %$958 (11)%(9)%
"NM" - not meaningful information
Net income attributable to Cummins was $622$501 million, or $3.97$3.36 per diluted share, on sales of $5.8$5.1 billion for the three months ended September 29, 2019,27, 2020, versus the comparable prior year period net income attributable to Cummins of $692$622 million, or $4.28$3.97 per diluted share, on sales of $5.9$5.8 billion. The decreases in net income and earnings per diluted share were driven by lower net sales, decreased gross margin, higher variable compensation expenses, a higher effective tax rate, the absence of a $35 million gain from unwinding derivative instruments recognized in the third quarter of 2019 and unfavorable foreign currency impacts (primarily in the Brazilian real), partially offset by prior restructuring actions and temporary salary reductions resulting in lower compensation expenses and increased equity, royalty and interest income from investees primarily in China (due to stronger demand for trucks and lower favorable discrete tax items, partially offset by lower variable compensation expenses and favorable foreign currency fluctuations (primarily the British pound).construction equipment.) The decreasesdecrease in gross margin and gross margin percentage werewas primarily due to lower volumes and tariffunfavorable foreign currency impacts (primarily in the Brazilian real), partially offset by favorable pricing,prior restructuring actions and temporary salary reductions resulting in decreased compensation expenses, a $44 million VAT recovery and lower material costs and decreased warranty expenses. Diluted earnings per common share for the three months ended September 29, 2019, benefited $0.04 from fewer weighted-average shares outstandingcosts. The increase in gross margin as a percentage of sales was primarily due to the stock repurchase program.prior restructuring actions and temporary salary reductions resulting in decreased compensation expenses, a VAT recovery and lower material costs.
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  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
 Nine months ended
Operating SegmentsSeptember 27, 2020September 29, 2019Percent change
 Percent  Percent 2020 vs. 2019
In millionsSalesof TotalEBITDASalesof TotalEBITDASalesEBITDA
Engine$5,693 41 %$897 $7,772 43 %$1,195 (27)%(25)%
Distribution5,140 37 %500 6,033 34 %529 (15)%(5)%
Components4,193 30 %681 5,357 30 %908 (22)%(25)%
Power Systems2,642 19 %269 3,406 19 %469 (22)%(43)%
New Power38 — %(121)20 — %(98)90 %(23)%
Intersegment eliminations(3,725)(27)%45 (4,595)(26)%46 (19)%(2)%
Total$13,981 100 %$2,271 $17,993 100 %$3,049 (22)%(26)%
Net income attributable to Cummins was $1,960$1,288 million, or $12.45$8.65 per diluted share, on sales of $18.0$14.0 billion for the nine months ended September 29, 2019,27, 2020, versus the comparable prior year period net income attributable to Cummins of $1,562$1,960 million, or $9.53$12.45 per diluted share, on sales of $17.6$18.0 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 lowerhigher effective tax rate, (due to $30 million of favorable discrete tax items recognized in the first nine months of 2019 and the absence of a net $37$35 million of unfavorable discrete tax itemsgain from unwinding derivative instruments recognized in the comparable period in 2018)third quarter of 2019 and unfavorable foreign currency fluctuations (primarily the Brazilian real, Chinese renminbi and emerging market currencies), partially offset by prior restructuring actions, temporary salary reductions and lower variable compensation resulting in lower compensation expenses, partially offset by higher research, development and engineering expenses and lowerincreased equity, royalty and interest

income from investees.investees in China (due to stronger demand for trucks and construction equipment) and favorable adjustments related to India Tax Law Changes in March 2020. The increasesdecreases in gross margin and gross margin as a percentage of sales were mainlyprimarily due to lower warranty costs (due to absence of the $368 million engine system campaign accrual recordedvolumes and unfavorable mix, partially offset by prior restructuring actions, temporary salary reductions and lower variable compensation resulting in the first half of 2018), increased pricing anddecreased compensation expenses, lower material costs, partially offset by tariff impacts, unfavorable foreign currency impacts (primarily the Australian dollar, Euro, Brazilian real, Canadian dollarreduced warranty costs 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.a $44 million VAT recovery. Diluted earnings per common share for the nine months ended September 29, 2019,27, 2020, benefited $0.10$0.16 from fewer weighted-average shares outstanding, primarily due to the stock repurchase programs.programs in the first quarter of 2020.
We generated $2,343$1,223 million and $1,580 million of cash from operations for the three and nine months ended September 29, 2019,27, 2020, compared to $1,388$1,123 million and $2,343 million for the comparable periodperiods in 2018.2019. Refer to the section titled "Cash Flows" in the "LIQUIDITY AND CAPITAL RESOURCES" section for a discussion of items impacting cash flows.
Our debt to capital ratio (total capital defined as debt plus equity) at September 27, 2020, was 32.2 percent, compared to 21.9 percent at December 31, 2019. The increase was primarily due to higher debt balances of $1,745 million since December 31, 2019, as the result of our August 2020 debt issuance. At September 27, 2020, we had $3.3 billion in cash and marketable securities on hand and access to our $3.5 billion credit facilities, if necessary, to meet currently anticipated working capital, investment and funding needs.
In the first half of 2020, we entered into additional interest rate lock agreements to reduce the variability of the cash flows of the interest payments on a total of $500 million of fixed rate debt forecast to be issued in 2023 to replace our senior notes at maturity.
In the first nine months of 2020, we purchased $550 million, or 3.5 million shares of common stock, which was all purchased in the first quarter of 2020.
On April 14, 2020, we were approved for the Federal Reserve Bank of New York's Commercial Paper Funding Facility to assure access to commercial paper funding during volatile market conditions. See NOTE 9, "DEBT" to the Condensed Consolidated Financial Statements for additional information.
In June and July of 2020, we settled 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 $24 million gain realized upon settlement over the remaining three year term of related debt.
On August 21, 2019,19, 2020, 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 throughprior to August 18, 2020.2021. This credit agreement amends and restates the prior $1.5 billion 364-day credit facility that matured on August 21, 2019.19, 2020.
On August 24, 2020, we issued $2 billion aggregate principal amount of senior unsecured notes consisting of $500 million aggregate principal amount of 0.75% senior unsecured notes due in 2025, $850 million aggregate principal amount of 1.50% senior unsecured notes due in 2030 and $650 million aggregate principal amount of 2.60% senior unsecured notes due in 2050. We received net proceeds of $1.98 billion.
34
Table of Contents
Our debt to capital ratio (total capital defined as debt plus equity) at September 29, 2019, was 23.3 percent, compared to 23.1 percent at December 31, 2018. The increase was primarily due to higher outstanding commercial paper. At September 29, 2019,On August 24, 2020, we terminated our 364-day credit facility that had $1.9been entered into on May 1, 2020, concurrent with the $2 billion in cash and marketable securitiesbond issuance on hand and access to our $3.5 billion credit facilities, if necessary, to meet currently anticipated investment and funding needs. August 24, 2020.
In July 2019, ourOctober 2020, the Board of Directors authorized an increase to our quarterly dividend of 153 percent from $1.14$1.311 per share to $1.311$1.35 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 nine months of 2019,2020, the investment gain on our U.S. pension trust was 14.72.7 percent while our U.K. pension trust gain was 18.97.9 percent. WeInvestment performance year-to-date in both trusts is still recovering from the negative impacts of COVID-19 on capital markets. During the remainder of 2020, we anticipate making $7 million in additional defined benefit pension contributions duringin the remainder of 2019 of $13U.K. and $7 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. We expect our 20192020 annual net periodic pension cost to approximate $64$102 million.
On September 9, 2019, we acquired an 81 percent interest in Hydrogenics Corporation for total considerationAs of $235 million. The Hydrogen Company, a wholly-owned subsidiarythe date of L’Air Liquide, S.A., will maintain a non-controlling interest in Hydrogenics. We accounted forthis filing, our credit ratings and outlooks from the transaction as a business combinationcredit rating agencies were confirmed, with the $2 billion bond issuance on August 24, 2020, and included it in the Electrified Power segment in the third quarter of 2019. See Note 15, "ACQUISITIONS," to our Condensed Consolidated Financial Statements for additional information.
remain unchanged.
On April 29, 2019, we announced that we were conducting a formal internal review
35
Table 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 review to our regulators and 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. 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. See Note 13, "COMMITMENTS AND CONTINGENCIES," to our Condensed Consolidated Financial Statements for additional information.Contents
In October 2019, we initiated a voluntary retirement program for eligible employees in the U.S. Costs for this program will be recognized in the fourth quarter of 2019.

RESULTS OF OPERATIONS
 Three months endedFavorable/Nine months endedFavorable/
September 27,
2020		September 29,
2019		(Unfavorable)September 27,
2020		September 29,
2019		(Unfavorable)
In millions, except per share amountsAmountPercentAmountPercent
NET SALES$5,118 $5,768 $(650)(11)%$13,981 $17,993 $(4,012)(22)%
Cost of sales3,769 4,274 505 12 %10,448 13,326 2,878 22 %
GROSS MARGIN1,349 1,494 (145)(10)%3,533 4,667 (1,134)(24)%
OPERATING EXPENSES AND INCOME      
Selling, general and administrative expenses533 600 67 11 %1,549 1,822 273 15 %
Research, development and engineering expenses224 242 18 7 %651 730 79 11 %
Equity, royalty and interest income from investees98 68 30 44 %342 256 86 34 %
Other operating expense, net(20)(21)1 5 %(35)(25)(10)(40)%
OPERATING INCOME670 699 (29)(4)%1,640 2,346 (706)(30)%
Interest income4 14 (10)(71)%15 38 (23)(61)%
Interest expense25 26 1 4 %71 87 16 18 %
Other income, net37 68 (31)(46)%119 174 (55)(32)%
INCOME BEFORE INCOME TAXES686 755 (69)(9)%1,703 2,471 (768)(31)%
Income tax expense182 139 (43)(31)%402 501 99 20 %
CONSOLIDATED NET INCOME504 616 (112)(18)%1,301 1,970 (669)(34)%
Less: Net income (loss) attributable to noncontrolling interests3 (6)(9)NM13 10 (3)(30)%
NET INCOME ATTRIBUTABLE TO CUMMINS INC.$501 $622 $(121)(19)%$1,288 $1,960 $(672)(34)%
Diluted Earnings Per Common Share Attributable to Cummins Inc.$3.36 $3.97 $(0.61)(15)%$8.65 $12.45 $(3.80)(31)%
"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 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)
 Three months endedFavorable/
(Unfavorable)		Nine months endedFavorable/
(Unfavorable)
 September 27,
2020		September 29,
2019		September 27,
2020		September 29,
2019
Percent of salesPercentage PointsPercentage Points
Gross margin26.4 %25.9 %0.5 25.3 %25.9 %(0.6)
Selling, general and administrative expenses10.4 %10.4 %— 11.1 %10.1 %(1.0)
Research, development and engineering expenses4.4 %4.2 %(0.2)4.7 %4.1 %(0.6)
Net Sales
Net sales for the three months ended September 29, 2019,27, 2020, decreased by $175$650 million versus the comparable period in 2018.2019. The primary drivers were as follows:
•Engine segment sales decreased 1113 percent due to lower demand in global construction markets, especially in China and North America, and lower volumes in the North American heavy-duty truck market.and medium-duty truck and bus markets, partially offset by increased light-commercial vehicle demand in China and Brazil.
•Distribution segment sales decreased 14 percent due to lower demand in all product lines.
•Power Systems segment sales decreased 13 percent primarily due to reduced industrial market demand in international mining markets and oil and gas markets in China and lower demand in power generation markets in India and North America.
•Components segment sales decreased 67 percent primarilylargely due to lower truck demand in Western Europe, India andNorth America, partially offset by higher demand in China.
•Unfavorable foreign currency fluctuations of 1 percent of total sales, primarily in the British pound, Chinese renminbi, Euro and Australian dollar.

Brazilian real.
These decreases were partially offset by:by a $44 million VAT recovery.
Distribution segment sales increased 4 percent primarily due to higher demand in North America and Western Europe, especially in the power generation product line.
36
Power Systems sales increased 2 percent primarily due to higher demand in global mining markets and power generation markets in North America, China and Eastern Europe, partially offset by lower oil and gas demand in North America.
Table of Contents
Net sales for the nine months ended September 29, 2019, increased $34827, 2020, decreased $4,012 million versus the comparable period in 2018.2019. The primary driver was the drivers were as follows:
•Engine segment sales decreased 27 percent due to lower volumes in all North American on-highway markets.
•Components segment sales decreased 22 percent largely due to lower demand in North America and Western Europe, partially offset by higher demand in China.
•Distribution segment as sales increased 4decreased 15 percent due to lower demand in all product lines.
•Power Systems segment sales decreased 22 percent primarily due to higherreduced industrial demand in most geographic regions, especiallyinternational mining markets and oil and gas market in China and lower demand in power generation markets in North America and increased demand in the power generation product line.India.
This increase was partially offset by:
•Unfavorable foreign currency fluctuations of 21 percent of total sales, primarily in the Chinese renminbi, Euro, British pound,Brazilian real, Australian dollar Brazilian real and Indian rupee.Euro.
Engine segment sales decreased 1 percent, primarily due to lower demand in China for LCV and off-highway construction markets, lower global bus sales and decreased medium-duty truck demand in Brazil,These decreases were partially offset by higher volumes in North American heavy-duty and pick-up truck markets.a $44 million VAT recovery.
Sales to international markets (excluding the U.S. and Canada), based on location of customers, for the three and nine months ended September 29, 2019,27, 2020, were 3741 percent and 3842 percent of total net sales compared with 3937 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$145 million for the three months ended September 29, 201927, 2020 and decreased 0.2increased 0.5 points as a percentage of sales, versus the comparable period in 2018.2019. The decreasesdecrease in gross margin and gross margin percentage werewas primarily due to lower volumes and tariffunfavorable foreign currency impacts (primarily in the Brazilian real), partially offset by favorable pricing,prior restructuring actions and temporary salary reductions resulting in decreased compensation expenses, a $44 million VAT recovery and lower material costscosts. The increase in gross margin as a percentage of sales was primarily due to prior restructuring actions and temporary salary reductions resulting in decreased warranty expenses.compensation expenses, a VAT recovery and lower material costs.
Gross margin increased $476decreased $1,134 million for the nine months ended September 29, 201927, 2020 and increased 2.1decreased 0.6 points as a percentage of sales versus the comparable period in 2018.2019. The increasesdecreases in gross margin and gross margin as a percentage of sales were mainlyprimarily due to lower warranty costs (due to absence of the $368 million engine system campaign accrual recordedvolumes and unfavorable mix, partially offset by prior restructuring actions, temporary salary reductions and lower variable compensation resulting in the first half of 2018), increased pricing anddecreased compensation expenses, lower material costs, partially offset by tariff impacts, unfavorable foreign currency impacts (primarily the Australian dollar, Euro, Brazilian real, Canadian dollarreduced warranty costs 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.a $44 million VAT recovery.
The provision for base warranties issued as a percent of sales for the three and nine months ended September 29, 2019,27, 2020, was 1.82.3 percent and 2.0 percent, respectively, compared to 2.01.8 percent and 1.92.0 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$67 million for the three months ended September 29, 2019,27, 2020, versus the comparable period in 2018,2019, primarily due to prior restructuring actions and temporary salary reductions resulting in decreased compensation expenses, reduced travel expenses and lower variable compensationconsulting expenses, partially offset by higher consultingincreased variable compensation expenses. Overall, selling, general and administrative expenses, as a percentage of sales, remained flat at 10.4 percent in the three months ended September 27, 2020.
Selling, general and administrative expenses decreased $273 million for the nine months ended September 27, 2020, versus the comparable period in 2019, primarily due to prior restructuring actions, temporary salary reductions and lower variable compensation resulting in decreased compensation expenses and reduced travel expenses. Overall, selling, general and administrative expenses, as a percentage of sales, increased to 10.411.1 percent in the threenine months ended September 29, 2019,27, 2020, from 10.210.1 percent in the comparable period in 2018.
Selling, general and administrative expenses increased $28 million for the nine months ended September 29, 2019, versus the comparable period2019. The increase in 2018, primarily due to higher consulting and compensation expenses, partially offset by lower variable

compensation expenses. Overall, selling, general and administrative expenses as a percentage of sales decreasedwas primarily due to 10.1 percent in the nine months ended September 29, 2019, from 10.2 percent in the comparable period in 2018.sales declining faster than selling, general and administrative expenses.
37
Table of Contents
Research, Development and Engineering Expenses
Research, development and engineering expenses increased $13decreased $18 million for the three months ended September 29, 2019,27, 2020, versus the comparable period in 2018,2019 primarily due to increased consultingprior restructuring actions and temporary salary reductions resulting in decreased compensation expenses and decreased expense recovery,reduced consulting expenses, partially offset by lowerincreased variable compensation expenses. Overall, research, development and engineering expenses as a percentage of sales increased to 4.24.4 percent in the three months ended September 29, 2019,27, 2020, from 3.94.2 percent in the comparable period in 2018.2019, primarily due to sales declining faster than research, development and engineering expenses decreased, despite lower compensation expenses.
Research, development and engineering expenses increased $72decreased $79 million for the nine months ended September 29, 2019,27, 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 recoveryprior restructuring actions, temporary salary reductions and increased consulting expenses, partially offset by lower variable compensation resulting in decreased compensation expenses and reduced consulting expenses. Overall, research, development and engineering expenses as a percentage of sales increased to 4.14.7 percent in the nine months ended September 29, 2019,27, 2020, from 3.74.1 percent in the comparable period in 2018.2019, primarily due to sales declining faster than research, development and engineering expenses decreased, despite lower compensation expenses. Research activities continue to focus on development of new products to meet future emission standards around the world, improvements in fuel economy performance of diesel and natural gas 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 $30 million for the three months ended September 29, 2019,27, 2020, versus the comparable period in 2018,2019, primarily due to lowerhigher earnings at Beijing Foton Cummins Engine Company,Co., Ltd. and Dongfeng Cummins Engine Co., Ltd., Tata Cummins Ltd. and Cummins Westport.partially offset by $10 million of impairment charges for a joint venture in our Power Systems segment.
Equity, royalty and interest income from investees decreased $59increased $86 million for the nine months ended September 29, 2019,27, 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, 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.$18 million of technology fee revenue recorded in the first quarter of 2020, partially offset by $13 million of impairment charges. See NOTE 6, "INCOME TAXES" to the
Condensed Consolidated Financial Statements for additional information on India Tax Law Changes.
Other Operating Income (Expense),Expense, Net
Other operating income (expense),expense, net was as follows:
 Three months endedNine months ended
In millionsSeptember 27,
2020		September 29,
2019		September 27,
2020		September 29,
2019
Loss on write-off of assets$(13)$(20)
(1)
$(18)$(20)
(1)
Amortization of intangible assets(5)(5)(16)(15)
(Loss) gain on sale of assets, net(2)(2)(8)3 
Royalty income, net1 3 3 12 
Other, net(1)3 4 (5)
Total other operating expense, net$(20)$(21)$(35)$(25)
(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.
  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 $10 million and $12$23 million for the three and nine months ended September 29, 2019,27, 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$1 million and increased $5$16 million for the three and nine months ended September 29, 2019,27, 2020, versus the comparable periods in 2018. The three month decrease is2019, mainly due to lower interest rates despite an increase in the average short-term borrowings. Theborrowings through the nine month increase is primarily due to higher interest rates on relatively flat average short-term borrowings.months ended September 27, 2020

38
Table of Contents
Other Income, Net
Other income, net was as follows:
 Three months endedNine months ended
In millionsSeptember 27,
2020		September 29,
2019		September 27,
2020		September 29,
2019
Non-service pension and other postretirement benefits credit$16 $18 $48 $54 
Gain on corporate owned life insurance12 9 50 64 
Rental income2 2 6 6 
Foreign currency loss, net2 36 
(1)
(1)28 
(1)
Gain on marketable securities, net2 1 6 8 
Bank charges(5)(3)(15)(9)
Other, net8 5 25 23 
Total other income, net$37 $68 $119 $174 
(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.
  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 duringIncome Tax Expense
Our effective tax rates for the three and nine months ended September 29, 2019.27, 2020, were 26.5 percent and 23.6 percent, respectively.
Income Tax Expense
Our effectiveThe three months ended September 27, 2020, contained unfavorable discrete items of $31 million, or $0.21 per share, consisting of $17 million of changes in tax ratereserves, $8 million of provision to return adjustments relating to tax returns filed for 2019 is expectedand $6 million of net other discrete items.
The nine months ended September 27, 2020, contained $27 million, or $0.18 per share, of unfavorable net discrete tax items, primarily due to approximate 21.5 percent, excluding any discrete items that may arise.$34 million of unfavorable changes in tax reserves and $8 million of provision to return adjustments, partially offset by $15 million of favorable tax changes within India's 2020-2021 Union Budget of India (India Tax Law Change) passed in March 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 Condensed Consolidated Financial Statements for additional information on India Tax Law Changes.
Our effective tax rates for the three and nine months ended September 29, 2019, were 18.4 percent and 20.3 percent, respectively.
The three months ended September 29, 2019, contained favorable discrete items of $23 million, or $0.14 per share, of favorable net discrete tax items, primarily due to withholding taxes and provision to return adjustments. The nine months ended September 29, 2019,27, 2020, contained $30 million, or $0.19 per share, 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, 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, partially offset by $11 million of other favorable discrete items.
The change in the effective tax rate for the three months ended September 29, 2019, versus the comparable period in 2018, was primarily due to favorable net discrete tax items related to 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.
Noncontrolling Interests
Noncontrolling interests eliminate the income or loss attributable to non-Cummins ownership interests in our consolidated entities. Noncontrolling interests in income of consolidated subsidiaries for the three and nine months ended September 29, 2019, decreased $1227, 2020, increased $9 million and $5$3 million, respectively, versus the comparable periods in 2018,2019. The increases for the three months ended September 27, 2020 are primarily due to decreasedincreased earnings at Eaton Cummins Joint Venture andVenture. The increases for nine months ended September 27, 2020 are principally due to a $19 million unfavorable adjustment as the result of India Tax Law Changes passed in March 2020, partially offset by decreased earnings at Cummins India Limited. 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, 2019,27, 2020, decreased $70$121 million and $0.31$0.61 per diluted share versus the comparable period in 2018,2019, primarily due to lower net sales, decreased gross margin, higher variable compensation expenses, a higher effective tax rate, the absence of a $35 million gain from unwinding derivative instruments recognized in the third quarter of 2019 and unfavorable foreign currency impacts (primarily in the Brazilian real), partially offset by prior restructuring actions and temporary salary reductions resulting in lower compensation expenses and increased equity, royalty and interest income from investees 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 outstandingprimarily in China due to the stock repurchase program.stronger demand for trucks and construction equipment.
39
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Net income and diluted earnings per common share attributable to Cummins Inc. for the nine months ended September 29, 2019, increased $39827, 2020, decreased $672 million and $2.92$3.80 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 lowerhigher effective tax rate, (due to $30 million of favorable discrete tax items recognized in the first nine months of 2019 and the absence of a net $37$35 million of unfavorable discrete tax itemsgain from unwinding derivative instruments recognized in the comparable period in 2018)third quarter of 2019 and unfavorable foreign currency fluctuations (primarily the Brazilian real, Chinese renminbi and emerging market currencies), partially offset by prior restructuring actions, temporary salary reductions and lower variable compensation resulting in lower compensation expenses, partially offset by higher research, development and engineering expenses and lowerincreased equity, royalty and interest income from investees.investees in China (due to stronger demand for trucks and construction equipment) and favorable adjustments related to India Tax Law Changes in March 2020. Diluted earnings per common share for the nine months ended September 29, 2019,27, 2020, benefited $0.10$0.16 from fewer weighted-average shares outstanding, primarily due to the stock repurchase programs.programs in the first quarter of 2020.
Comprehensive Income - Foreign Currency Translation Adjustment
The foreign currency translation adjustment was a net gain of $111 million and net loss of $62 million, respectively, for the three and nine months ended September 27, 2020, compared to a net loss of $182 million and $197 million, respectively, for the three and nine months ended September 29, 2019 compared to a net loss of $159 million and $374 million, respectively, for the three and nine months ended September 30, 2018 and was driven by the following:
Three months ended
September 27, 2020September 29, 2019
In millionsTranslation adjustmentPrimary currency driver vs. U.S. dollarTranslation adjustmentPrimary currency driver vs. U.S. dollar
Wholly-owned subsidiaries$69 Chinese renminbi, Indian rupee$(153)British pound, Chinese renminbi, Brazilian real
Equity method investments32 Chinese renminbi(24)Chinese renminbi
Consolidated subsidiaries with a noncontrolling interest10 Indian rupee(5)Indian rupee
Total$111 $(182)
Nine months ended
September 27, 2020September 29, 2019
In millionsTranslation adjustmentPrimary currency driver vs. U.S. dollarTranslation adjustmentPrimary currency driver vs. U.S. dollar
Wholly-owned subsidiaries$(62)Brazilian real, Indian rupee, offset by Chinese renminbi$(161)British pound, Chinese renminbi, Brazilian real
Equity method investments12 Chinese renminbi(34)Chinese renminbi, British pound
Consolidated subsidiaries with a noncontrolling interest(12)Indian rupee(2)Indian rupee
Total$(62)$(197)

40
  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, "OPERATING SEGMENTS," to the Condensed Consolidated Financial Statements for additional information.
Our results for the first nine months 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 and continued to affect third quarter results, and we expect them to continue to impact our results of operations, financial condition and cash flows throughout the remainder of 2020. The Board 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/Nine months endedFavorable/
 September 29, September 30, (Unfavorable) September 29, September 30, (Unfavorable) September 27,September 29,(Unfavorable)September 27,September 29,(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$1,617 $1,822 $(205)(11)%$4,133 $5,879 $(1,746)(30)%
Intersegment sales 594
 644
 (50) (8)% 1,893
 1,923
 (30) (2)%Intersegment sales495 594 (99)(17)%1,560 1,893 (333)(18)%
Total sales 2,416
 2,726
 (310) (11)% 7,772
 7,868
 (96) (1)%Total sales2,112 2,416 (304)(13)%5,693 7,772 (2,079)(27)%
Research, development and engineering expenses 79
 74
 (5) (7)% 245
 229
 (16) (7)%Research, development and engineering expenses72 79 7 9 %217 245 28 11 %
Equity, royalty and interest income from investees 34
 55
 (21) (38)% 152
 189
 (37) (20)%Equity, royalty and interest income from investees74 34 40 NM236 152 84 55 %
Interest income 5
 3
 2
 67 % 13
 8
 5
 63 %Interest income1 5 (4)(80)%6 13 (7)(54)%
Segment EBITDA 341
 405
 (64) (16)% 1,195
 1,053
 142
 13 %Segment EBITDA382 341 41 12 %897 1,195 (298)(25)%
                
  
  
 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 sales18.1 %14.1 % 4.0 15.8 %15.4 % 0.4 
"NM" - not meaningful information"NM" - not meaningful information
Sales for our Engine segment by market were as follows:
 Three months endedFavorable/Nine months endedFavorable/
September 27,September 29,(Unfavorable)September 27,September 29,(Unfavorable)
In millions20202019AmountPercent20202019AmountPercent
Heavy-duty truck$694 $851 $(157)(18)%$1,859 $2,800 $(941)(34)%
Medium-duty truck and bus492 645 (153)(24)%1,501 2,105 (604)(29)%
Light-duty automotive522 478 44 9 %1,055 1,340 (285)(21)%
Total on-highway1,708 1,974 (266)(13)%4,415 6,245 (1,830)(29)%
Off-highway404 442 (38)(9)%1,278 1,527 (249)(16)%
Total sales$2,112 $2,416 $(304)(13)%$5,693 $7,772 $(2,079)(27)%
  Percentage Points  Percentage Points
On-highway sales as percentage of total sales81 %82 % (1)78 %80 % (2)
41
  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%  
 1
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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/Nine months endedFavorable/
 September 29, September 30, (Unfavorable) September 29, September 30, (Unfavorable) September 27,September 29,(Unfavorable)September 27,September 29,(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-duty23,300 28,000 (4,700)(17)%65,000 96,900 (31,900)(33)%
Medium-duty 63,200
 76,000
 (12,800) (17)% 218,600
 233,500
 (14,900) (6)%Medium-duty50,100 63,200 (13,100)(21)%156,200 218,600 (62,400)(29)%
Light-duty 62,600
 76,800
 (14,200) (18)% 183,100
 207,200
 (24,100) (12)%Light-duty67,200 62,600 4,600 7 %146,400 183,100 (36,700)(20)%
Total unit shipments 153,800
 187,400
 (33,600) (18)% 498,600
 533,900
 (35,300) (7)%Total unit shipments140,600 153,800 (13,200)(9)%367,600 498,600 (131,000)(26)%
Sales
Engine segment sales for the three months ended September 29, 2019,27, 2020, decreased $310$304 million versus the comparable period in 2018.2019. The following were the primary drivers by market:
•Heavy-duty truck sales decreased $157 million principally due to lower volumes in North America with lower shipments of 29 percent.
•Medium-duty truck and bus sales decreased $153 million mainly due to lower demand in North America with decreased unit shipments of 30 percent.
•Off-highway sales decreased $110$38 million primarily due to lower demand in global construction markets especially in ChinaNorth America, Western Europe and North America.Asia Pacific, partially offset by higher construction demand in China.
Heavy-duty truck sales decreased $107 million principally due to lower volumes•Unfavorable foreign currency fluctuations, primarily in the North American heavy-duty truck market with decreased shipments of 18 percent.Brazilian real.
•
Medium-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-dutyThese decreases were partially offset by increased light-duty automotive sales decreased $39of $44 million primarily due to lower LCV saleshigher light commercial vehicle demand in China partially offset by higher pick-up sales in North America.and a $30 million VAT recovery.
Engine segment sales for the nine months ended September 29, 2019,27, 2020, decreased $96$2,079 million versus the comparable period in 2018.2019. The following were the primary drivers by market:
•Heavy-duty truck sales decreased $941 million principally due to lower volumes in North America with lower shipments of 47 percent.
•Medium-duty truck and bus sales decreased $604 million mainly due to lower demand in North America with decreased shipments of 34 percent.
•Light-duty truck automotive sales decreased $285 million primarily due to lower pick-up sales in North America.
•Off-highway sales decreased $117$249 million primarilyprincipally due to lower demand in construction markets in ChinaNorth America, Western Europe and India.
Medium-duty truck and bus sales decreased $63 million principally due to decreased global bus sales and lower medium-duty truck demand in Brazil,Asia Pacific, partially offset by increased medium-duty truck saleshigher construction demand in North America.
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.China.
Segment EBITDA
Engine segment EBITDA for the three months ended September 29, 2019, decreased $6427, 2020, increased $41 million versus the comparable period in 2018,2019, primarily due to lower gross margin,increased equity, royalty and interest income from investees, the absence of a $33 million charge related to ending production of the 5-liter5 liter ISV engine for the U.S. pick-up truck market in the third quarter of 2019 and decreased equity, royaltylower selling, general and interest income from investees.administrative expenses, partially offset by lower gross margin. The decrease in gross margin was mainly due to lower volumes, and tariff impacts, partially offset by improved pricing.a $30 million VAT recovery, prior restructuring actions and temporary salary reductions resulting in lower compensation expenses, decreased warranty expenses and lower material costs. The increase in gross margin as a percentage of sales was primarily due to a VAT recovery, prior restructuring actions and temporary salary reductions resulting in lower compensation expenses, decreased warranty expenses, lower material costs and the absence of a charge related to ending production of the 5 liter ISV engine for the U.S. pick-up truck market in the third quarter of 2019. The decrease in selling, general and administrative expenses was primarily due to prior restructuring actions and temporary salary reductions resulting in decreased compensation expenses, reduced consulting expenses and lower travel expenses, partially offset by increased variable compensation 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., Ltd.
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Engine segment EBITDA for the nine months ended September 27, 2020, decreased $298 million versus the comparable period in 2019, primarily due to lower gross margin, partially offset by increased equity, royalty and interest income from investees, lower selling, general and administrative expenses and decreased research, development and engineering expenses. The decrease in gross margin and gross margin as a percentage of sales was mainly due to lower volumes, partially offset by prior restructuring actions, temporary salary reductions and lower variable compensation resulting in lower compensation expenses, decreased material costs, reduced warranty expenses and a $30 million VAT recovery. Selling, general and administrative expenses and research, development and engineering expenses decreased principally due to prior restructuring actions, temporary salary reductions and lower variable compensation 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 Beijing Foton Cummins Engine Co., Ltd., increased earnings at 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 income 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 wasLtd., mainly due to the absencean $18 million adjustment related to India Tax Law Changes passed in March 2020 and $18 million of a $184 million engine system campaign accrualtechnology fee revenue recorded in the first halfquarter 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 recovery2020, 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 FotonDongfeng Cummins Engine Co., Ltd. See NOTE 6, "INCOME TAXES" to the 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/Nine months endedFavorable/
 September 27,September 29,(Unfavorable)September 27,September 29,(Unfavorable)
In millions20202019AmountPercent20202019AmountPercent
External sales$1,715 $2,001 $(286)(14)%$5,123 $6,009 $(886)(15)%
Intersegment sales6 3 3 100 %17 24 (7)(29)%
Total sales1,721 2,004 (283)(14)%5,140 6,033 (893)(15)%
Research, development and engineering expenses9 7 (2)(29)%20 21 1 5 %
Equity, royalty and interest income from investees13 12 1 8 %45 35 10 29 %
Interest income1 4 (3)(75)%3 12 (9)(75)%
Segment EBITDA182 186 (4)(2)%500 529 (29)(5)%
   Percentage Points  Percentage Points
Segment EBITDA as a percentage of total sales10.6 %9.3 % 1.3 9.7 %8.8 % 0.9 

Sales for our Distribution segment by region were as follows:
 Three months endedFavorable/Nine months endedFavorable/
 September 27,September 29,(Unfavorable)September 27,September 29,(Unfavorable)
In millions20202019AmountPercent20202019AmountPercent
North America$1,125 $1,374 $(249)(18)%$3,412 $4,157 $(745)(18)%
Asia Pacific196 224 (28)(13)%582 667 (85)(13)%
Europe153 135 18 13 %425 382 43 11 %
China77 82 (5)(6)%246 266 (20)(8)%
Africa and Middle East49 60 (11)(18)%138 170 (32)(19)%
Russia42 34 8 24 %128 114 14 12 %
India42 47 (5)(11)%101 143 (42)(29)%
Latin America37 48 (11)(23)%108 134 (26)(19)%
Total sales$1,721 $2,004 $(283)(14)%$5,140 $6,033 $(893)(15)%
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
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/Nine months endedFavorable/
 September 29, September 30, (Unfavorable) September 29, September 30, (Unfavorable) September 27,September 29,(Unfavorable)September 27,September 29,(Unfavorable)
In millions 2019 2018 Amount Percent 2019 2018 Amount PercentIn millions20202019AmountPercent20202019AmountPercent
Parts $798
 $800
 $(2) — % $2,475
 $2,425
 $50
 2 %Parts$722 $798 $(76)(10)%$2,163 $2,475 $(312)(13)%
Power generation 467
 359
 108
 30 % 1,297
 1,031
 266
 26 %Power generation416 467 (51)(11)%1,169 1,297 (128)(10)%
Service 376
 372
 4
 1 % 1,112
 1,094
 18
 2 %Service304 376 (72)(19)%929 1,112 (183)(16)%
Engines 363
 400
 (37) (9)% 1,149
 1,228
 (79) (6)%Engines279 363 (84)(23)%879 1,149 (270)(23)%
Total sales $2,004
 $1,931
 $73
 4 % $6,033
 $5,778
 $255
 4 %Total sales$1,721 $2,004 $(283)(14)%$5,140 $6,033 $(893)(15)%
Sales
Distribution segment sales for the three months ended September 29, 2019, increased $7327, 2020, decreased $283 million versus the comparable period in 2018.2019. The primary regional driver was decreased North American sales of $249 million, representing 88 percent of the total change in Distribution segment sales, due to decreased demand in all product lines.
Distribution segment sales for the nine months ended September 27, 2020, decreased $893 million versus the comparable period in 2019. The following were the primary drivers by region:
•North American sales increased $41decreased $745 million, representing 5683 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 decreased enginelines, especially parts and engines 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, and Euro.
Distribution segment sales for the nine months ended September 29, 2019, increased $255 million versus the comparable period in 2018. The following were the primary drivers by region:
North American sales increased $195 million, representing 76 percent of the total change in Distribution segment sales, largely due to increased demand in the power generation product line mostly for improved data center orders 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 foreign currency fluctuations, mainly in the Australian dollar, Euro,Brazilian real, Chinese renminbi Canadian dollar and Indian rupee.South African rand.
Segment EBITDA
Distribution segment EBITDA for the three months ended September 29, 2019, increased $3127, 2020, decreased $4 million versus the comparable period in 2018,2019, primarily due to higherlower gross margin. The increase in 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 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,(especially 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 lower material costs. Selling,prior restructuring actions and temporary salary reductions resulting in decreased compensation expenses. The increase in gross margin as a percentage of sales was primarily due to prior restructuring actions and temporary salary reductions resulting in decreased compensation expenses and favorable pricing. The decrease in selling, general and administrative expenses decreasedwas due to lowerprior restructuring actions and temporary salary reductions resulting in decreased compensation expenses and reduced travel expenses, partially offset by higher variable compensation expense.expenses and increased consulting expenses.
ComponentsDistribution segment EBITDA for the nine months ended September 29, 2019, increased $15627, 2020, decreased $29 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, developmentdecreased 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,volumes, partially offset by prior restructuring actions, temporary salary reductions and lower volumes, reduced pricingvariable compensation resulting in decreased compensation expenses and unfavorable foreign currency fluctuations (primarily in the Chinese renminbi, Brazilian real, Australian dollar, Euro and Canadian dollar).favorable pricing. The increase in research, development and engineering expensesgross margin as a percentage of sales was mainlyprimarily due to prior restructuring actions, temporary salary reductions and lower expense recovery, increasedvariable compensation 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, temporary salary reductions and lower variable compensation 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 largelyprincipally 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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Power SystemsComponents Segment Results
Financial data for the Power SystemsComponents 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/Nine months endedFavorable/
 September 27,September 29,(Unfavorable)September 27,September 29,(Unfavorable)
In millions20202019AmountPercent20202019AmountPercent
External sales$1,201 $1,253 $(52)(4)%$3,192 $4,055 $(863)(21)%
Intersegment sales340 397 (57)(14)%1,001 1,302 (301)(23)%
Total sales1,541 1,650 (109)(7)%4,193 5,357 (1,164)(22)%
Research, development and engineering expenses64 73 9 12 %187 223 36 16 %
Equity, royalty and interest income from investees13 9 4 44 %46 30 16 53 %
Interest income1 2 (1)(50)%3 6 (3)(50)%
Segment EBITDA261 286 (25)(9)%681 908 (227)(25)%
   Percentage Points  Percentage Points
Segment EBITDA as a percentage of total sales16.9 %17.3 % (0.4)16.2 %16.9 % (0.7)
Sales for our Power SystemsComponents segment by product linebusiness 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/Nine months endedFavorable/
 September 27,September 29,(Unfavorable)September 27,September 29,(Unfavorable)
In millions20202019AmountPercent20202019AmountPercent
Emission solutions$665 $745 $(80)(11)%$1,801 $2,427 $(626)(26)%
Filtration314 310 4 1 %881 966 (85)(9)%
Turbo technologies281 279 2 1 %767 933 (166)(18)%
Electronics and fuel systems187 170 17 10 %525 580 (55)(9)%
Automated transmissions94 146 (52)(36)%219 451 (232)(51)%
Total sales$1,541 $1,650 $(109)(7)%$4,193 $5,357 $(1,164)(22)%
Sales
Power SystemsComponents segment sales for the three months ended September 29, 2019, increased $1927, 2020, decreased $109 million versus the comparable period in 2018.2019. The following were the primary drivers by product line:business:
Industrial•Emission solutions sales increased $12decreased $80 million primarily due to higherweaker demand in global mining marketsNorth America, partially offset by stronger demand in China.
•Automated transmissions sales decreased $52 million primarily due to lower heavy-duty truck demand in North America.
These decreases were partially offset by increased demand in electronics and most international markets, especially Latin America and Australia,fuel systems of $17 million, mostly in China, partially offset by lower demand in North American oil and gas markets.America.
Power generation sales increased $11 million due to higher demand in North America, China and Eastern Europe, partially offset by lower demand in Western Europe and the Middle East.
These increases were partially offset by unfavorable foreign currency fluctuations primarily in the British pound and Chinese renminbi.
Power SystemsComponents segment sales for the nine months ended September 29, 2019,27, 2020, decreased $21$1,164 million versus the comparable period in 2018.2019. The following were the primary drivers by product line:business:
Industrial•Emission solutions sales decreased $33$626 million primarily due to weaker demand in North America and Western Europe, partially offset by stronger demand in China.
•Automated transmissions sales decreased $232 million primarily due to lower heavy-duty truck demand in North America.
•Turbo technologies sales decreased $166 million primarily due to lower demand in North American oilAmerica and gas markets and international mining markets,Western Europe, partially offset by higher demand in certain international markets, especially the oil and gas market in China.
•Unfavorable foreign currency fluctuations, primarily in the British pound, Indian rupeeChinese renminbi and Chinese renminbi.Brazilian real.
These decreases were partially offset by increased power generation sales
45
Table 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.Contents

Segment EBITDA
Power SystemsComponents segment EBITDA for the three months ended September 29, 2019,27, 2020, decreased $5$25 million versus the comparable period in 2018, primarily2019, mainly due to lower gross margin, the absence of a gain from unwinding derivative instruments recognized in the third quarter of 2019 and unfavorable foreign currency fluctuations (primarily in the Brazilian real), partially offset by lower selling, general and administrative expenses. The decrease in gross margin was mainly due to lower volumes, partially offset by prior restructuring actions and temporary salary reductions resulting in decreased compensation expenses, lower material costs, a VAT recovery and reduced warranty expenses. The increase in gross margin as a percentage of sales was primarily due to prior restructuring actions and temporary salary reductions resulting in decreased compensation expenses, lower material costs and a VAT recovery. Selling, general and administrative expenses decreased due to prior restructuring actions and temporary salary reductions resulting in decreased compensation expenses and reduced consulting expenses, partially offset by higher variable compensation expenses.
Components segment EBITDA for the nine months ended September 27, 2020, decreased $227 million versus the comparable period in 2019, mainly due to lower gross margin and unfavorable mix.foreign currency fluctuations (primarily in the Brazilian real and Chinese renminbi), partially offset by lower selling, general and administrative expenses, decreased research, development and engineering expenses and higher equity, royalty and interest income from investees. The decrease in gross margin and gross margin as a percentage of sales was mainly due to lower volumes, unfavorable mix and unfavorable foreign currency fluctuations (primarily in the Brazilian real and Chinese renminbi), partially offset by prior restructuring actions, temporary salary reductions and lower variable compensation resulting in decreased compensation expenses, reduced warranty expenses and lower material costs. Selling, general and administrative expenses and research, development and engineering expenses decreased due to prior restructuring actions, temporary salary reductions and lower variable compensation 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 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 endedFavorable/Nine months endedFavorable/
 September 27,September 29,(Unfavorable)September 27,September 29,(Unfavorable)
In millions20202019AmountPercent20202019AmountPercent
External sales$567 $683 $(116)(17)%$1,495 $2,030 $(535)(26)%
Intersegment sales414 443 (29)(7)%1,147 1,376 (229)(17)%
Total sales981 1,126 (145)(13)%2,642 3,406 (764)(22)%
Research, development and engineering expenses53 58 5 9 %148 171 23 13 %
Equity, royalty and interest income from investees— 13 (13)(100)%18 39 (21)(54)%
Interest income1 3 (2)(67)%3 7 (4)(57)%
Segment EBITDA101 158 (57)(36)%269 469 (200)(43)%
   Percentage Points  Percentage Points
Segment EBITDA as a percentage of total sales10.3 %14.0 % (3.7)10.2 %13.8 % (3.6)
Sales for our Power Systems segment by product line were as follows:
 Three months endedFavorable/Nine months endedFavorable/
 September 27,September 29,(Unfavorable)September 27,September 29,(Unfavorable)
In millions20202019AmountPercent20202019AmountPercent
Power generation$601 $647 $(46)(7)%$1,544 $1,882 $(338)(18)%
Industrial309 392 (83)(21)%896 1,244 (348)(28)%
Generator technologies71 87 (16)(18)%202 280 (78)(28)%
Total sales$981 $1,126 $(145)(13)%$2,642 $3,406 $(764)(22)%
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Table of Contents
Sales
Power Systems segment sales for the three months ended September 27, 2020, decreased $145 million versus the comparable period in 2019. The following were the primary drivers by product line:
•Industrial sales decreased $83 million due to lower demand in international mining markets and decreased demand in oil and gas markets in China.
•Power generation sales decreased $46 million due to lower demand in India and North America.
These decreases were partially offset by a $7 million VAT recovery.
Power Systems segment sales for the nine months ended September 27, 2020, decreased $764 million versus the comparable period in 2019. The following were the primary drivers by product line:
•Industrial sales decreased $348 million due to lower demand in international mining markets and decreased demand in oil and gas markets in China and North America.
•Power generation sales decreased $338 million due to lower demand in North America and India.
•Unfavorable foreign currency fluctuations, primarily in the Chinese renminbi, British pound and Indian rupee.
These decreases were partially offset by a $7 million VAT recovery.
Segment EBITDA
Power Systems segment EBITDA for the three months ended September 27, 2020, decreased $57 million versus the comparable period in 2019, primarily due to lower gross margin, decreased equity, royalty and interest income from investees and the absence of a gain from unwinding derivative instruments recognized in the third quarter of 2019, partially offset by lower selling, general and administrative expenses. The decrease in gross margin and gross margin as a percentage of sales was mainly due to lower volumes and unfavorable mix, partially offset by prior restructuring actions and temporary salary reductions resulting in decreased compensation expenses. Selling, general and administrative expenses decreased primarily due to prior restructuring actions and temporary salary reductions resulting in decreased compensation expenses, lower travel expenses and reduced consulting expenses, partially offset by higher variable compensation expense.

expenses. The decrease in equity, royalty and interest income from investees was largely due to $10 million of impairment charges.
Power Systems segment EBITDA for the nine months ended September 29, 2019,27, 2020, decreased $22$200 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 and gross margin as a percentage of sales was mainly due to decreasedlower volumes, and unfavorable mix, partially offset by improved pricing,prior restructuring actions, temporary salary reductions and lower variable compensation 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, temporary salary reductions and lower variable compensation resulting in decreased compensation expenses, reduced travel expenses and lower consulting expenses. Research, development and engineering expenses decreased principally due to prior restructuring actions, temporary salary reductions and lower variable compensation 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 a $13 million impairment charge of a joint venture and lower earnings at 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/Nine months endedFavorable/
 September 27,September 29,(Unfavorable)September 27,September 29,(Unfavorable)
In millions20202019AmountPercent20202019AmountPercent
Total external sales$18 $9 $9 100 %$38 $20 $18 90 %
Research, development and engineering expenses26 25 (1)(4)%79 70 (9)(13)%
Segment EBITDA(40)(36)(4)(11)%(121)(98)(23)(23)%

47
  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 endedNine months ended
In millionsSeptember 27,
2020		September 29,
2019		September 27,
2020		September 29,
2019
TOTAL SEGMENT EBITDA$886 $935 $2,226 $3,003 
Intersegment eliminations (1)
(10)23 45 46 
TOTAL EBITDA876 958 2,271 3,049 
Less:
Interest expense25 26 71 87 
Depreciation and amortization (2)
165 177 497 491 
INCOME BEFORE INCOME TAXES686 755 1,703 2,471 
Less: Income tax expense182 139 402 501 
CONSOLIDATED NET INCOME504 616 1,301 1,970 
Less: Net income (loss) attributable to noncontrolling interests3 (6)13 10 
NET INCOME ATTRIBUTABLE TO CUMMINS INC.$501 $622 $1,288 $1,960 
(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 27, 2020 and September 29, 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 $2 million and $2 million for the nine months ended September 27, 2020 and September 29, 2019, respectively.

48
  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 trends 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 Trends
North American pick-up truck demand will remain strong.
Power generation markets will remain stable,As a result of actions taken throughout 2020 our liquidity of $6.5 billion in cash, marketable securities and available credit facilities puts us in a strong position to deal with increased demandany uncertainties that may arise in global data center markets.the fourth quarter.
Challenges
Industry production•The tiered payroll cut across our workforce ended at September 30 and will add approximately $90 million to our fourth quarter expenses.
•The risk of heavy-duty trucks in North America will decline.
Demand in truckcustomer shutdowns and construction markets in China is expected to decline.
Weakthe impact of lower economic conditions in Indiaactivity, driven by COVID-19, may continue to negatively impact demand across our businesses.results of operations, financial position and cash flows.
Demand•Supply chain constraints related to COVID-19 may negatively impact our revenues and result in North American construction marketsincreased costs.
•In response to the pandemic we closed or slowed certain global manufacturing facilities in the first nine months of 2020. At the end of the third quarter our global manufacturing facilities remained open; however, it is expectedpossible these facilities may be closed again in response to weaken.future outbreaks.
Lower commodity prices•We may close or restructure additional manufacturing and capital expenditures by mining companiesdistribution 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 continue to 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 demand for mining engines.operating costs.
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 nearlong-term.
COVID-19 Impacts
The COVID-19 pandemic negatively impacted our financial performance in the first nine months of 2020 and long-term.
Cost increases duemay continue to U.S. trade tariffs with China will continue.
Prolonged trade disputes coulddo so in the future. 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 where COVID-19 may 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. Many customers ramped up their production in the third quarter as they reopened their facilities. Levels of future production remain 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 closed or partially shut down certain office, manufacturing and distribution facilities around the world at the end of the first quarter and into the third 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 millionsSeptember 27,
2020		December 31,
2019
Working capital (1)
$5,353 $3,127 
Current ratio1.94 1.50 
Accounts and notes receivable, net$3,628 $3,670 
Days' sales in receivables71 58 
Inventories$3,470 $3,486 
Inventory turnover3.9 4.7 
Accounts payable (principally trade)$2,597 $2,534 
Days' payable outstanding69 58 
Total debt$4,112 $2,367 
Total debt as a percent of total capital32.2 %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
 Nine months ended 
In millionsSeptember 27,
2020		September 29,
2019		Change
Net cash provided by operating activities$1,580 $2,343 $(763)
Net cash used in investing activities(337)(829)492 
Net cash provided by (used in) financing activities564 (1,198)1,762 
Effect of exchange rate changes on cash and cash equivalents31 (59)90 
Net increase in cash and cash equivalents$1,838 $257 $1,581 
Net cash provided by operating activities increased $955decreased $763 million for the nine months ended September 29, 2019,27, 2020, versus the comparable period in 2018,2019, primarily due to higherlower consolidated net income of $393$669 million, restructuring payments of $100 million and higher equity in income of investees, net of dividends of $92 million, partially offset by lower working capital requirements of $367 million, lower deferred income taxes of $153 million and higher dividends from equity investees of $64$135 million. During the first nine months of 2019,2020, the lower working capital requirements resulted in a cash outflow of $192$57 million compared to a cash outflow of $559$192 million in the comparable period in 2018.2019, mainly due to lower accounts and notes receivable and higher accounts payable, partially offset by lower accrued expenses.
Net cash used in investing activities increased $310decreased $492 million for the nine months ended September 29, 2019,27, 2020, versus the comparable period in 2018,2019, primarily due to the prior year acquisition of Hydrogenics for $235 million, higherlower capital expenditures of $127 million, lower cash flows from derivatives not designated as hedges of $71 million and lower net investments in marketable securities of $53 million and increased capital expenditures of $34$57 million.
Net cash used inprovided by financing activities increased $238$1,762 million for the nine months ended September 29, 2019,27, 2020, versus the comparable period in 2018,2019, primarily due to lower nethigher proceeds from borrowings of commercial paper of $380$1,989 million partially offset byand lower repurchases of common stock of $73$256 million, and increasedpartially offset by higher net borrowings under short-term credit agreementspayments of $44commercial paper of $466 million.
The effect of exchange rate changes on cash and cash equivalents for the nine months ended September 29, 2019,27, 2020, versus the comparable period in 2018,2019, increased $3$90 million primarily due to an unfavorable $13 million fluctuationfavorable fluctuations in the British pound partially offset by favorable fluctuations in the Indian rupee and Chinese renminbi.of $75 million.

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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$1,580 million generated in the nine months ended September 29, 2019.27, 2020. 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.
September 27, 2020
In millionsTotalU.S.InternationalPrimary location of international balances
Cash and cash equivalents$2,967 $1,793 $1,174 China, Mexico, Singapore, Belgium, Australia, Netherlands, Canada
Marketable securities (1)
345 75 270 India
Total$3,312 $1,868 $1,444 
Available credit capacity
Revolving credit facilities (2)
$3,184 
International and other uncommitted domestic credit facilities$191 
(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 2021, respectively, are maintained primarily to provide backup liquidity for our commercial paper borrowings and general corporate purposes. At September 27, 2020, we had $316 million of commercial paper outstanding, which effectively reduced the available capacity under our revolving credit facilities to $3.2 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 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. At September 27, 2020, there were no outstanding borrowings under the CPFF program.
In June and July of 2020, we settled 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 $24 million gain realized upon settlement over the remaining three year term of related debt.
On August 21, 2019,19, 2020, 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 throughprior to August 18, 2020.2021. This credit agreement amends and restates the prior $1.5 billion 364-day credit facility that matured on August 21, 2019.19, 2020.
On August 24, 2020, we issued $2 billion aggregate principal amount of senior unsecured notes consisting of $500 million aggregate principal amount of 0.75% senior unsecured notes due in 2025, $850 million aggregate principal amount of 1.50% senior unsecured notes due in 2030 and $650 million aggregate principal amount of 2.60% senior unsecured notes due in 2050. We received net proceeds of $1.98 billion.
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On August 24, 2020, we terminated our 364-day credit facility that had been entered into on May 1, 2020, concurrent with the $2 billion bond issuance on August 24, 2020.
We have access to committed credit facilities that total $3.5 billion, including the new $1.5 billion 364-day facility that expires August 19, 202018, 2021 and aour $2.0 billion five-year facility that expires on August 22, 2023. We intend to 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 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 facilityfacilities and commercial programprograms should not exceed $3.5 billion. See Note 10,9, "DEBT," to our Condensed Consolidated Financial Statements for additional information.
At September 27, 2020, we had $316 million of commercial paper outstanding, which effectively reduced the available capacity under our revolving credit facilities to $3.2 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 nine 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 
September 27— — — 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 continuedWe suspended share repurchases during the second and third quarters 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, ourOctober 2020, the Board of Directors authorized an increase to our quarterly dividend of 153 percent from $1.14$1.311 per share to $1.311$1.35 per share.
We paid dividends of $562$582 million during the nine months ended September 29, 2019.27, 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. Restructuring payments were substantially complete at September 27, 2020. See Note 15, "ACQUISITIONS,14, "RESTRUCTURING ACTIONS," to the Condensed Consolidated Financial Statements,for additional information.information.
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Capital Expenditures
Capital expenditures, including spending on internal use software, for the nine months ended September 29, 2019,27, 2020, were $445$301 million versus $416$445 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. Approximatelyover 50 percent of our capitalthese expenditures are expected to be invested outside of the U.S. in 2019.North America. In addition, we plan to spend an estimated $65$50 million to $75$60 million on internal use software in 2019.2020.
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 nine months of 2019,2020, the investment gain on our U.S. pension trust was 14.72.7 percent while our U.K. pension trust gain was 18.97.9 percent. Investment performance year-to-date in both trusts is still recovering from the negative impacts of COVID-19 on capital markets. Approximately 7573 percent of our pension plan assets are held in highly liquid investments such as fixed income and equity securities. The remaining 2527 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 $7 million in additional defined benefit pension contributions duringin the remainder of 2019 of $13U.K. and $7 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$316 million of commercial paper outstanding at September 29, 2019,27, 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$525 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 August of 2020, concurrent with our new $2 billion debt issuance, both Standard and Poor's Rating Services and Moody's Investors Service, Inc. reviewed and reaffirmed their respective credit rating and stable outlook. Our ratingsrating 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 the 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 liquidityrevolving 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 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 nine months of 2019.2020.
RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 17, "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, 2019,27, 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.
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 triggered a significant downturn in our markets globally and these challenging market conditions could continue for an extended period of time. Most global economies slowed and there is still much uncertainty as to when these global markets will fully recover. If any or all of these major markets were to endure a sustained
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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, which continued to unfavorably impact market conditions through the end of the third quarter 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, distribution and technical center facilities around the world in March 2020. Although most of our manufacturing, distribution and technical center facilities re-opened early in the second quarter of 2020, many operated at reduced capacities and most of our global office buildings remained closed through the third 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 Part I, “Item 1A. Risk Factors”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 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
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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.


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 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
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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 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
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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 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.
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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 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
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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 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
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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 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
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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 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
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include China, India and Germany. In addition, California government officials have called for the state to phase out sales of diesel-powered certain vehicles by 2035. 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.
(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
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
Approximate
Dollar Value of Shares
that May Yet Be
Purchased Under the
Plans or Programs
(in millions) (2)
June 29 - August 2— $— — $2,085 
August 3 - August 30— — — 2,085 
August 31 - September 27— — — 2,085 
Total— — — 
(1) Shares purchased represent shares under the Board authorized share repurchase program.
(2) Shares repurchased under our Key Employee Stock Investment Plan only occur in the event of a participant default, which cannot be predicted, and were excluded from this column.

In December 2019, the Board authorized the acquisition of up to $2.0 billion of additional common stock upon completion of the 2018 repurchase plan. In October 2018, the Board authorized the acquisition of up to $2.0 billion of additional common stock. During the three months ended September 27, 2020, we did not repurchase any common stock under the 2018 authorization. The dollar value remaining available for future purchases under the 2018 program at September 29, 2019,27, 2020, was $1.1 billion.$85 million.
In October 2018, our Board of Directors authorized the acquisition of up to $2 billion of additional common stock. During the three months ended September 29, 2019, we repurchased $706 million of common stock under this authorization.
During the three months ended September 29, 2019, we repurchased 5,106 shares of common stock from employees in connection with theOur 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 as security for the loans and would, in effect, repurchase shares only if the participant defaulted in repayment of the loan. There isEffective May 1, 2020, we no maximum amountlonger repurchase shares of shares that we may purchase under this plan.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. 
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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
Description of Exhibit 001-04949)).
31(a)
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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 nine months ended September 29, 201927, 2020 and September 30, 2018,29, 2019, (ii) the Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 29, 201927, 2020 and September 30, 2018,29, 2019, (iii) the Condensed Consolidated Balance Sheets at September 29, 201927, 2020 and December 31, 2018,2019, (iv) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 29, 201927, 2020 and September 30, 2018,29, 2019, (v) the Condensed Consolidated Statements of Changes in Equity for the three and nine months ended September 29, 201927, 2020 and September 30, 201829, 2019 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, 201927, 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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